Controlled group
I expect to own a separate business with full-time employees. Will this affect my existing Solo 401k, which is adopted by my business where I'm the sole owner and the only employee?
You must first determine if your businesses fall under controlled group rules, established by the IRS and Department of Labor (DOL).
Purpose of controlled group rules
Controlled group rules were created to protect employees from business owners who might structure their businesses to avoid providing retirement benefits to their employees.
For example, a business owner has a business with full-time employees. To avoid providing retirement benefits to those employees, the business owner creates a new, separate business in which he is the only employee. He uses that new, separate business to adopt a Solo 401k only for himself.
To reduce the occurrence of the above, the IRS and DOL established controlled group rules.
Controlled groups
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
Controlled group rules are often complex, and it can be difficult to determine the controlled group status. Please consult with an experienced CPA and/or a qualified ERISA attorney to determine your status.