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Controlled Group Case Studies
Ilene H. Ferenczy, Esq., APA, CPC,
Managing Partner, Ferenczy + Paul LLP
Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP
Ilene Ferenczy is the managing member of
Ferenczy + Paul LLP with offices in Atlanta,
GA, Sacramento, CA, and Knoxville, TN. Ilene
particularly focuses her practice on qualified
retirement plans, benefits issues in mergers
and acquisitions, and advising third-party
administrators of employee benefit programs on
technical and practice issues. Ilene became an
attorney after more than ten years as a third-
party administrator, and she brings a unique
and practical approach to her advice to clients.
Ilene H. Ferenczy, Esq., APA, CPC, Managing Partner, Ferenczy + Paul LLP
She is a member of the State Bars of Georgia
and California, and holds designations as a
Certified Pension Consultant from the American
Society of Pension Professionals and Actuaries
("ASPPA”) and Accredited Pension
Administrator from the National Institute of
Pension Administrators. She is a nationally
known speaker on benefits issues and has
authored more than 70 articles and five books.
Ilene is the first female co-chair of ASPPA’s
Government Affairs Committee, was the 2007
recipient of ASPPA’s Educator of the Year
Award, and is a Fellow in the American College
of Employee Benefits Counsel.
Agenda
• Introduction
• Parent-Subsidiary CGs
• Brother-Sister CGs
• Combined CGs
• Attribution of Ownership
• Big Case Study
Introduction
Why Are There Controlled Group Rules?
• Congress intends that the benefits of qualified plans are
to be available only if the plans cover a broad cross-
section of employees and are nondiscriminatory
• The CG rules dissuade companies from trying to bypass
these rules by using different company structures
6
Effect of CG Rules
• If two or more companies are part of a controlled group,
they are treated as one company for benefits purposes for:
• Coverage (IRC §410(b))
• Nondiscrimination (IRC §401(a)(4))
• Benefits Limits (IRC §415)
• Compensation Limits (IRC §401(a)(17))
• Service Crediting (IRC §§410 and 411)
• Top-Heavy Rules (IRC §416)
• Deferral and Catch-up Limits (IRC §§401(a)(30), 414(v))
7
Types of Controlled Groups
• Parent-Subsidiary
• Deals with one company owning another
• Brother-Sister
• Deals with two or more companies being owned by the same
people or entities
• Combined Groups
• Deals with entities that include some parent-subsidiaries and
some brother-sisters
8
Parent-Subsidiary Controlled
Groups
Parent-Subsidiary Controlled Group
10
Parent
Company
Subsidiary
At least 80%
A parent-subsidiary
group exists if one
company (the
“parent”) owns at
least 80% of another
company (the
“subsidiary”)
Special Rule for IRC §415
• For purposes of applying §415 limitations, the “at least
80%” ownership requirement becomes “more than 50%”
• Example:
• Mary owns 100% of M company and M company owns 70% of Z
company. Each company sponsors a plan, and Mary (and only
Mary) participates in both plans.
• M and Z are not a controlled group for most purposes, including
coverage, eligibility, vesting because M doesn’t own at least 80% of
Z.
• BUT, M and Z are a parent-subsidiary controlled group for §415
purposes, because M owns more than 50% of Z.
• So, when Mary’s maximum benefit/contribution amounts are
determined, her benefits in both the M plan and the Z plan must be
aggregated.
