Sunshine … on my controlled group makes me happy

by John Ludlum

The controlled group rules under the IRC are possibly one of the driest and most technical areas in benefits practice, but mistakes in controlled group status can be very expensive and complicated to correct.  The problem we are seeing is that in too many cases, it is not clear whether the plan sponsor or the plan’s service providers have responsibility for monitoring which entities are in the plan sponsor’s controlled group.

Why it matters: in the typical single employer plan that is most common, the ERISA rules provide that a plan sponsor can operate the plan for the benefit of the sponsor’s employees and for the employees of other entities within the IRS controlled group.  There will be compliance problems if the employees of an entity outside of the plan sponsor’s controlled group are allowed to participate in a single employer plan.  While there are benefit plans designed to allow employees of more than one controlled group to participate, such as Multiple Employer Welfare Arrangements or “MEWAs” and “multiple employer plans,” these plans are less common than single employer plans.

At a very high and simplified level, legal entities will be part of the same IRS controlled group if one entity owns 80% or more of the voting power or value of another entity, or if two or more entities are both 80% or more owned by the same parent group.  This is a “parent-subsidiary” controlled group which is most common among our corporate clients, but there also are “brother-sister” controlled groups that tend to be more common in small businesses which apply where the same 5 of fewer individuals, estates, or trusts have majority levels of control over the entities’ value or voting power (greatly simplified).  

We have seen problems with controlled group identification come up through sales of ownership in subsidiaries and purchases and sales of entities into and out of the controlled group.  We recommend that companies and the HR team pay close attention to any changes in ownership for entities within the corporate group, and that any such changes should be discussed with service providers to the benefit plans to ensure proper eligibility and participation.  Annual compliance testing, audits, and IRS reporting are all good triggers to check the controlled group status.

If you have any questions, please reach out to a member of the Holland & Hart Benefits Law Group and we would be happy to help.