Let AI pick your perfect Self-Directed solution! Try Our AI Tool Today!

IRA Financial Blog

401(k) Controlled Group Rules Explained – Episode 342

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the controlled group rules for 401(k) retirement plans, and why you cannot exclude employees from utilizing the plan.

The 401(k) Plan Control Groups Finally Explained

Hey everyone, Adam Bergman here, tax attorney and founder of IRA Financial and on today’s podcast, gonna spend some time explaining in simple, simple terms, how the 401(k) plan control group rules work. Now, if there’s one area that confuses people more in the retirement space, it’s this. This is the one area that trips up so many tax practitioners when it comes to setting up 401(k) plans for their clients. And why? Because it’s so damn confusing. So, what I’m going to do is I spent a lot of time working on the PowerPoint, which I’m going to share with all of you. So, if you are listening to this and you’re like, what the hell is this guy talking about sharing a PowerPoint? You can simply check us out on YouTube and you can actually watch the video if you wish, or you can just listen along and I will do my best to kind of explain what’s in front of you.

But, essentially the 401(k) plan control group rules were created to stop business owners, highly compensated employees, partners, people that control the business from essentially offering themselves benefits and not their employees,okay? So, the rules are basically to say, hey, if you can have a 401(k) plan, you need to be able to offer the same benefits that the highly compensated employees, the owners receive; the rank and file employees need to receive the same. And what we want to stop people from doing is the business owners creating their own 401(k) plan for their side business with their spouse maybe, or their other partners, and not including the employees; basically not even telling them that there’s a 401(k) plan out there. Okay, so these control group rules were created for that purpose: to protect the rank and file employees; to make sure that if there is a 401(k) plan out there that the business owners have created, they should receive benefits.

So, this is an area that a lot of people don’t realize, right? I’ve probably gotten oh my God, in 12-13 years just with IRA Financial and then prior as a tax attorney, hundreds and hundreds of times I’ve gotten this question in this proposal, hey Adam, I got this idea. I have a company, there’s eight employees, 15 employees. I don’t have a 401(k) plan yet because it’s kind of annoying. I got to provide benefits to my employees. So, this is what I’m going to do. I’m going to create my own little LLC, me and my husband, me and my wife, and I’m going to have that business pay the LLC. I’m going to max out my 401(k), that’s it. I can max out. I don’t have the cost of having a big 401(k) plan. I don’t have to give my employees any safe harbor matches, 3% safe harbor matches, or deal with complicated 5500 and plan testing and all that nonsense. I don’t need to do it. I can just have my own 401(k), no one’s going to know about it. Well, guess what? You can’t do it.

So, the Internal Revenue Code established the control group rules back in 1964, actually, before ERISA was created, which was 1974. So, they were concerned about people, businesses and their owners not offering benefits to their employees. So again, I’m going to go through these rules, I’m going to try to keep them simple. I’m going to offer examples. There’s some flow charts. So again, if you are listening to the podcast, you can check out the video on YouTube. Just go to the IRA Financial channel and you can watch it and actually see the PowerPoint for yourself, if you’re interested. That may make things easier for you to understand. But I just want to give everyone a, I think, detailed but not overly complex explanation of how these control group rules work so you don’t find yourself in a bind, because I can’t tell you how many people I’ve spoken to, where they came to me and said I’m in trouble, Adam. I set up this Solo K last year, two years ago, five years ago, no one told me about this thing called the Control Group Rules. I own two, three businesses and employees. They don’t have any 401(k)s. And now my accountant said I’m in trouble and I may have to go back three years and basically take away my contributions and offer benefits, and this is a royal mess. So, this is the point of today’s podcast videos to educate people, small business owners, business owners who are contemplating setting up a 401(k) or at least setting up a Solo K for themselves, and they have businesses. I want to make sure that you’re aware of the rules.

