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Answers are provided by S. Derrin Watson, JD, APM
Over Half Isn't At Least 80%
(Posted May 13, 2002)
Question 180: A partnership in one state (say, Maine) also has an office (same type of business) in another state (say, Alaska) that is an LLC electing to be taxed as a partnership. The 2 partners of the Maine business own 100% of that entity, and they are 2 of the 4 partners of the Alaska office, owning approximately 53% of that entity (the LLC). All of the employees of both offices are covered by a 401(k) plan maintained by the Maine office. Are these businesses under common control?
Answer: We call that a multiple employer plan, because the two businesses are not under common control and are not an affiliated service group, based on the information you have given me. (There may be an affiliated service group, but I haven't been given any facts which would indicate that there is.)
I have received several questions like this one recently, from folks who do not seem to understand the basic principles of controlled groups and groups of trades or businesses under common control. Many have been in the form of "A bunch of people own 100% of one business and more than half of another. Are the businesses under common control?"
This is symptomatic of an impression among many in the pension industry that ownership of more than half of two businesses is sufficient to crate a controlled group. It isn't. It never has been.
The issues involved are too important to trust to "Gee, I kinda think it oughta be this way." You wouldn't run the ADP test by saying "If the NHCEs have 5%, I'd better limit the HCEs to 5.5%, just to be on the safe side." Why would you run the controlled group test like that?
In this article, I am not going to write a treatise on what constitutes a controlled group. But let me start with the basic rule of brother-sister groups:
Apply the attribution and exclusion rules. Then ignore shareholders who don't own stock in both businesses. Once you've done that, if you can't find a group of 5 or fewer shareholders who own at least 80% of each business, you don't have a controlled group. That isn't the end of the test, but it's a really good beginning. Two examples:
The controlled group rules are not difficult, but it does take some investment of time to learn them. If you aren't willing to invest the time, count on the fact that you will make mistakes-- mistakes that can prove very costly.
- John owns 79% of corporations A, B, C, and D. Able owns the rest of A, Baker the rest of B, Charlie the rest of C, and David the rest of D. Assume nothing triggers attribution or exclusion rules. None of these businesses is in a controlled group with any of the others. John is the only overlapping shareholder, and he doesn't own at least 80% of any of them.
- 7 women each own 14.2857% of each of two corporations. Ownership of the corporations is identical. However, no group of five shareholders owns more than 71.5% of either corporation. Hence, they are not a controlled group.
And where do you go to learn them? I thought you'd never ask! Try Chapters 6 through 11 of my book Who's the Employer.
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