Brother-Sister Controlled Groups
Or, For the More Cynical Among You
Brother-Sister Controlled Groups
Brother-Sister Controlled Group
• Deals with companies owned by the same other
individuals, estates, or trusts
• Two-Part Test:
• 80% Common Control Test
• 50% Effective Control Test
14
Brother-Sister Controlled Group
• 80% Common Ownership:
• Five or fewer common owners own at least 80% of each
company
• Common owners:
• Individuals
• Trusts
• Estates
• Note: not other businesses (those fall under parent-subsidiary
rules)
• Ignore common owners who own no interest in one or more of
the companies under consideration (but be careful …) – Vogel
Fertilizer decision
15
Brother-Sister Controlled Group: 80% Common Ownership Test
Owner Company A Company B
Jonathan 70% 30%
Jared 30% 60%
Zoe 0% 10%
16
• These three individuals own all of the two companies
• Zoe, however, has no ownership in Company A, so she is
ignored for this test
• So, Jonathan and Jared together own 100% of Company A
and 90% of Company B – 80% common ownership test is met
Brother-Sister Controlled Group: 80% Common Ownership Test
Owner Company A Company B
Jonathan 70% 30%
Jared 30% 10%
Zoe 0% 60%
17
• These three individuals own all of the two companies
• Zoe, however, has no ownership in Company A, so she is
ignored for this test
• So, Jonathan and Jared own 100% of Company A but only
40% of Company B – 80% common ownership test is failed
Brother-Sister Controlled Group
• 50% Effective Control Test:
• The same five or fewer common owners from the 80% common
ownership test have more than 50% ownership when only
identical ownership is considered
• Identical ownership is the lowest ownership the individual has in
any of the companies being considered
18
Brother-Sister Controlled Group: 80% Common Ownership Test
Owner Company A Company B Identical
Ownership
Jonathan 70% 30% 30%
Jared 30% 60% 30%
Zoe 0% 10% 0%
19
• These three individuals own all of the two companies
• Jonathan’s lowest ownership is 30%
• Jared’s lowest ownership is 30%
• The total, 60%, is greater than 50% – companies are a
controlled group
Brother-Sister Controlled Group: 80% Common Ownership Test
Owner Company A Company B Identical
Ownership
Jonathan 90% 30% 30%
Jared 10% 60% 10%
Zoe 0% 10% 0%
20
• These three individuals own all of the two companies
• Jonathan’s lowest ownership is 30%
• Jared’s lowest ownership is 10%
• The total, 40%, is not more than 50% - companies are not a
controlled group
Another Example
Corporation A Corporation B Identical
Ownership
Dylan 40% 30% 30%
Maggie 20% 40% 20%
Joan 35% 15% 15%
Lewis 5% 0% n/a
Shannon 0% 15% n/a
Ownership of 5 or
fewer (D, M, J)
95% 85% 65%
21
• Individuals with ownership in both companies control at
least 80% (80% common control test passed)
• Same individuals have identical ownership of more than
50% (50% effective control test passed)
Be Careful When There Are More Than Two Companies
Owner Company A Company B Company C Identical
Ownership
Gina 20% 10% 0% 0%
Barbara 35% 40% 5% 5%
Louise 35% 25% 60% 5%
Erica 10% 25% 35% 10%
Total 80% 90% 100% 20%
• Gina has no ownership in one of the companies, so she is
ignored entirely
• The remaining 3 individuals own at least 80% of all companies
(common control test is passed)
• But, the same 3 individuals do not own more than 50% when
identical ownership is considered (50% effective ownership
test is failed)
Be Careful When There Are More Than Two Companies
• Are we done?
• NO!!
• We must consider any sub-groupings of the various
companies to determine if they represent a controlled
group
• Possible CGs: A-B-C
A-B
A-C
B-C
Be Careful When There Are More Than Two Companies
Owner Company A Company B Company C Identical
Ownership
Gina 20% 10% 0% 10%
Barbara 35% 40% 5% 35%
Louise 35% 25% 60% 25%
Erica 10% 25% 35% 10%
Total 100% 100% 100% 80%
• Consider first just A and B
• 4 people control 100% of both companies
• Identical ownership total is 80%
• These two companies are a controlled group
Be Careful When There Are More Than Two Companies
Owner Company A Company B Company C Identical
Ownership
Gina 20% 10% 0% 0%
Barbara 35% 40% 5% 5%
Louise 35% 25% 60% 35%
Erica 10% 25% 35% 10%
Total 80% 100% 100% 50%
• Now consider just A and C
• Ignore Gina (no ownership in Company C)
• 3 remaining people control at least 80% of both companies
• Identical ownership total is 50% - not more than 50%
• These two companies are not a controlled group
Be Careful When There Are More Than Two Companies
Owner Company A Company B Company C Identical
Ownership
Gina 20% 10% 0% 0%
Barbara 35% 40% 5% 5%
Louise 35% 25% 60% 25%
Erica 10% 25% 35% 25%
Total 100% 90% 100% 55%
• Now consider just B and C
• We ignore Gina, because she doesn’t own anything in
Company C
• The 3 remaining people control at least 80% of both
companies
• Identical ownership total is 55%
• These two companies are a controlled group
Wait a Minute There, Buddy!
