Controlled Groups and Affiliated Service Groups
What You Need to Know Before Designing a Plan
Most business owners think of “my retirement plan” and “my business” as a one-to-one relationship. That assumption can break down when business relationships create what the IRS calls a “controlled group” or an “affiliated service group.”
A controlled group exists when the same ownership, at 80% or more, connects two or more businesses. When that’s the case, the IRS treats those businesses as a single employer for retirement plan purposes, even if each business operates independently, has its own name, and files its own taxes.
Owning a second business, bringing on a partner, or having a spouse who owns a separate company can all create a controlled group.
A controlled group can take one of two forms:
PARENT-SUBSIDIARY
One business owns 80% or more of another.
BROTHER-SISTER
The same five or fewer owners hold at least 80% of each business, with more than 50% of that ownership identical.
Ownership can also count even when it isn’t direct. Certain family members, trusts, and estates can be treated as owning a share of a business for this purpose, which means a controlled group can exist even when no single document makes that obvious.
Consequences
Missing a controlled group or affiliated service group member isn’t a paperwork gap. If that member is left out of coverage testing, the plan can lose its qualified status entirely, and that failure is often retroactive. A disqualified plan means the trust becomes taxable, participant contributions that were meant to be tax-deferred become taxable income, and deductions for prior contributions can be lost.
The exposure isn’t limited to disqualification, either. If one entity within a controlled group adopts a SEP or SIMPLE IRA, that plan and its required contributions apply to every eligible employee across the entire group, not just the entity that established it. A business can unintentionally trigger contribution obligations for employees at a company it didn’t realize was connected.
Another Challenge:
Affiliated Service Groups
Controlled groups are built on ownership. Affiliated service groups are not, which is exactly why they’re the more commonly missed of the two.
An affiliated service group can exist between two or more businesses that regularly work together to provide services, even when common ownership is minimal or absent entirely. The classic example is a professional practice organized as a partnership of individually incorporated providers: physicians, attorneys, or consultants, each with their own corporation, all operating under one shared practice. Income flows from the practice to each corporation, but for retirement plan purposes, the employees of every corporation in that structure must be considered together.
A related version applies when one business exists primarily to provide management services to another. If a significant portion of a company’s business is managing another company’s operations, the two can be treated as an affiliated service group regardless of how the ownership is structured.
Where This Shows Up
Controlled group and affiliated service group questions tend to surface in a handful of recurring situations.
Owning multiple LLCs or corporations, whether actively operated or largely dormant
A professional practice with individually incorporated partners or providers
A spouse who owns a separate business, triggering family attribution rules
Acquiring, merging with, or divesting a business
A management company or staffing arrangement connecting two otherwise separate businesses
Getting This Right
A controlled group or affiliated service group determination isn’t a compliance formality completed after a plan is already running. It’s foundational to whether the plan was designed correctly in the first place, and it isn’t a one-time check. Ownership changes, new entities form, businesses are bought and sold. A determination that was accurate when the plan was first designed can become inaccurate the following year without anyone noticing until testing reveals a problem.
Quick screen: does your situation apply?
CONTROLLED GROUP SCREEN
Ownership attribution rules for family, trusts, and stock options can still change any of these answers.
AFFILIATED SERVICE GROUP SCREEN
This screening illustration is provided for general informational purposes only and does not constitute legal or tax advice. Please consult a qualified professional regarding your specific situation.
Any “yes,” or any uncertainty, is worth a closer look.
Confirm with your MAP Plan Consultant.
