Subscribe (Free) to
Daily or Weekly Newsletters
Post a Job

Featured Jobs

Retirement Plan Administrator

Hessel & Associates, LLC
(Remote / IL)

Hessel & Associates, LLC logo

Retirement Plan Administrator

Nicholas Pension Consultants
(Remote / Rancho Cordova CA / Corona CA)

Nicholas Pension Consultants logo

Senior Plan Consultant

Sentinel Benefits & Financial Group
(Remote / Wakefield MA)

Sentinel Benefits & Financial Group logo

Distribution \ Loan Clerk

Retirement, LLC
(Remote / Oklahoma City OK)

Retirement, LLC logo

Junior Implementation Specialist - 401(k) Administration

Ubiquity Retirement + Savings
(Remote / San Francisco CA)

Ubiquity Retirement + Savings logo

Sr. Retirement Plan Administrator

Tycor Benefit Administrators, Inc.
(Berwyn PA)

Tycor Benefit Administrators, Inc. logo

Benefits Supervisor

NFL Player Benefit Office
(Baltimore MD)

NFL Player Benefit Office logo

Plan Consultant

Sentinel Benefits & Financial Group
(Remote / Wakefield MA)

Sentinel Benefits & Financial Group logo

Senior Actuarial Analyst/ Project Manager

Van Iwaarden Associates
(Remote / Minneapolis MN)

Van Iwaarden Associates logo

Defined Benefit Pension Consultant

The Ryding Company
(Remote / Westlake Village CA)

The Ryding Company logo

Senior Administrator / Site Manager

Nicholas Pension Consultants
(Remote / AZ / ID / NM / NV / UT)

Nicholas Pension Consultants logo

Defined Benefit Plan Consultant

Sentinel Benefits & Financial Group
(Remote / Wakefield MA / Melville NY / Bingham Farms MI)

Sentinel Benefits & Financial Group logo

DC Plan Administrator

Retirement, LLC
(Remote / Oklahoma City OK)

Retirement, LLC logo

Senior Retirement Plan Administrator

Enhanced Retirement Solutions
(Rochester NY)

Enhanced Retirement Solutions logo

DC Administrator

United Benefit Pensions Inc.
(Remote / Melville NY)

United Benefit Pensions Inc. logo

Manager - Defined Contribution Plans

M2B Retirement Consulting LLC
(Remote / Wexford PA)

M2B Retirement Consulting LLC logo

Compliance Analyst - 401(k) Administration

Ubiquity Retirement + Savings
(Remote / San Francisco CA)

Ubiquity Retirement + Savings logo

View More Employee Benefits Jobs

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Should we treat these two as a controlled group just to be safe?

(Posted December 7, 1999)

Question 38: A corporation is 100% owned by X. A new corporation is created with X as 65% shareholder and Y as 35% shareholder. (1) Does this constitute a brother-sister controlled group? (2) If not, shouldn't we treat it as a controlled group, just to be safe? (3) If it were a controlled group, would it qualify for the transition rule of IRC 410(b)(6)(C)?

Answer: The answer to the first question is probably no, but I need to make some assumptions. The answer to the second question is NO. The answer to the third question is of course it would.

In giving these answers, I am assuming that there is no reason to exclude Y's stock. For example, suppose Y were an employee of the new company, and had given X a right of first of refusal on his shares (without a corresponding provision going from X to Y). In that case, we would ignore Y's shares, and X would be deemed to own 100% of both companies.

I am also assuming that there is no reason to attribute Y's stock to X. If Y were X's daughter or grandson, for example, regardless of the age, X would be deemed to own Y's stock under these facts, since X already owns more than 50% of the new company.

Barring attribution or exclusion, X does not meet the 80% controlling interest test on his own. Y is ignored for purposes of the controlling interest test, thanks to the 1980s Vogel Fertilizer Supreme Court case.

That means you can own 79% of 50 corporations, and so long as the remaining 21% is owned by 50 unrelated individuals (i.e., 21% of corp 1 is held by X1, 21% of corp 2 is held by X2, etc.), none of them are in a controlled group.

Being part of a controlled group has both benefits (or, at the least, planning opportunities) and pitfalls. While you avoid the pitfalls if you are not in a controlled group, you also do not receive the benefits. For a variety of reasons, treating two businesses as part of a controlled group when they are not is not being on the safe side. It is wrong and could, depending on the circumstances, lead the unwary plan to penalties or disqualification.

An example of one of the benefits of joining a controlled group is the transition rule of IRC 410(b)(6)(C). Whenever a corporation becomes part of a controlled group, that provision gives them a free pass of the coverage requirements of 410(b), lasting through the current year and the following year, so long as certain conditions are met. You don't have the free pass if you didn't join a group, even if you administer the plan as though you had.

The controlled group rules are vital to understand clearly. They are black and white rules with clearly drawn lines. Unfortunately, many practitioners administer plans based more on what they suspect the rules ought to be than what they actually are. That is why my book, Who's the Employer?, discusses the controlled group rules, including the transition rules of 410(b)(6)(C) in depth in chapters 6 through 11.


Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.


Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2022 BenefitsLink.com, Inc.