• There are two controlled groups:
• Company A and Company B
• Company B and Company C
• What does this mean?
• Company B’s plan(s) must be tested twice for coverage (and
maybe nondiscrimination):
• Once with Company A
• Once with Company C
• Company B’s coverage and (if applicable) nondiscrimination must
be generous enough to meet both controlled group testing
Why Would Nondiscrimination Testing Be Affected By CGs?
• Scenario 1: If all three companies are in the same plan,
need separate coverage and nondiscrimination testing
for the two controlled groups
• Scenario 2: If the plan covering the Company B
employees uses general testing, the average
percentage test portion of the average benefits test
takes into account all accrued benefits/contributions of
all employees of the employer (unless the plans are
subject to mandatory disaggregation). So, the test
needs to include the employees in other controlled
group members
Tax-Exempt Organizations
• No stock ownership
• 2007 Regulations (effective for 2009 forward):
• A tax-exempt organization is considered to be under common
control with another organization (tax-exempt or for-profit) if at
least 80% of the Board of one organization is a representative of
or controlled by the other
• 80% is reduced to 50% for§415 purposes
• “Representative” means: trustee, director, agent, or employee of
the exempt organization
• “Control” means: the other organization has ability to remove
such trustee or director and replace him/her with someone else.
Based on facts and circumstances
Tax-Exempt Organizations
• Two companies with a common exempt purpose that
participate in the same plan can treat themselves as
controlled if they “regularly coordinate their day-to-day
exempt activities”
• The regulations contain an “anti-abuse” provision
allowing the IRS to treat two tax-exempts as a controlled
group
Combined Controlled Groups
Combined Controlled Group
32
Parent
Sub 1 Sub 2
82% ownership 90% ownership
• This combined group contains one parent and two
different subsidiaries. A common parent creates one
combined group that can be tested together
Combination of Parent-Sub and Bro-Sis Controlled Group
• In this case, the parent is part of a B/S Controlled Group,
as well as the Parent-Sub Controlled Group
• General rule: if a parent is in a controlled group, the
subsidiary of the parent is also in that other controlled
group
Parent
Subsidiary
Bro/Sis to
Parent
• Penny and Leonard own 100% of the
parent, which owns 100% of Sub
• Penny and Leonard also own more
than 80% of Bro/Sis
Remember This Scenario?
Owner Company A Company B Company C Identical
Ownership
Gina 20% 10% 0% 0%
Barbara 35% 40% 5% 5%
Louise 35% 25% 60% 25%
Erica 10% 25% 35% 10%
Total 100% 100% 100% 40%
• We determined that there were two separate CGs (A-B and B-
C)
• But, there is not one big combined CG because the three
companies, considered together, did not meet the effective
control test.
What About Companies That Are Not Corporations?
• Code Section 414(c) applies controlled group rules to
unincorporated entities
• Corporate ownership based on stock
• Partnership ownership based on profits or capital interest
• Trust based on actuarial value of beneficial interest
• Nonprofits ownership based on common control
• Are directors controlled by directors of other entity? If 80%+,
there is a controlled group
Attribution of Ownership
(What’s Mine is Yours)
Attribution of Ownership
• Attribution means that one person/entity’s ownership
is considered to be owned by a related person or
entity
• Family attribution
• Attribution among companies, trusts, etc.
