Controlled Group Solo 401k Plan Rules
A controlled group Solo 401(k) plan involves specific rules governing businesses that are connected through common ownership or control. These rules are vital to ensure compliance with IRS regulations, especially regarding retirement plan benefits across multiple companies. Here's a breakdown of how it works:
What is a Controlled Group?
A controlled group is a collection of businesses that are treated as a single employer for IRS and ERISA purposes because of their common ownership or control. The IRS defines two main types of controlled groups:
Parent-Subsidiary Controlled Group: One business owns at least 80% of another business.
Brother-Sister Controlled Group: Two or more businesses have 80% or more common ownership between them by five or fewer individuals, trusts, or estates.
There is also the possibility of an affiliated service group, where businesses provide services for each other or are managed in a way that ties them together.
How a Controlled Group Impacts Solo 401(k) Plans
A Solo 401(k) plan is designed for self-employed individuals or business owners with no employees, except for a spouse. When businesses are part of a controlled group, all employees across the group are treated as part of a single entity. This has significant implications:
Employee Count Across the Group:
Even if a business owner qualifies for a Solo 401(k) in one company, having employees in another business that is part of the controlled group means the Solo 401(k) may no longer be applicable.
If the controlled group has any employees, it disqualifies the owner from using the Solo 401(k) plan, as these plans are meant only for businesses without full-time employees.
Nondiscrimination Rules:
Controlled group rules require that all employees across the group must be treated equally under the retirement plan. If a Solo 401(k) is disallowed, the owner may need to establish a traditional 401(k) plan, which provides benefits to all eligible employees across the entire controlled group.
Contribution Limits and Testing:
The controlled group rules also ensure that no preferential treatment is given to business owners or highly compensated employees in retirement contributions. The businesses within the group must adhere to nondiscrimination testing rules for contributions, which could limit the amount the business owner can contribute compared to rank-and-file employees.
How to Navigate a Controlled Group Scenario:
Review Ownership Structure:
Determine if your business falls into a controlled group by reviewing ownership stakes and relationships between entities. If you own more than 80% of multiple companies, or the group qualifies under brother-sister rules, you are likely part of a controlled group.
Seek Professional Guidance:
If you're unsure whether your businesses form a controlled group, it's essential to consult with a financial advisor or retirement plan expert. They can help you analyze the ownership structure and determine if you qualify for a Solo 401(k), or if a traditional 401(k) plan is more appropriate.
Explore Other Retirement Plans:
If you cannot maintain a Solo 401(k) because of controlled group rules, explore other retirement plan options, such as a Safe Harbor 401(k) or SIMPLE IRA, which might provide more flexibility in offering benefits across the entire group of employees.
Moving a Controlled Group Solo 401k
If your business becomes part of a controlled group, moving your Solo 401(k) can be more complex. You would likely need to terminate the Solo 401(k) if you’re no longer eligible (due to having employees in the controlled group). Once terminated, you can roll over the Solo 401(k) into another retirement plan, like a Traditional IRA or a traditional 401(k), without incurring taxes or penalties if done as a direct rollover. Alternatively, you might need to establish a traditional 401(k) for the entire controlled group, covering all employees.
Why Controlled Group Rules Matter:
Controlled group rules are designed to prevent business owners from circumventing retirement plan regulations by splitting up employees across different entities. These rules ensure fairness, compliance with IRS laws, and equal treatment of employees across related businesses. Failing to comply with these regulations could lead to IRS penalties and the loss of tax benefits associated with retirement plans.
For more details or to assess whether your business structure qualifies for a Solo 401(k), consult a tax professional or retirement plan expert to stay in compliance with controlled group rules.