So, there’s four ways to really trigger the control group rules. Something called a parent-sub, which is kind of up and down, brother-sister, which is sideways, if you go horizontal, and then the combination of the above. And then something called affiliated service, which also means kind of management services. So, we’re going to go through parents-sub and brother-sister, which talk about cross ownership, and then we’re going to talk about affiliated service, about something called an A and a B. An A will require ownership of this affiliated service, so the idea I mentioned, where you have, let’s say, a law firm with ten employees, and now you’re going to set up your own LLC for you and your spouse. It’s going to receive most of its income from service, income from the law firm, and then B, where there’s actually no cross ownership, but there’s still management services. Basically, it’s very hard to break these rules. I have some smart, smart, smart clients; I have probably about 7,000 Solo 401(k) clients. I probably could have had ten more thousand without these control group rules. But out of the 7,000, I got a couple of really, really smart people and they’ve worked super hard to kind of get around these rules. Trust me, it’s not easy.

So let’s start with parent-subs. Parent-sub is the easiest. Basically, there’s 80% ownership. So, if you own company A and you own more than 80% of it, any other business that you own is part of the control group. Okay? So, this is the easiest one to figure out. So, I own 100% of Corp A, which owns 90% of Corp B. That’s a control group. This is the easiest one, right? I own 100% of a car washing company and then I own 10% of, let’s make it simple, and then I own 10% of some random shoe company. The control group rules will say because you own more than 80%, sorry, I own 100% of the car wash and 80% of the dry cleaning company or the shoe store or the bar; because they’re both own 80% or more: parent-sub control group rules will work, and we’ll treat companies, even though they are two separate companies, two different industries, two different tax returns, they’re going to treat it as one business for purposes of 401(k)s or SEP IRAs for retirement contributions. So again, 80-80.

Now, there’s something called brother-sister; okay so parent-sub is where one company owns the other company; more than 80% ownership. Brother-sister is just think about it when you talk about horizontal, like along the same line, two or more corps, which five or fewer shareholders own directly or indirectly, a controlling interest. Controlling interest generally means 80% or more of the stock of each corp and 50% or more of the voting. Okay? So it’s 80% of the stock and 50% of the actual control.

So again, two or more corps in which five or fewer owners own 80% of each company. Unlike the parents-sub, where one owns the other, here there are two separate companies, with just common ownerships. So, this is also a super common way to get tripped up and run afoul of the control group rules.

Again, you have a restaurant where you have 30 employees and then you have a random, I don’t know, dry cleaning business where you have the same common owners and the same common owners own 80% or more of that business; bang, you’re in the brother-sister. Parent-sub is when there’s owner, the parent owns the sub; and the brother-sister, the companies don’t actually own each other, but the owners, the shareholders or the members; there’s common ownership and there’s 80% more of common ownership. Again, even if the businesses are totally, totally, totally unrelated, nothing to do with each other; again, one is a restaurant, one is sells roof tiles, it doesn’t matter. Totally random. It’s all about ownership. What’s the purpose of this? The purpose is, hey, one, Adam owns a law firm with ten other people. They don’t want me to set up a side business with my wife that, even if it’s separate, if there’s common ownership, we’re in trouble.

So, if there’s not common ownership, right, let’s say I have a law firm, ten Partners, okay? And let’s say I own 80% of that. And then I have a second business that’s totally unrelated but owns less than 80%, now, I’m not in the brother-sister, I’m not in the parent-child, but, we’ll soon see in a minute that I could be in the affiliated service and I probably am.

Okay, so look at an example here: Adam and Bell are owned by four shareholders. Shareholder A owns 80% and 20% of B. B owns 10% and 50%. C owns 5% and 15%. D owns 5% and 15%. Again, all of them, we have four shareholders, all of them common, all own more than 80% in both companies. So let’s look, does this satisfy or trigger the control group rules? So, we have the same five or fewer shareholders own more than 80%. And since four shareholders own more than 80%, the first test is met. The second test talks about five or fewer shareholders own 50% of the stock and that is also satisfied. But, the issue is, is it satisfied? So in this example, the four shareholders together own 80% of the more the stock of each corp, but they do not own more than 50% of the stock of each corp. So, in this case, it actually fails the control group rule. So, it’s 80% and 50%, right? Let’s just summarize that because I know it gets confusing to some people.

Parent-sub, okay, let me just go back to parent-sub. That’s 80%, okay? Corporation owns 80% of at least one other corp. So, 80 and 80. In the brother-sister, and that’s the parent owning the sub, right? Up and down. Parent owning the sub. Brother-sister is side by side. There’s two tests. There’s 80%, five or fewer shareholders need to own 80% or more of the  companies, but 50% of the stock of each corp must be owned by those people. Okay?

So, if you look at this example, which is interesting, the Adam Corp. Shareholder A owns 80% of Adam’s Corp. And, only 20% of B Corp. So, if you look at the brother-sister, to meet the second test, five or fewer common owners must own more than 50% of each corp, taking into account the stock ownership. So, in this example, although the four shareholders own 80% or more of the stock of each corp, they do not owe more than 50% of the stock of each corporation, taking into account only the identical ownership. So, you have to look at identical ownership and you don’t have a match. You only have 5%, 5%, 15% and 15%. So, you don’t have the 50%. So, the brother-sister again, trips up a lot of people. The parents-sub is super easy to see, right? 80% ownership,. Brother-sister, people forget that there are two tests. There’s the 80% test, which is easy to figure out, but the 50% test of identical ownership is how some people are able to get through brother-sister. But, we’re going to see in a second why that’s not always so easy.

So, one thing I want to talk about is attribution and basically the way it works is they will attribute ownership of family members to you, right? So, a lot of people say, okay, Adam, this is super easy to just solve, I’ll just have my wife, my kids take some of my ownership in the other business. But no. So, if you look at ownership and attribution, spouse to spouse, there is no attribution between spouses if there’s no direct ownership, okay? And, there’s no more than 50% of the income is passive. So, if one spouse doesn’t own the other business, you can’t attribute to that spouse. But if there is both spouses in the business, then you have potential attribution. Minor childs, parent, parents, adult child – only if the adult child owns more than 50% of the business. Adult child to parent – only if the parent owns greater than 50%. Grandparents to children – only if the minor adult owns greater than 50%. There’s no attribution between siblings.

So, attribution is a way you can kind of try to think at least you can get around the control group rules, but the IRS put in the attribution rules to stop it. Now, the spousal way is kind of how most people get stopped and the control group rules prevail and stopping the 401(k) to get created. So again, there’s no attribution if there’s no direct ownership in the company and no more than 50% of the income is passive. But if you have a husband and wife owning one company, there’s going to be attribution; as long as there’s direct ownership. If the, one spouse owns something, the other spouse owns nothing of either company, there’s no attribution. There needs to be direct ownership. And then with parent and child, it’s more than 50%. So, if the parent owns 20% and the kid owns 60%, the kid ownership will be attributed to the parents and the parent will be deemed to own the kid’s percentage as well.

Again, all this is there to make sure that no one can violate the brother-sister or the parent-child. So, attribution is another tool the IRS uses to stop people from doing or at least trying to evade the control group rules. Okay.

Affiliated service, management services; three and four, this is catchall. This is the area people don’t know about and a lot of people just do the analysis of parent-child and brother-sister and say, okay, I’m good, Adam. I did it. I don’t have 80% and there’s no common ownership of 50% or more, same ownership because I played around with the numbers, I’m good. I’m going to do my own Solo K, thank you very much.

And that’s why I said, you guys ever checked out 414(m) affiliate service? And they’re like, what are you talking about? So the affiliate service says, hey, even if you can pass brother-sister or parent-child, because you’re under the 80% or 50%, you still have to worry about service being performed.

So now I mentioned I broke it down into A orgs and B orgs. So an affiliate service group is type of related employers, two or more orgs that have a service relationship, and in some cases, they may not even have an ownership relationship. So an A org consists of an organization designated as a first service org, which we’ll get into, and an A org, and a B org is a B org and an FSO, FSO first service org.

