We have a controlled group/multiple employer question. We have three car dealerships all owned differently. Dealer A is owned by father at 49% and (1) child at 26.5% the (2) child at 24.5%. Dealer B is owned by father at 51% (1) child at 24.5% and (2) child at 24.5%. Last dealership is owned 51% by dad and (1) son at 29% and (3) son at 20%. How are we supposed to test 1 controlled group 2 controlled group and they are all under one plan should it be a multiple employer plan?
Since the Internal Revenue Service Employee Plans and Exempt Organization Division will not "rule" on controlled groups, it is necessary to obtain the services of a competent employee benefits/ERISA lawyer who has dealt with the issue and obtain an opinion of counsel relating to the controlled group issue. Nevertheless, the basic overview of dealing with "controlled groups" is as follows:
The Internal Revenue Code established its Controlled Groups Provisions as part of the Revenue Act of 1964. They were initially issued as part of a tax reform package intended to encourage small businesses, which operated in the corporate form. Over time, some medium and large businesses began taking advantage of the lower tax rates afforded small businesses by organizing their structure into multiple corporate forms.
The Employee Retirement Income Security Act of 1974 (ERISA) added sections 414(b) and (c). These sections required that all employees of commonly controlled corporations, trades or businesses be treated as employees of a single corporation, trade or business. These Code provisions used the statutory definition of controlled groups found in section 1563(a) of the Code. Section 1563(a) provides mechanical ownership tests, which are used in determining if a controlled group situation exists.
Sections 414 (b) and (c) did not cover many of the arrangements devised by employers who attempted to avoid coverage of employees. Congress enacted section 414(m) pursuant to section 201 of the Miscellaneous Revenue Act of 1980. Section 414 (m) addresses employees of an affiliated service group.
The controlled group definition is found in section 414(b) & (c). Section 414(b) covers controlled group consisting of corporations and defines a controlled group as a combination of two or more corporations that are under common control within the meaning of section 1563(a).
All employees of companies in the controlled group must be considered to determine if a plan maintained by a controlled group member meets the requirements of sections 401, 408(k), 408(p), 410, 411, 415, and 416. Section 414(c) applies to controlled group of trades or businesses (whether or not incorporated), such as partnerships and proprietorships. Since section 1563 was written only for corporations, Treasury Regulations 1.414(c)-1 through 1.414(c)-5 mirror the section 1563 controlled group principles.
A parent-subsidiary controlled group exists when one or more chains of corporations are connected through stock ownership with a common parent corporation; and
- 80% of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and
- Parent Corporation must own 80% of at least one other corporation.
A brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest of each group and have effective control.
- Controlling interest - 1.414(c)-2(b)(2) generally means 80% or more of the stock of each corporation (but only if such common owner own stock in each corporation); and
- Effective control 1.414(c)-2(c)(2) generally more than 50% of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.
Attribution is the concept of treating a person as owning an interest in a business that is not actually owned by that person. Attribution may result from family or business relationships. Section 1563 attribution is used in determining a controlled group of businesses, under section 414(b) and (c).