An IRS-controlled group refers to two or more businesses that are related through significant ownership and are treated as a single employer for certain tax and employee benefit purposes under U.S. tax law. These rules are designed to prevent companies from circumventing tax or benefit requirements by splitting into smaller entities. Controlled groups are defined under Internal Revenue Code Section 414(b) and (c) and typically affect employee benefit plans, retirement plan limits, and other tax provisions.

Types of Controlled Groups

There are three main types of controlled groups:

1. Parent-Subsidiary Group
   A parent-subsidiary controlled group exists when one business owns at least 80% of one or more other businesses. For example:
   • Corporation A owns 85% of Corporation B.
   • These two corporations form a parent-subsidiary controlled group.
2. Brother-Sister Group
   A brother-sister controlled group exists when:
   • The same five or fewer individuals, estates, or trusts own at least 80% of the stock of two or more companies, and
   • They collectively have more than 50% of the total voting power or value of the stock in those companies, taking into account only identical ownership across the entities.
3. Combined Group
   A combined group is a combination of the parent-subsidiary and brother-sister relationships. For example:
   • A parent company (A) owns 80% of a subsidiary (B), and
   • The same individuals who control the parent company also own other businesses (C and D) in a brother-sister arrangement.

Implications of Controlled Group Status

Being part of a controlled group has significant implications for compliance and taxation, including:

1. Employee Benefits
   The companies in a controlled group are treated as a single employer for purposes of:
   • Retirement plan contributions (e.g., 401(k) plan limits).
   • Health insurance requirements under the Affordable Care Act (ACA).
2. Tax Compliance
   • Limits on tax benefits, such as the small business deduction.
   • Application of certain thresholds for tax reporting.
3. Non-Discrimination Rules
   Controlled groups must ensure that their employee benefits plans do not discriminate in favor of highly compensated employees (HCEs) across the entire group.

Why It Matters

Understanding controlled group rules is crucial for ensuring compliance with IRS regulations, avoiding penalties, and managing the administration of employee benefits and taxes across related businesses. If you have any questions about this, you can reach out to our team here and we can help point you in the right direction.