Introduction
Qualified retirement plans are employer-sponsored programs that meet IRS requirements, offering significant tax advantages for both employers and employees. When establishing such plans, common ownership rules are crucial. They determine which employees must be included, how contributions are aggregated, and how benefits are allocated. Understanding these rules helps employers maintain compliance, ensure fairness, and optimize retirement benefits.
1. Definition of Common Ownership
Common ownership occurs when multiple businesses or entities are owned by the same individual(s) or group of individuals. The IRS considers these ownership structures when applying rules for qualified retirement plans, including eligibility, contribution limits, and nondiscrimination testing.
Types of Common Ownership
- Parent-Subsidiary: One company owns at least 80% of another company’s stock or capital.
- Brother-Sister: Two or more companies are owned by the same five or fewer individuals, with at least 80% overlap in ownership and effective control.
- Combined Control Groups: Situations that combine parent-subsidiary and brother-sister structures, aggregating ownership and control for regulatory purposes.
2. Impact on Plan Coverage
Common ownership directly affects which employees must participate in a retirement plan:
- Employees from all entities in a controlled group may need inclusion to satisfy nondiscrimination rules.
- Aggregating employees across commonly owned entities ensures the plan does not disproportionately favor highly compensated employees (HCEs).
Example:
- Company A owns 85% of Company B.
- Both companies maintain separate 401(k) plans.
- IRS rules require including employees from both entities for nondiscrimination testing.
3. Contribution and Benefit Limits
When entities have common ownership, contribution limits may be applied collectively across the group.
- Defined contribution plans, such as 401(k)s and profit-sharing plans, have maximum limits per participant ($66,000 for 2025, including employer contributions).
- Employees earning compensation from multiple controlled entities must aggregate contributions to avoid exceeding IRS limits.
Table: Contribution Limits Across Common Ownership Entities
| Employee | Company A Contribution | Company B Contribution | Total Contributions | 2025 Limit | Status |
|---|---|---|---|---|---|
| John Doe | 30,000 | 25,000 | 55,000 | 66,000 | Within Limit |
| Jane Smith | 40,000 | 30,000 | 70,000 | 66,000 | Exceeds Limit |
Example Calculation:
- John works for both companies. Total contributions: 30,000 + 25,000 = 55,000.
- Since 55,000 < 66,000, he remains within the annual limit.
4. Nondiscrimination Testing
Common ownership affects nondiscrimination testing, which ensures plans do not favor HCEs:
- Aggregated employee counts across controlled entities are used for top-heavy testing and Actual Deferral Percentage (ADP) testing.
- Excluding relevant employees can disqualify the plan, resulting in lost tax benefits or required corrective distributions.
5. Employer Considerations
When establishing a plan under common ownership, employers should:
- Identify all controlled group entities to ensure compliance and proper coverage.
- Coordinate contributions for employees working across multiple entities.
- Plan for consolidated nondiscrimination testing to avoid penalties.
- Consult legal and tax professionals to structure the plan correctly under IRS rules.
6. Benefits of Properly Considering Common Ownership
- Maintains the plan’s qualified status and tax advantages.
- Protects against disqualification penalties.
- Promotes fair treatment of all employees across entities.
- Facilitates accurate reporting and compliance during IRS audits.
Conclusion
Common ownership is a critical factor when establishing a qualified retirement plan. Parent-subsidiary, brother-sister, and combined control groups affect plan coverage, contribution aggregation, and nondiscrimination testing. Employers who carefully identify ownership structures, coordinate contributions, and consult professional advisors can maintain compliance, maximize benefits, and ensure fairness for all employees. Tables and practical examples, like aggregating contributions across multiple entities, help illustrate the application of these rules and protect the long-term integrity of the retirement plan.
