Menu Close

Can a Business Start a Different Solo 401(k) Plan for Another Business?

The 401(k) Controlled Group Rules

One must first determine whether adopting the additional Solo 401(k) would violate the CONTROLLED GROUP RULES set up by the IRS and Department of Labor.

The Controlled Group Rules were created essentially to protect employees from a business owner or executive establishing a separate 401(k) plan for another business and thereby not offering those employees the benefits inherent in participating in a 401(k) qualified retirement plan.

The IRS and Department of Labor were concerned that business owners wanting to establish a qualified retirement plan, but not wanting the burden of having to provide benefits to all eligible employees, would create a new separate business which would have no employees other than the owner or executive and then adopt a Solo 401(k) plan for that company. Since the new company would be wholly owned by the business owner and would not have any full-time employees, the business owner could establish his or her own Solo 401(k) plan and, thus, enjoy all the benefits of having a qualified retirement plan without having to provide any benefit to the employees from the other company.

WHAT IS A CONTROLLED GROUP OF CORPORATIONS?

As per Internal Revenue Code Section 414, a controlled group is any two or more corporations connected through stock ownership in any of the following ways:

Parent-subsidiary group

  • 80% of stock of each (subsidiary) corporation is owned by another member of the group
  • Parent corporation must own 80% of the stock of at least one of the other members of the group
  • The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Brother-sister group

  • The same five or fewer individuals own at least 80% of the stock of the corporations
  • “Individual” includes ownership by an estate or trust
  • “Ownership” includes having a controlling interest and effective control of the corporations
  • The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Combined group

  • Combination of a Parent-subsidiary and a Brother-sister group

HOW DOES ONE DETERMINE WHO IS PART OF A CONTROLLED GROUP?

To determine whether one is part of a controlled group, one must take into account the stock attribution rules.

The purpose of the stock attribution rules is to attribute shares, or interest in a company held by certain family members, to the person in question and determine whether that person is part of a controlled group. Internal Revenue Code Section 318 governs the stock attribution rulesPursuant to Internal Revenue Code Section 318, an individual shall be considered as owning the stock, owned directly or indirectly, by or for –

(i) his/her spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance)

(ii) his/her children, grandchildren, parents

CAN THE COMPANIES IN A CONTROLLED GROUP BE TREATED AS SEPARATE COMPANIES?

IRS does have a procedure through which a company can request to be treated as a Separate Line of Business. (see IRC §414(r)) . Following are limitations for these requests:

  • Must have a valid business purposes
  • Must have at least 50 employees within each line of business
  • Restrictions on HCE ratios in each separate line of business
  • Must notify IRS to request their approval

DO ALL MEMBERS OF A CONTROLLED GROUP HAVE TO PARTICIPATE IN ONE PLAN?

No. Members of a controlled group may each have a different plan. Similarly, two or more members of the controlled group may adopt a single plan. In either case, all employees of the controlled group must be taken into account for testing purposes.

For example, if one company is owned by a shareholder with greater than 80% and has no employees, but that same person also has ownership of over 80% in another company with full-time employees, a single plan may be adopted for both companies. However, the adopted plan must provide benefits to the eligible employees from the second company.

In other words, the rules are in place to restrict the owner(s) of a business with full-time employee from establishing a new company with no employees and adopt a Solo 401(k) plan that would exclude the full-time employees from the other company. The IRS and Department of Labor wanted to make sure that all eligible employees of a company that is part of a controlled group receives all available retirement benefits.

To learn more about the Controlled Group Rules, please contact us @ 800.472.0646.

Posted in Solo 401(k)