37
Attribution Among Spouses
• A spouse is generally considered to own all the
stock owned by his/her spouse
• Exception: • Spouse has no direct ownership in owner’s business
• Spouse is not a director or employee of the business, nor does
he/she participate in management of the business
• No more than 50% of the income is derived from passive activity
• No disposition restrictions in favor of spouse or minor children
• Community property state problem: each spouse is
considered to own 50% of community • So does the exception apply?
38
Attribution Among Parents and Children
• Parent considered to own stock of minor children
• Parent considered to own stock of adult children if parent
owns more than 50% of the business
• Minor child is considered to own stock of parent
• Adult child is considered to own stock of parent only if
child owns more than 50% of the business
39
Example: Adult Kids
• Jerry owns an accounting firm and his adult son,
Jonathan, owns a comic book store. Neither has an
interest in the other’s business.
• A parent’s ownership in a company attributes to a child
only if the child owns at least 50% of the company. Jerry
owns nothing in the comic book store to attribute to
Jonathan.
• A child’s ownership in a company attributes to a parent
only if the parent owns at least 50% of the company
Jonathan owns nothing in the accounting firm to attribute
to Jerry.
Example: Adult Kids
• Suppose instead that Jerry and Jonathan each own 10%
of the other’s business.
• Jerry’s interest in the comic book store would attribute to
Jonathan, because Jonathan owns more than 50% of the
comic book store (so, Jonathan’s actual and attributed
interest total 100%)
• Jonathan’s interest in the comic book store does not attribute to
Jerry, because Jerry does not own 50% of the store
• Jonathan’s interest in the accounting firm would attribute
to Jerry, because Jerry owns more than 50% of the
accounting firm (so, Jerry’s actual and attributed interest
total 100%)
• Jerry’s interest in the accounting firm does not attribute to
Jonathan, because Jonathan does not own 50% of the firm
Attribution Between Grandparents and Grandchildren
• Grandparent considered to own stock of grandchild if
grandparent owns at least 50% of the company
• Grandchild considered to own stock of grandparent if
grandchild owns at least 50% of the company
42
The “Minor Child” Problem
• Suppose Ilene owns a law firm and her husband, Jerry,
owns an accounting firm and neither is involved in the
other’s company
• They do not live in a community property state
• Pursuant to the spousal exception, their company
interests do not attribute to each other because of the
spousal exception
• But, their daughter, Zoe, is a minor
The “Minor Child” Problem
• Ilene’s interest in the law firm attributes to Zoe, who is a
minor child
• Jerry’s interest in the accounting firm attributes to Zoe
• Zoe is considered to own 100% of both companies
through parent-child attribution
• The companies are in a controlled group as the spousal
exception is not an exception to child attribution (Yikes!)
Attribution Among Siblings
• None
45
Example
• Besides Jonathan (the comic book store owner), Ilene
and Jerry have another son: Jared, who owns a record
store.
• Jared and Jonathan’s interest in their respective businesses do
not attribute to each other (or to their sister, Zoe)
• There is no attribution between Ilene and Jerry and their sons, as
there is no cross-ownership and ownership only attributes
between adult kids and their parents if one of them owns 50% of
the company
Double Attribution
• Generally, there is no double attribution among family
members
• Double Attribution:
• The ownership of a company attributes from one family member
to another … and then attributes to a third family member who is
not related to the original owner
• Example 1 (no double attribution):
• Ilene’s interest in her company attributes to her husband, Jerry
• Ilene’s interest in her company attributes to her minor child, Zoe
• Example 2 (double attribution):
• Ilene’s interest in her company attributes to her husband, Jerry
• Jerry’s interest in Ilene’s company then attributes to his daughter
from an earlier marriage (i.e., not Ilene’s child), Mergatroid
Business Attribution - Partnerships
• 5% partner is considered to own a proportionate share of
a company owned by the partnership
• This rule also applies to LLCs that elect to be taxed as a
partnership, and LLPs
48
Example 1
• Susan and Barbara are partners in a partnership, SB.