Let’s talk about an FSO. An FSO is basically a service org, an organization that really just provides services, okay? The consulting companies, the law firms, and we’ll get to them in a second. Now, to be an A org, you have to satisfy two tests. There’s got to be some ownership. The organization is a partner or shareholder in the FSO, some common ownership, and the organization regularly performs service for the FSO. Okay? So, there’s some common services being performed. Think about the law firm and Adam and his wife doing consulting, right? We’ll see in a second. There’s going to be ownership, will be satisfied because I own some of the law firm and we’re going to have a working relationship because service was being performed. So, even if I’m under the 80% and I think I can satisfy parent-sub because I play around with ownership numbers, I’m going to fail the affiliated service

A B org. So, this is the crazy stuff; with the B org, a significant portion of the business must be performance of services for the FSO, okay? The services must be what’s typically performed and 10% or more of the interest in the org must be held by highly compensated employees. But you’ll see, there’s not necessarily common ownership or even ownership, which is crazy.

Actually, let me get into what a service org is. So, a service org is an org engaged in one of the following services: health, law, engineering, architecture, accounting, actuary services, performing arts, consulting, insurance, right? All the stuff that you really catch all services, basically consulting stuff.  Because that’s what a service org is. Okay? So, an organization will not be considered a service org if it’s engaged in manufacturing or sale of equipment and performance research, or if an employee provides one of the enumerated service to the org and the other employees of the org, unless the org is also engaged in the performances of services for a third party.

So, if it’s doing stuff like selling widgets or manufacturing something, creating something, it’s probably not going to be deemed a service org. If the principle business of the org will be considered the performance of service if capital is not a material income-producing factor. So super important, and this is probably the most important thing to remember when you’re determining whether you have a service org. Is capital a material income-producing factor of the business? Now capital is material income-producing factor for banks and similar institution. Capital is not a material income producing factor if the gross income of the business consists principally of fees, commissions and other compensation of personal services, right? Consulting. You know when you see it. You know when you’re consulting, law, engineering, accounting, that type of stuff. That’s where capital is not a material income reducing factor. And then think of a factory that’s a business that you have a situation where capital is a material income-producing factor. So that’s what a service org is. Okay?

Now this is a great chart. So if you’re listening on the podcast, I’m sorry, you can’t see this, so check out the YouTube video of this, because this chart is actually pulled from an IRS document. It’s super helpful. It goes through the flow chart for A orgs and FSOs. So, basically, first question: is the org a partner or shareholder of the FSO? If it’s no, guess what, you’re not in the affiliate service A part. We’re going to talk about B, okay? And then it goes through what is an FSO? Is the organization of principal business performing services? Yes. Is capital not a material and producing factor? Yes. The organization is an FSO.

Okay, so if you have a situation where, let’s say I have a law firm and then I have a business, second business, where I have no ownership but there are services being provided from the law firm to this business, that maybe I’m an employee of, I’m not going to fail the A org, okay, and assuming I don’t fail parent-sub and obviously, brother-sister because there’s no common ownership.

So now let’s look at the B, right? The B; is a significant portion of the business of the org the performance of services for the FSO? Yes, let’s say. Let’s say 100% of the LLC that I’m an employee of services my law firm. Are there services of a type historically performed by employees in the service? Let’s say yeah, we’re doing, let’s say I don’t know, let’s say secretarial work or maybe we’re paralegals, let’s say, it’s paralegal service, so that’s the service typically law firm employees would do.

