As a finance professional, I often get questions about how retirement plan aggregation rules work. These rules determine how multiple retirement plans interact for contribution limits, testing, and compliance purposes. The IRS imposes strict guidelines to prevent abuse, and understanding them helps optimize retirement savings while staying compliant.
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What Are Aggregation Rules?
Aggregation rules require employers and individuals to combine certain retirement plans when calculating contribution limits, nondiscrimination testing, and top-heavy rules. The IRS enforces these rules to ensure fairness and prevent high-income earners from exploiting multiple plans to exceed annual limits.
Types of Aggregation
The IRS distinguishes between three main types of plan aggregation:
- Controlled Group Aggregation – Applies to businesses under common control.
- Affiliated Service Group (ASG) Aggregation – Targets professional service organizations structured to avoid retirement plan obligations.
- Multiple Plan Aggregation – Combines separate plans of a single employer for testing purposes.
Controlled Group Rules
If businesses share common ownership, the IRS treats them as a single employer for retirement plan purposes. This prevents business owners from splitting companies to bypass contribution limits.
Example: Brother-Sister Controlled Group
Suppose two companies, A and B, are owned by the same five individuals with the following ownership percentages:
| Owner | Company A Ownership | Company B Ownership |
|---|---|---|
| John | 40% | 30% |
| Sarah | 30% | 20% |
| Mike | 20% | 30% |
| Lisa | 5% | 10% |
| David | 5% | 10% |
To determine if they form a controlled group:
- Identify “identical ownership” – Each owner’s lower percentage in A and B.
- John: 30%, Sarah: 20%, Mike: 20%, Lisa: 5%, David: 5%
- Sum the identical ownership – 30 + 20 + 20 + 5 + 5 = 80%
- Check if the group exceeds 50% – Since 80% > 50%, A and B are a controlled group.
This means their retirement plans must be aggregated for IRS testing.
Affiliated Service Group (ASG) Rules
ASG rules prevent service-based businesses (e.g., law firms, medical practices) from avoiding retirement plan obligations by splitting into separate entities.
Example: First-Service Organization (FSO)
A law firm (Firm A) sets up a management company (Company B) to handle administrative tasks. If:
- Firm A’s owners control Company B,
- Company B primarily serves Firm A,
then they form an ASG, and their retirement plans must be aggregated.
Multiple Plan Aggregation
If an employer sponsors multiple retirement plans (e.g., a 401(k) and a defined benefit plan), they may need to be combined for:
- Annual Addition Limits – The total contributions across all plans must not exceed \$66,000 (2023 limit) or 100% of compensation.
- Nondiscrimination Testing – Plans must be tested together to ensure they don’t favor highly compensated employees (HCEs).
Example: Combined 401(k) and Profit-Sharing Plan
Suppose I contribute \$22,500 to my 401(k) and my employer adds a \$30,000 profit-sharing contribution. The total is \$52,500, which is under the \$66,000 limit.
But if I also have a defined benefit plan, the calculations become more complex. The IRS uses a formula to convert defined benefit accruals into an equivalent annual addition:
\text{Equivalent Annual Addition} = \text{Annual Benefit Accrual} \times \text{Present Value Factor}If the sum exceeds \$66,000, the excess must be corrected to avoid penalties.
Key Aggregation Scenarios
1. Solo 401(k) with Side Business
If I own a solo 401(k) and start another business, I must check controlled group rules. If both businesses are under my control, contributions to both plans must be aggregated.
2. Multiple Employers with Common Ownership
Two unrelated companies may seem separate, but if they share owners meeting controlled group criteria, their retirement plans must be combined for testing.
3. Mergers and Acquisitions
When companies merge, their retirement plans may need aggregation. Failure to comply can lead to disqualification and tax penalties.
Penalties for Non-Compliance
Ignoring aggregation rules can result in:
- Plan Disqualification – Loss of tax benefits.
- Excise Taxes – Up to 10% on excess contributions.
- Corrective Distributions – Forcing withdrawal of excess amounts.
Best Practices
- Review Ownership Structures – Annually assess if businesses fall under controlled group or ASG rules.
- Coordinate Contributions – Ensure combined contributions don’t exceed IRS limits.
- Consult a TPA (Third-Party Administrator) – They help navigate complex aggregation scenarios.
Final Thoughts
Retirement plan aggregation rules are complex but critical for compliance. By understanding controlled groups, ASGs, and multiple plan aggregation, I can optimize contributions while avoiding costly mistakes. Always consult a tax or ERISA attorney when in doubt.
