Common Control and Controlled Group Rules: Types and Attribution

Controlled group rules are the federal tax provisions that force separate legal entities to be treated as a single employer when their ownership overlaps enough to meet the thresholds in Internal Revenue Code Sections 414 and 1563. When they apply, every employee across every related entity is pooled for retirement plan nondiscrimination and coverage testing, contribution limits, and the Affordable Care Act’s employer size count.¹ The point is to stop an owner from splitting a business into smaller pieces so that each piece looks small enough to escape the rules that would apply to the whole.

The specific provisions that trigger aggregation include nondiscrimination under Section 401(a)(4), the ADP and ACP tests for 401(k) plans, coverage under Section 410(b), vesting, the Section 415 contribution limits, top-heavy rules under Section 416, and the Section 402(g) elective deferral limit.¹²

The Three Types of Controlled Groups

Parent-Subsidiary

A parent-subsidiary group exists when one entity owns at least 80 percent of the voting power or total value of another, and each entity in the chain (other than the parent) is at least 80 percent owned by other members of the group.³ The chain can run through multiple levels. If A owns 90 percent of B and B owns 80 percent of C, all three sit in one group.

Brother-Sister

Brother-sister groups are about common owners rather than a chain. For corporations, Section 1563(a)(2) asks whether the same five or fewer individuals, estates, or trusts hold more than 50 percent of the total voting power or value of each entity, counting only the identical portion of each owner’s stake across the entities.³ Identical ownership means the smaller of an owner’s two percentages. Someone who holds 60 percent of one company and 40 percent of another contributes 40 percent to the identical-ownership total.

For unincorporated businesses, the Section 414(c) regulations layer on a second test: the same five or fewer persons must also hold a controlling interest of at least 80 percent in each organization. Both the 80-percent controlling interest and the more-than-50-percent effective control tests must be met.⁴

Combined

A combined group appears when three or more corporations sit in both a parent-subsidiary and a brother-sister structure at once. One corporation must be the common parent of a parent-subsidiary group and also a member of a brother-sister group.³ This catches ownership structures that would slip past either test on its own.

Affiliated Service Groups: When Ownership Is Too Low but Aggregation Still Applies

Even when the ownership numbers fall short of a controlled group, related entities can still be treated as one employer under Section 414(m). This rule targets professional-service arrangements: law firms, medical practices, accounting firms, engineering groups, and the service or management entities that operate alongside them.¹

The structure centers on a “first organization” that provides services, together with related organizations that either share ownership in it and work with it (A-Organizations) or perform a significant portion of their work for it and are at least 10 percent owned by its highly compensated employees (B-Organizations). Section 414(m)(5) adds a separate category for entities whose principal business is performing management functions on an ongoing basis for another organization; the manager and the managed entity form an affiliated service group.¹

A medical practice with a separate staffing entity that supplies nurses and technicians only to that practice, partly owned by the practice’s physicians, is the textbook example. Employees of both must be combined for plan testing.

Ownership You Don’t Realize You Have

The thresholds above use the tax code’s attribution rules, not just the names on the stock ledger. Interests held by relatives, entities you’re involved in, and options you haven’t exercised can all count toward your ownership.

Family

Under Section 1563(e)(5), a person is generally treated as owning stock held by their spouse. The exception is narrow: no direct ownership in the corporation, no role as director or employee, no participation in management, and the corporation earns no more than half its income from passive sources such as rents and dividends. A parent is treated as owning the stock of any child under 21, and a minor child is treated as owning the parents’ stock.³ Moving shares to a teenage child does not break the group.

Entities

Ownership flows through entities to their stakeholders. A partner with at least a 5 percent interest in profits or capital is treated as owning a proportionate share of what the partnership owns. The same 5 percent floor applies to trust and estate beneficiaries by actuarial interest and to shareholders by stock value.³ Small passive investors below the floor are generally ignored.

Options

An option to buy stock is treated as if you already own the stock. That includes an option to acquire another option.⁵ Whether the option is in the money or likely to be exercised does not matter.

What Changes Once You’re in a Group

Retirement Plan Testing

All employees across every entity are combined for the actual deferral percentage test, the actual contribution percentage test, and the coverage test under Section 410(b).¹ A plan that passes on its own can fail once a related entity’s lower-paid workers are folded in.

Contribution Limits

Limits aggregate across the group. If you work for two entities in the same group and both offer defined contribution plans, total annual additions across both plans cannot exceed $72,000 for 2026.²⁶ Elective deferrals are similarly capped at $24,500 across all plans in the group. Exceeding these limits because the entities weren’t recognized as related can disqualify a plan.

ACA Employer Status

Common control also determines whether a business is an Applicable Large Employer under the Affordable Care Act. Employees across entities related under Section 414(b), (c), (m), or (o) are counted together. If the combined headcount reaches 50 or more full-time employees, including full-time equivalents, every entity in the group is individually subject to the employer shared responsibility provisions, even one with only a few workers.⁷ Failing to offer minimum essential coverage when required triggers penalties under Section 4980H(a) of $3,340 per full-time employee per year for plan years beginning in 2026, or $5,010 per employee who receives subsidized marketplace coverage under Section 4980H(b). Each member of the group also has its own information reporting duties under Section 6056.⁸

The Rules Reach Beyond Corporations

Section 414(b) covers corporations, and Section 414(c) extends the same framework to any trade or business, whether or not incorporated. Partnerships, LLCs, sole proprietorships, trusts, and estates are all inside the analysis.⁴ The ownership thresholds don’t change; only the unit of measurement does, using profits or capital interests in a partnership rather than stock. A solo practitioner with a 90 percent stake in an LLC that owns the office building is running the same analysis as a large conglomerate.

1
Office of the Law Revision Counsel. 26 USC 414 – Definitions and Special Rules
2
eCFR. 26 CFR 1.415(f)-1 – Aggregating Plans
3
Office of the Law Revision Counsel. 26 USC 1563 – Definitions and Special Rules
4
eCFR. 26 CFR 1.414(c)-2 – Two or More Trades or Businesses Under Common Control
5
eCFR. 26 CFR 1.414(c)-4 – Rules for Determining Ownership
6
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs (Notice 2025-67)
7
Internal Revenue Service. Determining if an Employer Is an Applicable Large Employer
8
Internal Revenue Service. Information Reporting by Applicable Large Employers