Is 10% or more of the interest in the org held, in the aggregate, by persons who are designated group of members of the FSO. Okay? So, if I don’t own 10% or more of the interest in this org, maybe I’m not a B org, right? I’m just an employee. But, if I own 10% or more of the interest in this B org, then I’m going to fail the test. Okay? So, 10% is kind of the number. So, you can stay under 10% of this service company, become an employee, and you technically will get around A, but maybe not, right? Because remember, if you go back to A, is the organization a partneror shareholder in the first? Well, you’ll say no or yes, right, depends. Let’s say Adam owns 30% of the law firm, okay? So I’m not a parent-sub. I’m not a brother-sister. And I own 5%, let’s say, of this paralegal company. So is the org a partner or shareholder in the first service? Maybe through attribution indirectly, but let’s say no. Okay? So then I satisfy A, but if I own more than 10% or more of the interest in the org held, in the aggregate, by persons or designated group of members of the FSO, then I fail B. But, if my ownership is zero of the B, let’s say, there’s no attribution. Let’s say my friend, my neighbor owns the paralegal company and I’m just an employee of it, okay? And there’s no common ownership and there’s no attribution because it’s not kids or spouses. I may be able to get around the B test. But, if I put my wife there, I’m going to fail because of attribution, right? Because there will be common ownership because I own the law firm. My wife owns a paralegal company. There’s attribution that will fail. I’ll probably fail the B or the A. I won’t fail the brother-sister, parent because of the, well, maybe the parent, depending on the ownership of my wife.

But that’s how you see attribution coming in and really kind of running havoc on these rules and turning something in a situation where you may be able to circumvent the rules because you can have a spouse or a kid own the other company, that will stop it. The only way this works, honestly, if you own 0% or under 10% of the B org, okay? There’s no common ownership, other than the less than 10%. But again, you need to find someone that’s going to own 90%. You basically got to give up 90% of the income. I have people that say, well, I don’t really care, I’ll just rip the income off in my salary, and that’s possible. You got to get someone to play along with you that’s actually going to want to waste their time owning a company that they may not make any money on, but that’s really the only way to do it. It’s hard to beat the parent-sub, brother-sister because of attribution. The brother-sister, you can play around with the 50% of common ownership, but then you get into the A org, where you’re going to fail that probably. Because the org is probably common ownership. Remember, if you go back to what the A org rules are; I’ll just slide back up here. You have a situation where, to satisfy the A org, the organization is a partner or shareholder in the FSO, regardless of the percentage that’s just it owns, okay.? And there’s a regular performance of services. So, if there’s common ownership there of even 1%, you can be in trouble and there’s going to be probably attribution to the partners and then the B org: 10% or more of the interest in the org is held by key people. That’s how the B org will stop it. It’s really hard to do it. You essentially have to own zero to satisfy this. So, the A people get around the A because they’re like, oh, the law firm doesn’t own the paralegal company, I’m good. But then the B org will come in, where there’s a 10% or more of the interest are held by key people, highly compensated employees.

So, the only way to do it is if Adam owns 50% of the law firm or even, let’s say 70% of law firm, if I own 1% of this paralegal company and Joe Smith, my neighbor, owns 99%, I may be okay under the B org rules, because it will fail the B org.

So, let me just go back down to some examples. So, the ABC partnership is a law partnership and essentially it’s a corporation in Capital City is a partner in the law firm, ABC of Capital City. ABC of Capital City provides paralegal services to the law firm. Since all the employees of the corp directly for the corp and none of them work directly for the law firm. The law firm is an FSO, right? It’s the first service organization. The corporation is the A org, because it is a partner in the FSO. Right? There’s common ownership. Okay, so that’s easy.

Next one. XYZ is a financial service org that has eleven partners. Each partner of XYZ owns 1% of the stock in Magic Corp. Magic provides services to the partnership of a type historically performed by the employees of the financial service. Significant portion in the business of Magic consists of providing services XYZ. Considering XYZ as an FSO, the Magic Corp. is a B org because a significant portion of the business is in the performance of services and more than 10% of the interest in the Magic is held in the aggregate by highly compensated, okay? Eleven common owners. So that gives you an idea. But, let’s say only nine or eight common owners, then you’d technically be able to get under the B org common ownership rules. Okay? So, that’s something to consider. Once you’re under the 10%, you have some wiggle room.

Here’s another one. Joe Smith is an office manager and a highly compensated employee of the accounting partnership, DEF. Blue Corps provides the secretarial services for DEF. Joe Smith owns 50% of the stock of the secretarial corp. A significant portion of the business of the secretarial corp consists of providing services to the partnership. Considering the partnership as an FSO, blue is a B org because, again, a significant portion of the business, the secretary services, to the company and more than 10% of the interest in the Blue Corp is held by highly compensated, Joe Smith. Okay? So, another example of how this works.