Susan’s interest is 4% and Barbara’s interest is 96%.
• SB owns 20% of another company, ABC.
• Because Barbara owns 5% or more of SB, she is
attributed a pro-rata share of the stock in ABC: 96% (her
ownership of SB) x 20% (SB’s ownership of ABC) =
19.2% of ABC is deemed to be owned by Barbara
• Because Susan’s interest in SB is less than 5%, she is
attributed none of the stock in ABC.
Example 2: A Variation of Example 1
• Susan and Barbara are partners in a partnership, SB.
Susan’s interest is 5% and Barbara’s interest is 95%.
• SB owns 20% of another company, ABC.
• Because Barbara owns 5% or more of SB, she is
attributed a pro-rata share of the stock in ABC: 95% (her
ownership of SB) x 20% (SB’s ownership of ABC) = 19%
of ABC is deemed to be owned by Barbara
• In this example, Susan owns 5% of SB. Therefore, she
now is attributed her pro-rata share of the ABC stock
owned by SB: 5% x 20% = 1%
What Is Partnership Ownership?
• Ownership of either capital or profits share of the
partnership counts for attribution purposes.
• Example:
• Martha is a nonequity partner in a legal partnership. She has no
capital ownership, but gets 10% of the profits.
• She would be attributed her pro-rata share of any entity that the
partnership owns.
Business Attribution - Corporations
• 5%+ shareholders are considered to own proportionate
ownership in stock owned by the corporation
• Note: ownership is based on value, so you would aggregate the
value of all the various classes of stock
• Owner of options considered to own the relevant share of
the company
• Treasury stock is attributed to no one
Example 1
• Erica and Aaron are 50% shareholders in a corporation,
EA, Inc.
• EA, Inc. owns 40% of another entity, XYZ.
• Erica and Aaron are each deemed to own 20% (50% x
40%) of XYZ.
Example 2
• Erica is a 4% shareholder and Aaron is a 96%
shareholder in a corporation, EA, Inc.
• EA, Inc. owns 40% of another entity, XYZ.
• Aaron is deemed to own 38.4% of XYZ.
• There is no attribution to Erica, because she does not
own at least 5% of EA.
Example 3
• Continuing the facts of Example 2 (Aaron owns 96% and
Erica owns 4% of EA):
• Aaron has granted Erica an option in half of his shares of EA.
• Erica is deemed to own 48% of EA, plus her direct interest of 4%,
for a total of 52% of EA.
Attribution from Estates and Trusts
• Beneficiary considered to own actuarial share of stock
owned by trust/estate if such interest is 5% or more
• Grantor of trust is considered to own the stock owned by
the trust
Big Case Study
Big Case Study
• Facts: The Ward Family and the Farmer Family share
ownership in WF, Inc. and Ward-Farmer Manufacturing,
Inc. Members of the Ward Family also have ownership in
another company.
• Question: Are there any controlled groups?
• Companies at issue:
• WF, Inc.: 40% by Mark Ward, 10% by Marta Ward, 10% by Scott
Farmer, 5% by Macie Farmer, 5% by Les Farmer, 30% by
Farmer Family Trust
• Brynne Management, Inc.: 100% by Brynne Ward
• Ward-Farmer Manufacturing, Inc.: 10% by Marta Ward, 50%
by Lisa Farmer 10% by Les Farmer, 30% by Macie Farmer,
Big Case Study
• Family Relationships:
• Ward Family:
• Mark and Marta are married
• Brynne is their adult daughter
• Farmer Family:
• Lisa and Scott are married
• Les is their adult son
• Macie is their minor daughter
• Lisa and Scott are grantors of the
Farmer Family Trust
Mark Marta
Brynne
Scott Lisa
Les Macie
Big Case Study
• Actual Owners:
WF, Inc.
