Introduction
In retirement planning, common control refers to situations where multiple retirement plans are sponsored by entities that share ownership, management, or other controlling relationships. Understanding common control is essential for plan administrators, fiduciaries, and participants because it affects compliance with contribution limits, nondiscrimination testing, and reporting requirements under U.S. retirement law.
Definition of Common Control
The Internal Revenue Service (IRS) and Department of Labor (DOL) define common control in the context of retirement plans primarily for qualified retirement plans such as 401(k)s, defined benefit plans, and profit-sharing plans. Common control arises in three primary structures:
- Parent-Subsidiary Control: One company owns 80% or more of another company.
- Brother-Sister Control: Two or more corporations share five or fewer common owners who together control 80% or more of each company.
- Combined Control: Elements of both parent-subsidiary and brother-sister rules create a controlled group.
Implications for Retirement Plans
When entities are under common control, the IRS treats all employees of the controlled group as part of a single employer for retirement plan purposes. This affects several key areas:
1. Contribution Limits
Contribution limits under Section 401(k), 415, and 402(g) apply across all plans under common control. For example, if an employee participates in 401(k) plans at two sister companies, the combined contributions cannot exceed the IRS limit.
Example:
- IRS 401(k) elective deferral limit (2025): $23,000
- Employee defers $15,000 to Company A’s plan
- Maximum deferral allowed to Company B’s plan: 23,000 - 15,000 = 8,000
2. Nondiscrimination Testing
Plans under common control are tested as a single aggregated plan to ensure compliance with:
- ADP/ACP Tests: Average deferral percentage (ADP) and average matching contribution percentage (ACP) tests.
- Top-Heavy Rules: Determines whether key employees disproportionately benefit from plan contributions.
Failing nondiscrimination testing may require corrective contributions or participant refunds.
3. Coverage Requirements
The coverage ratio—the proportion of non-highly compensated employees (NHCEs) benefiting from the plan—must be calculated across all plans in the controlled group. Plans may need to combine or adjust benefits to meet minimum participation requirements.
4. Reporting and Form 5500 Filing
Controlled group plans often require aggregated reporting for Form 5500 purposes. Failure to report common control relationships can result in penalties and compliance issues.
Determining Common Control
Fiduciaries and plan sponsors typically assess control using:
- Ownership Percentage: Individual or related-party ownership thresholds.
- Voting Rights: Influence over corporate decisions and board representation.
- Management Overlap: Shared officers, directors, or HR administration.
Example: Brother-Sister Corporation
- Company X and Company Y each have five owners.
- The same three individuals collectively hold 85% of each company.
- Result: Companies X and Y are under common control, and their retirement plans must be treated as one for contribution and testing purposes.
Practical Considerations
- Employee Communication: Employees participating in multiple plans should be informed of contribution limits and aggregation rules.
- Plan Design Coordination: Sponsors may adjust matching formulas and vesting schedules to simplify administration across controlled entities.
- Audit Preparedness: Accurate records of ownership and control are essential to demonstrate compliance during IRS or DOL audits.
- Cross-Entity Benefits: Employers may implement cross-entity allocation of profit-sharing or 401(k) contributions to meet nondiscrimination requirements.
Conclusion
Common control is a critical concept in retirement plan administration that ensures compliance with U.S. tax and ERISA regulations. Entities under common control are treated as a single employer for contribution limits, nondiscrimination testing, coverage, and reporting. For plan sponsors and fiduciaries, understanding ownership structures, properly aggregating plans, and communicating limits to participants are essential steps to maintain compliance and optimize retirement benefits.