So, putting this all together. If you have common ownership of more than 10%, it’s going to be awfully hard to get around control group rules. Again, so even if you can satisfy parent-sub, brother-sister, because you can get around the 50% or more of common ownership, and even if you can get around the A org, because of the ownership rules, one company doesn’t own the other, the 10% threshold and the B rules will make it awfully difficult to satisfy, right? You think you’re getting there right? If you go through the B org flow chart, it says number one, a significant portion of the business orgs for the performance of services of the FSO, so you’re like, okay, I lose that. Are those services typically performed? Yes, paralegal services are the same. So, I lose that. Is 10% or more of the interest in the org held, in the aggregate, by persons who are highly comps of the FSO? If it’s no, then it’s not an affiliated service group. Okay? So that’s the key, since you got to stay under the 10%. Okay, that’s really the thing to consider under the A and B rules.

And that’s the most confusing part that people get tripped up on is they go through parent-sub, they go through brother-sister, and they forget about the affiliated service. They never heard of it and they think they’re home free and then they find out they’re in big trouble because they set up a plan and never offered benefits to their employee. So, you have to look at affiliate service. It’s all about the facts. It’s super, super key. Attribution. Don’t forget about attribution; kids, spouse, where there’s direct ownership. This is why it’s so important to work with professionals. This is the most important reason. Well, obviously you need plan documents. You’re not going to create your own plan docs. But, if you have more than one business where you have ownership in, and you want to set up a 401(k) and one of the companies has employees, you absolutely 100% need to think about control group rules. 100%! Do not do anything without speaking to a tax professional about the control group rules. I’ve seen nightmares, literally nightmares, where companies have to pay hundreds of thousands of dollars in penalties to make this right, because for the last three years they’ve had 30 employees and they never offered them any benefits and they maxed out for the last three years and there’s excess taxes. It’s a freaking mess.

So again, if you have two or more businesses and want to have employees, you need to think control group rules. Okay? You got to think affiliated service. There’s no common ownership between the companies. The 10% or more of the ownership: is it from highly compensated employees of the other business, okay? So, you need to be super careful about all this stuff. Are management services being performed? So again, I know it’s a confusing topic. I probably kind of dove in a little bit too detailed. I’m sorry for that. But, it just needs to be explained. This PowerPoint that I have, if you are interested in this subject, definitely check it out on YouTube. It will make a huge difference to kind of see the flow charts. The flow charts are crucial for A and B. Parent-sub’s easy to understand. It’s just 80%. Brother-sister: 80% ,and then the 50% common is where you can kind of play around with stuff.

The issue is then the A and B affiliated service. That’s where people get killed and fail the control group rules because they’re either common ownership between the companies, one company or the other, or there’s 10% or more from the highly comps, and it just gets tripped up. And again, most people kind of follow the lines of, hey, I got a business with ten employees, I’m just going to set up a consulting company. And it’s one company will pay the other. There’s more than 10% ownership across company, and that’s what the affiliated service rules are going to stop. It’s very hard to have two businesses that are actually separate. One has employees, one does not, and there’s no connection. It’s possible. I’ve seen it, but it doesn’t always happen. So, it’s very rare that someone has a manufacturing business with employees and then has a factory with no employees. It just doesn’t make sense. It doesn’t happen. That’s why those scenarios aren’t very common.

The scenario that’s common is one business has employees, and then the owners want to create a business that has no employees. Because if one business has employees and you want to create another business, it’s awfully hard to have a successful business that’s not consulting, that has no employees. Right? You just can’t do everything yourself. Not even Tom Brady can do it all, Bill Gates, like you need employees. So, that’s why once they have the consulting first service org rules there, it’s hard to get around them. I mean, It could work. You can have a situation where you have business with employees, and then you have a separate side business that’s not an FSO, that has nothing to do with the company, with employees that’s not a consulting or service business that doesn’t have employees. It’s possible, but not often, right? Just doesn’t happen. Right.