Brynne
Mgmt
Ward -
Farmer Mfg
Mark W. 40% 0% 0%
Marta W. 10% 0% 10%
Brynne W. 0% 100% 0%
Scott F. 10% 0% 0%
Lisa F. 0% 0% 50%
Les F. 5% 0% 10%
Macie F. 5% 0% 30%
Farmer Trust 30% 0% 0%
Total 100% 100% 100%
Big Case Study
• Because no company owns another company, we do not
have any parent-subsidiary CGs – everything is either a
B-S group or not controlled
Big Case Study
• Attribution of Ownership: Family
• Because we need to attain a certain level of ownership to get a
controlled group, I find the best way to do this is to attribute as
much as possible to one person in the family, then do other
layers of attribution to lesser owners
• If there is no attribution from a given entity to the one person I
picked, does it attribute to anyone else in the family?
Big Case Study – Ward Family Attribution
WF, Inc. Brynne, Inc. Ward-Farmer Mfg.
Mark
40% + 10% from
Marta (spousal)
No attribution
from Brynne, as
she is an adult
0% + 10% from
Marta
Marta
10% - 10%
attributes to Mark
No attribution
from Brynne, as
she is an adult
10% - 10%
attributes to Mark
Brynne
0% no attribution
from either parent,
as she is an adult
100% 0%
Big Case Study – Farmer Family Attribution
WF, Inc. Brynne, Inc. Ward-Farmer Mfg.
Scott 10% - 10% attributes
to Lisa 0% 0%
Lisa
0% +10% from Scott +
5% from Macie (she’s
a minor) + 30% from
Farmer Trust
0%
50% + 10% from
Les (she owns 50%
so gets attribution
from adult son) +
30% from Macie
Les
5% no attribution
to/from either parent,
as he is an adult and
they do not own 50%
0% 10% - 10%
attributes to Lisa
Macie 5% - 5% attributes to
Lisa
0% 30% - 30%
attributes to Lisa
Farmer Trust 30% - 30% attributes
to Lisa (grantor) 0% 0%
OK, Let’s Re-Look at Ownership
• Attributed Owners:
WF, Inc.
Brynne
Mgmt Farmer Mfg
Mark W. 50% 0% 10%
Marta W. 0% 0% 0%
Brynne W. 0% 100% 0%
Scott F. 0% 0% 0%
Lisa F. 45% 0% 90%
Les F. 5% 0% 0%
Macie F. 0% 0% 0%
Farmer Trust 0% 0% 0%
Total 100% 100% 100%
Let’s Apply the Rules (to all 3 Cos)
Owner WF, Inc. Brynne Mgmt Farmer Mfg Identical
Ownership
Mark 50% 0% 10% 10%
Brynne 0% 100% 0% 0%
Lisa 45% 0% 90% 0%
Les 5% 0% 0% 0%
Total 100% 100% 100% 10%
• No one has ownership in all 3 companies, so they cannot be a
controlled group
• Brynne is the only owner of Brynne Management, and she
owns nothing in any of the other companies, so Brynne
Management cannot be a part of a CG with any of these
entities
Let’s Apply the Rules (to just WF and FM)
Owner WF, Inc. Brynne Mgmt Farmer Mfg Identical
Ownership
Mark 50% 0% 10% 10%
Brynne 0% 100% 0% 0%
Lisa 45% 0% 90% 45%
Les 5% 0% 0% 0%
Total 95% 100% 100% 55%
• Eliminate Brynne and Les from consideration because they do
not own anything in one or both of the companies
• 3 remaining individuals own at least 80% of both companies
• The same 3 individuals own more than 50% when identical
ownership is considered
• These two entities make up a Brother-Sister Controlled Group
QUESTIONS?
32
Contact Information
ILENE H. FERENCZY Ferenczy + Paul LLP
2200 Century Parkway, Ste. 560
Atlanta, Georgia 30345
(678) 399-6602
69