Human Resource & Payroll Services And Solutions - Houston, Dallas, Austin - Texas www.hrp.net. For employee benefit purposes, when a business is related to other organizations, the group is generally treated as a single employer. The "controlled group" concept is complex and traps many employers. You might discover that you have more employees than you realize for benefit coverage and discrimination testing purposes. Here are some of the issues involved to help ensure compliance with federal laws.

1. Toll Free: 877.880.4477
Phone: 281.880.6525
Controlled Group Analysis Is the Key to
Complying with Benefits Rules
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2. In today's business world, companies may be owned by entities that also
have an interest in other companies. Business owners may partner with
investors on ventures without knowing about all of their partners'
business holdings. If the parties sponsor employee benefits plans, there
may be "controlled group" implications that result in penalties -- or even
disqualification of the plans.
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» Under federal law, related companies and
organizations are treated as a single group
for certain employee benefit purposes. In
other words, a business with 20 employees
may be treated as having 60 employees if it
is related to another company with 40
employees.

3. Specific plan requirements that apply to a "controlled group" include:
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 Non-discrimination rules under Internal Revenue Code Section 401(a)(4) ;
 Actual deferral percentage test (ADP) under Section 401(k);
 Actual contribution percentage test (ACP) under Section 401(m);
 Deduction rules under Section, 404(a) ;
 Coverage testing under Section §410(b);
 Vesting requirements under Section 411;
 Contribution limits under Section 415; and
 Top heavy rules under Section 416.

4. Controlled group rules are also applicable in the welfare plan arena. An
issue of immediate concern for small employers is the Patient Protection
and Affordable Care Act's (ACA) coverage mandates. Beginning in 2014, an
employer with more than 50 full-time equivalent employees will face a
penalty if it does not provide adequate healthcare benefits to full-time
employees. Some employers are assuming they will not be subject to the
ACA's coverage mandates, when they may be under the controlled group
rules.
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Here is a rundown on the three categories of controlled groups.

5. Parent-Subsidiary Relationship
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According to the IRS, 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 percent of the stock of each corporation, (except the common parent) is
owned by one or more corporations in the group; and
 The parent corporation must own at least 80 percent of at least one other
corporation.
If one of the corporations owned at least an 80 percent profit interest in a
partnership, the employees of that partnership would also be aggregated
with the other controlled group corporations.

6. Brother-Sister Groups
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As explained by the IRS, 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) collectively own --
directly or indirectly -- a controlling interest of each group and have
"effective control." Effective control requires collective ownership of more
than 50 percent of the stock of each corporation, but only to the extent
such stock ownership is identical with respect to each corporation.
For example, if a shareholder of A and B corporations owned 80 percent of
the stock in A, and 20 percent in B, only 20 percent of that shareholder's
ownership in A would be counted in this test.

7. Combined Groups
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Combined groups are three or more organizations in which:
 Each organization is a member of either a parent-subsidiary or brother-
sister group; and
 At least one corporation is the common parent of a parent-subsidiary
and is also a member of a brother-sister group
(A full detailed description of the controlled group rules by the IRS and
illustrations of how they work is available here.)
Determining stock ownership (or interests in trusts, estates, partnerships
and sole proprietorships) to assess controlled group status is complicated,
thanks to "attribution rules." These rules treat a person "as owning an
interest in a business that is not actually owned by that person," according
to the IRS. "Attribution may result from family or business relationships."
In the case of family relationships, that generally means that stock held by
a parent, minor child or a spouse can be attributed to a single individual.

8. Determining Ownership Stakes
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When different classes of stock are involved, the actual value of stock used to
determine ownership interests for controlled group purposes must be
assessed based on such factors as voting, dividend and liquidation rights.
Keep in mind there may be steps an entity can take to revamp a business so it
is not treated as part of the group. This is a highly complex area of federal
law. Consult with your tax adviser and attorney to ensure your organization is
in compliance with the rules.
Also, there is a procedure under Internal Revenue Code §414(r) that allows
companies to petition the IRS to separate entities from a controlled group on
the basis that they are distinct lines of business. This may be a cumbersome
process and restrictions apply. Among them, each entity must have at least
50 employees and there must be a valid business purpose for the request.
Also, there are restrictions on permissible highly compensated employee
ratios for discrimination testing purposes under this arrangement.
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9. A good time to assess your status under the controlled group rules and
their implications for employee benefit plans is before entering into a
transaction with another business. But even after the fact, it is important
to determine whether you are affected by the controlled group rules.
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