Controlled Group Solo 401(k) Plan: Rules, Compliance, and How it Works

If you own more than one business, you may wonder whether you can still use a Solo 401(k) plan. The answer depends on whether your businesses are treated as a controlled group under IRS rules. These rules decide if your companies must be viewed as one employer for retirement plan purposes.

This guide breaks down what a controlled group Solo 401(k) plan is, why it matters, and how to stay compliant so you can protect your plan and avoid IRS issues.

What is a Solo 401(k) Plan?

A Solo 401(k) plan is a retirement plan designed for self-employed individuals and business owners who have no full-time employees except a spouse. It allows you to contribute both as the employer and employee. Thus, it helps you save more compared to other plans.

What Is a Controlled Group?

A controlled group exists when the IRS determines that multiple businesses are effectively under the same ownership or control. When companies fall into this category, the IRS treats them as one employer for retirement plan rules. This matters because if any business in the group employs full-time workers, all companies in the group lose Solo 401(k) eligibility.

Types of Controlled Groups

1. Parent-Subsidiary Controlled Group

   This happens when one business owns 50% or more of another company.

2. Brother-Sister Controlled Group

   This involves two or more businesses owned by the same person or group of people, meeting specific ownership and control tests:

   • The same five or fewer individuals own 50% or more of each business.
   • They have “effective control,” meaning identical ownership of more than 50%.

3. Combined Controlled Group

   A mix of the above types is a combined controlled group. For instance, you own more than 50% of Company A, Company A owns 50% of Company B, and you also own a portion of Company C.

4. Family Attribution Rules

   The IRS may “attribute” ownership among family members, including spouses, parents, and minor children. If your spouse owns 100% of a company, the IRS may treat you as owning it too.

What is the Impact of a Controlled Group on a Solo 401(k)?

If your businesses fall under a controlled group, the IRS treats them as a single employer for retirement plan purposes. The main impacts include:

• Solo 401(k) Eligibility Changes: The plan is no longer allowed if any company in the group has a full-time employee.
• Shift to a Standard 401(k): You may need a plan that covers all eligible employees across every connected business.
• Combined Contribution Limits: Your total compensation from all controlled group businesses is used to calculate a single annual contribution limit.
• Unified Plan Oversight: All companies are expected to follow the same plan structure to avoid compliance issues.

In short, controlled group status can eliminate Solo 401(k) eligibility and increase administrative requirements.

What are the Key IRS Rules for Controlled Group Compliance?

The IRS enforces controlled group rules to ensure business owners do not use multiple entities to bypass employee coverage requirements. These rules determine when companies must be treated as one employer:

• Common Ownership and Control Tests Apply

  The IRS evaluates ownership percentages, voting control, and family attribution to determine whether businesses are connected.

• Employees Must Be Counted Collectively

  Any full-time employee in any entity must be included when determining retirement plan eligibility.

• Family Attribution Can Create a Controlled Group

  Spouses, minor children, and certain relatives may be treated as owners. Sometimes, linking companies unintentionally.

• One Combined Contribution Limit

  Since controlled group companies are treated as one employer, owners cannot use separate entities to inflate contributions.

• A Single Plan Must Cover the Entire Group

  If the structure requires a full 401(k) plan, it must universally apply to all eligible employees across all companies.

How Can You Set Up and Ensure Compliance for a Controlled Group Solo 401(k) Plan?

If your businesses form a controlled group, your retirement plan must be set up correctly to meet IRS requirements. This prevents plan disqualification and protects your tax-advantaged status.

Steps to Ensure Compliance

1. Identify all Ownership Interests

   Review direct and indirect ownership across all firms you control. Add family attribution guidelines.

2. Conduct a Controlled Group Analysis

   Use IRS guidelines or contact a specialist to determine whether your companies meet controlled group standards.

3. Choose the Proper Plan Structure

   If there are no employees in any business, a solo 401(k) is still permitted. If any firm has employees, you may require a Traditional 401(k) or Safe Harbor 401(k) that insures everyone.

4. Create a Single, Cohesive Strategy Document

   All qualifying businesses in the controlled group must be included under the same plan.

5. Conduct Yearly Compliance Assessments

   Annual testing ensures your plan fulfills IRS coverage and non-discrimination criteria.

Pros and Cons of a Controlled Group 401(k)

A controlled group setup has its own benefits and challenges. Check them out here:

Pros:

• Consistent Retirement Savings

  You can streamline retirement planning across multiple businesses.

• Increased Contribution Limits

  Income from all controlled group businesses can support higher employer contributions.

• Tax Benefits

  Unified plans may offer additional deductions and smoother tax planning.

Cons:

• Compliance Complexity

  Solo 401(k) controlled group rules are detailed and require careful analysis.

• Higher Administrative Costs

  More businesses and employees usually mean more testing, documentation, and service fees.

• Potential Loss of Solo 401(k) Status

  If employees exist anywhere, Solo 401(k) eligibility ends.

Final Thoughts: Is a Controlled Group Solo 401(k) Plan Right for You?

A controlled group Solo 401(k) can work well if you own multiple companies with no full-time employees across any entity. But if you employ workers in any business, you need another type of retirement plan to stay compliant.

If you are unsure whether your companies form a controlled group, it’s best to get a professional review. The right structure can protect your tax benefits and keep your retirement plan in good standing.

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