Controlled Groups

However, aggregation rules apply for companies under common ownership. All employees of a controlled group of businesses under Internal Revenue Code (Code) sections 414(b) or (c) or an affiliated service group under Code section 414(m) are taken into account to determine if an employer is subject to the pay or play rules. If the combined total meets the threshold, each separate member of the group is subject to the pay or play rules, even those companies that on their own do not have enough employees to meet the threshold.

There are 3 general types of controlled groups.

Parent-subsidiary, brother-sister, and a combination of the two.

A Parent-subsidiary controlled group exists when one or more chains of corporations are connected through stock ownership with a common parent corporation; and

  • 80 percent of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and
  • Parent Corporation must own 80 percent of at least one other corporation.

Sections 1563(a) and 414(b) and (c).

A brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest of each group and have “effective control”.

  •  Controlling interest – 1.414(c)-2(b)(2) – generally means 80 percent or more of the stock of each corporation (but only if such common owner own stock in each corporation); and
  • Effective control – 1.414(c)-2(c)(2) – generally more than 50 percent of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.

Here is an example.


Test 1 – Owners control 80% or more of each corporation – PASS.

Test 2 – Identical ownership % in both corporations is 50% or less – FAIL.

Therefore these corporations would not be considered part of a controlled group.

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