Controlled group
I expect to own a separate business with full time employees. Will this affect my existing Solo 401k for a business I own where I'm the sole owner and the only employee?
Answer:
One must first determine whether you are part of 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
In certain situations it might be difficult to determine the controlled group status. Therefore, we recommend that you consult experienced CPA and/or a qualified ERISA attorney.
The resource below will be helpful: