Key Takeaways
- Monitoring business structure changes ensures compliance with ERISA regulations and reduces financial risk.
- IRS penalties, retroactive benefit obligations, and legal risks arise when group status is not properly decided.
- Businesses with shared ownership may be subject to group rules, affecting compliance and plan costs.
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Why Controlled Group Identification Matters to You
If you have a business with multiple entities, it’s critical that you accurately find controlled group status. These rules affect a lot— tax obligations, employee benefit plans, and needed Form 5500 filings, to name a few. A misclassification can burden you with unexpected costs, IRS penalties, and compliance challenges, and since ownership structures often change, plan sponsors should regularly review business relationships to avoid potential risks.
Our guide breaks down controlled groups through a fictional case study, illustrating how specific ownership and control patterns can trigger group status.
Types of Controlled Groups and Key Tests
Controlled groups exist when multiple companies share common ownership or control. There are three main types.
1. Parent-Subsidiary Controlled Groups. A controlled group exists when a parent company owns at least 80% of a subsidiary.
2. Brother-Sister Controlled Groups. In this group, five or fewer individuals must own at least 80% of each entity and have at least 50% identical ownership across businesses.
3. Combined Groups. This is a mix of parent-subsidiary and brother-sister groups, where one company has overlapping ownership in two related entities.
If a business isn’t a part of a controlled group, it may still be classified as an affiliated service group — and this can also change benefit plan compliance.
Case Study: The Consequences of Misidentifying a Controlled Group
For over 25 years, the owners of Company Alpha, a successful children’s clothing retailer, expanded their business interests. They launched a clothing manufacturing facility (Company Beta), a luxury hotel and spa (Company Kappa), and two restaurants (Companies Delta and Epsilon). Ownership was distributed among family members, with each individual holding shares across multiple companies. Some family members also worked across the businesses in various roles.
Each company supported its own employee benefit plan, with different contribution levels, retirement plan structures, and health insurance offerings. Company Alpha’s plan was the most generous, offering higher employer-matching contributions and broader healthcare options. The business owners and their plan administrator believed they were in full compliance with ERISA and tax regulations—until an IRS audit revealed otherwise.
The IRS Findings and Financial Consequences
During the audit of Company Alpha, the IRS found interwoven ownership structures and overlapping management responsibilities, ultimately determining that all five businesses formed a controlled group under ERISA rules.
As a result…
– The IRS mandated retroactive benefit inclusion, requiring all employees from the related entities to be covered under Company Alpha’s generous benefit plan for past years.
– The businesses were assessed fines and penalties for non-compliance with controlled group rules.
– Employees who had previously received lower benefits had to be compensated retroactively, significantly increasing employment costs.
– The companies had to revise their benefit plan structure to follow IRS and Department of Labor regulations moving forward.
This unexpected financial and administrative burden disrupted cash flow, strained business operations, and required extensive legal and compliance work to rectify the situation.
What Could They Have Done Differently?
Had the business owners and plan administrators conducted annual reviews of ownership structures and applied controlled group tests, they could have shown the issue early and adjusted their benefit plans accordingly. Collaborating with third-party advisors and legal professionals before expansion would have helped them avoid costly missteps.
Your Best Practices for Controlled Group Compliance
Being in business, you know that business relationships evolve. That’s why it’s essential for plan sponsors to regularly review ownership structures to figure out if it changes impact-controlled group status. When you conduct annual compliance reviews, you unearth shifts in ownership, stock attribution, or management that could affect a group classification. Given the complexity of ERISA regulations, collaborating with experienced advisors can help navigate these rules and reduce compliance risks. Overlooking controlled group requirements can result in costly penalties, retroactive benefit obligations, and legal challenges. Taking an initiative-taking approach to compliance helps you manage your benefit plans effectively and avoid unnecessary financial exposure.
How MGO Can Help
Our employee benefit plan audits team works with plan sponsors to find risks, improve governance, and meet reporting obligations under ERISA and IRS regulations. With experience across industries like manufacturing, technology, life sciences, and entertainment, MGO provides guidance to businesses with multi-entity structures. We help in assessing controlled group status, reducing compliance risks, and aligning benefit plans with business goals. From Form 5500 reporting to retirement plan audits and compliance consulting, MGO helps organizations avoid costly errors and regulatory penalties while supporting financial health and fiduciary responsibility. Contact us to learn more.