Who's the Employer?

Answer: Status as an S or a C corporation is irrelevant in determining if a controlled group exists. It matters in determining whether a corporation is in an affiliated service group or is a related party, but it has no effect on controlled group status.

In the situation you describe, a controlled group does not exist. A's "effective control" ownership is 50% and B's is 0%, so together they do not have more than 50% effective control. Moreover, because we exclude B in determining a controlling interest, thanks to the Vogel Fertilizer case, a controlling interest does not exist.

As it is now, can the two corporations adopt a single plan? Of course they can, and it would be considered a multiple employer plan. Each employer would need to be tested separately in determining if the plan passes the requirements of the Code, and the plan would be required to file two Schedule T's with each year's 5500 filing.

The easiest way to create a controlled group is to sell B one share of stock in S-Corp 1, or give him an option to buy that one share. That will allow the corporations to be treated as a controlled group. That means the two will be tested together and will file only one Schedule T. Alternatively, B could sell (or give A an option to buy) 30% of S-Corp 2. Of course, either of these moves has significant tax and nontax consequences outside the realm of qualified plans and should be undertaken only after carefully reviewing the entire situation.

The controlled group rules are discussed at length in chapters 6 through 10 of my book, Who's the Employer?.

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