So an example, you own 50% of a law firm, and you have a side business where you do consulting, consulting work. Let’s say you do it for other people, right? Let’s run the scenario. You don’t consult for your own law firm. You consult for other people. So, you’re not an A org, right? Because, let’s do the math. Let’s say you own 100% of the LLC. You do consulting work. If you own 80% of the law firm, it’s parent-child, so you’re dead, right? If you own more than 50% of both, brother-sister, you’re dead. But let’s say you own 20% of the law firm and 100% of the consulting firm. So you don’t have brother-sister, 50/50, no parent-child, 80/80. So now, affiliate service. Let’s say one org doesn’t own the other. Bang. But I said you own more than 10%. So let’s see, is a significant portion of the business of the org performance of services for the FSO? Let’s say no, right? Because it does consulting work but does it for other law firms, then I think you’re okay, right? Because it’s totally separate from the law firm. And because you own less than the 50% and the 80%, you don’t have an affiliated service issue. But, if you own more than 80% of the initial business, you’re going to fail, potentially the parent-child, and you can probably fail, probably not fail the B org, but you fail the parent-child if you own 80/100. So, you’d have to be under 50% of the first business, okay? And then you’d have to be under well, if you were under 50% of the main business and your second business has nothing to do with your first business, then you’re okay. But, if there was services being provided between both companies, you’d be in trouble, right?

So this is how you see how it gets very confusing. And that’s why it’s all facts and circumstances. And you need to really work with a tax professional that can go through your scenario, get all the facts, gather them, and then do the analysis. Parent-child, brother-sister, A, B, what’s going on? And then attribution. Add attribution to all this. So, this is why this is the area that trips up the most tax practitioners and tax professionals I’ve seen. It confused the heck out of brilliant actuaries, super smart tax lawyers because it’s so damn confusing when you look at A and B FSO situations, which not a lot of people kind of focus on.

So,that’s it. Now, if you have more questions, generally, I totally get you. I’m here to help. IRA Financial, this is something we help our clients with, especially our Solo 401(k) clients. This is what happens, right? Some of them do have their own businesses outside of the Solo 401(k) world, and now they want to set up a Solo K for whatever reason. The first set of analysis we do is, does it satisfy control group rules? Can you do it? Are the control group rules triggered? Are you running afoul of those rules? Usually they satisfy parent-child, brother-sister; it’s the affiliated service stuff, right? Maybe they own 40% of the first company. Now the issue is, is the second company going to get most of its revenue from that first company? If yes, they’re in trouble. If no, hey, we may have an option for you. You could be in good shape. But it gets confusing. We got to look at all the companies you have an interest in, even passively, and kind of do that analysis.

So, there you go. That’s a long Adam Talks. And again, I suggest if you are interested in this topic, go to YouTube and watch the video. It’s going to be a lot easier to digest and understand, I promise, just because it’s something that you kind of need to visualize. So, it’s an area I’m happy to do more discussion on and have a separate follow on, podcast on because it’s such an important topic and it’s actually a topic I’m doing a presentation to CPAs in the coming weeks on this and this probably spent about two hours on. So, this is an area that I can spend a lot of time and kind of go through examples, facts, and kind of debate whether control rules would apply.

So, again, if you have two or more businesses, one has employees, one doesn’t, there’s some common ownership, you 100% need to focus on control groups before you set up the Solo K, please. Before! You may be able to get around them; there could be some strategies that we can work on, but in some cases, you just kind of maybe block, and that’s okay. Better to know up front, and you kind of address that at that point. It’s very difficult to unwind, and there’s significant repercussions from a tax and penalty standpoint. So, you do not want to be in that position.

Other than that, I hope you guys enjoyed today’s podcast or video. Again, I tried to keep it simple. I know it’s probably a little bit confusing. I hope your brain is not melting, but that just kind of gives you a taste of how confusing the topic is and how important it is. So, thanks again for spending some time with me today. And if you are listening and want more of the visual, definitely check out the video. I think it’s going to help you understand the topic more effectively. Thanks again. Be well and take care.


Latest Content

Send Us a Message!