Owning more than one business can create extra challenges when it comes to retirement planning. On the surface, it might seem simple to open a Solo 401k through a side company that has no employees. But the IRS has rules in place to stop business owners from doing exactly that. These rules, called controlled group rules, look at how your companies are connected and often treat them as if they were one employer.
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For anyone running multiple businesses, understanding these rules is key. They can determine whether you’re eligible for a Solo 401k or if you’ll need to consider a different type of retirement plan.
What Are Controlled Group Rules?
Controlled group rules are IRS guidelines that link related businesses together for retirement plan purposes. Instead of looking at each company on its own, the IRS may treat all of your businesses as part of a single group.
The goal is fairness. Without these rules, an owner could open a Solo 401k in a company with no employees and avoid offering benefits to workers in another business they control. Controlled group rules close that gap by requiring retirement plan coverage and nondiscrimination testing across all related businesses.
In practice, this means:
- Employees of connected businesses must be included when a retirement plan is offered.
- A Solo 401k is not an option if any company you own has full-time employees.
- Starting a new company without employees will not bypass the rules.
These provisions come from the Internal Revenue Code and ensure retirement plans don’t unfairly favor owners or highly compensated employees.
📌 Also read: Solo 401k Vs SEP IRA: Which One Makes More Sense for 2025?
Types of Controlled Groups
Controlled group status can sometimes be simple to determine, such as when one business clearly owns another. In other cases, the rules can become more complex, especially if ownership involves stocks, trusts, or estates.
The IRS generally recognizes three types of controlled groups:
- Parent-subsidiary
- Brother-sister
- Combined groups (a mix of parent-subsidiary and brother-sister relationships)
It is also important to understand related concepts:
- Family attribution: Ownership may be assigned, or “attributed,” to family members. For example, stock held by a spouse or child may count toward your ownership, even if you do not hold it directly. This is an attribution rule, not its own group type.
- Organizational attribution: Ownership can also be attributed through entities such as corporations, partnerships, or trusts. Like family attribution, this is an attribution rule, not a separate group type.
- Affiliated service groups (ASGs): These are covered under IRC Section 414(m). They are not technically controlled groups but are treated in a similar way for retirement plan purposes. Businesses may be considered part of an ASG if they work together to provide services, even without common ownership.
📝 Note: In practice, the effect is the same: businesses linked under these rules are often treated as one employer when it comes to retirement plan coverage and testing.
Parent-Subsidiary Controlled Group
A parent-subsidiary controlled group exists when a parent company owns at least 80% of another company’s stock, measured by vote or value.
✏️ Hypothetical Example:
If Company A owns 80% or more of Company B, the two companies form a parent-subsidiary controlled group. Company A is considered the parent, and Company B is the subsidiary.
For retirement plan purposes, businesses in a controlled group are treated as one employer under IRC section 414(b)–(c). This means employees from both companies must be included when applying rules on coverage, participation, and contribution limits. In many cases, both employee groups need to be considered for the plan to remain compliant.
Controlled group treatment applies regardless of industry, business structure, or tax filing status. The determining factor is ownership or control, not how the businesses operate day to day.
This rule also affects retirement plan eligibility. A one-participant (Solo) 401k is only available if the business has no employees other than the owner’s spouse. If Company A employs non-spouse workers, the owner would not qualify to establish a Solo 401k under Company B, since the companies are treated as one employer.
What if My Company Acquires Another Company?
If one company acquires another, there is a special transition period. From the transaction date through the end of the first plan year beginning after that date, coverage testing may be based on the pre-transaction employee population if certain conditions are satisfied. This generally gives employers one to nearly two years, depending on timing, to adjust to the new structure.
Brother-Sister Controlled Group
A brother-sister controlled group exists when two or more companies share the same individual owners. For this type of group, two conditions must be met:
- Controlling interest: The same five or fewer individuals own, directly or indirectly through attribution, 80% or more of each company.
- Identical ownership: The common owners hold more than 50% identical ownership. “Identical” refers to the lowest ownership percentage each owner has across the companies being evaluated.
Owners can include individuals, trusts, or estates. Both conditions must be satisfied for a brother-sister controlled group to exist. Meeting only one of the criteria does not qualify.
✏️ Hypothetical Example: Spouse-Owned Businesses
You and your spouse each run a separate business. Family attribution rules automatically treat you as owners of both businesses. Your ownership is attributed to your spouse, and vice versa.
If your business has no employees but your spouse’s business does, you would not be eligible to open a Solo 401k. For retirement plan purposes, the IRS treats both businesses as a single employer.
Spousal attribution may not apply if specific regulatory exceptions are met, such as when there is no direct ownership or participation and passive income is 50% or less. In that case, the two businesses might not be grouped solely due to marriage.
✏️ Hypothetical Example: Multiple Individual Owners
Three individuals — Jim, John, and James — own companies A, B, and C as follows:
| Owner | Company A | Company B | Company C | Identical Ownership |
| Jim | 35% | 35% | 45% | 35% |
| John | 35% | 25% | 30% | 25% |
| James | 15% | 20% | 20% | 15% |
| Total | 85% | 80% | 95% | 75% |
Together, they own at least 80% of all three companies, meeting the controlling interest requirement. Their identical ownership is 75%, which is over the 50% threshold. This satisfies the second condition for a brother-sister controlled group.
Identical ownership simplified: It is the lowest ownership percentage each owner holds across all companies. This ensures the calculation reflects the minimum shared stake among the owners.
Combined Controlled Group
A combined controlled group occurs when a parent-subsidiary group and a brother-sister group overlap. This type of group generally involves three or more organizations.
To qualify as a combined group:
✅ Each organization must belong to either a parent-subsidiary or brother-sister controlled group.
✅ At least one corporation must act as the common parent in the parent-subsidiary group and also be part of the brother-sister group.
This structure allows the IRS to treat multiple interconnected companies as a single employer for retirement plan purposes. As with other controlled groups, the combined group rules ensure that retirement plan coverage, eligibility, and nondiscrimination testing apply across all related entities.
✏️ Hypothetical Example:
Company X owns 100% of Company Y, forming a parent-subsidiary relationship. Companies Y, Z, and W are also linked through common ownership of the same individuals, forming a brother-sister group. Because Company Y is part of both the parent-subsidiary and brother-sister groups, all companies are treated as a combined controlled group.
For retirement plan purposes, these companies are considered one employer. Any plan offered in one company must account for employees across all linked organizations.
Family Attribution
Family attribution rules exist to prevent business owners from using family members to bypass controlled group regulations. Under these rules, ownership of a company may be attributed to family members such as a spouse, parents, grandparents, children, or grandchildren.
How Family Attribution Works
Ownership is combined for attribution purposes.
✏️ Hypothetical Example:
You own 45% of Company A, and your spouse owns 45% of Company B. For controlled group rules, you are considered a 90% owner — 45% through your direct ownership and 45% through attribution.
Spousal attribution usually applies, but exceptions exist if specific conditions are met (no direct participation, no management role, passive income ≤50%, and no restrictive agreements).
Attribution by Relationship
- Spouse: A spouse’s ownership is generally attributed to you unless exceptions apply.
- Parents: Ownership is attributed to children under 21 years old. For children 21 or older, attribution applies only if the child already has effective control of the business (generally more than 50% ownership after attribution).
- Children: Ownership is attributed to parents if the child is under 21. For children 21 or older, attribution only applies if the parent already has effective control.
- Grandchildren and Grandparents: Attribution occurs only if either party has effective control, not simply because one holds more than 50%.
- Legally adopted children: Treated the same as biological children for attribution purposes.
- Siblings: Ownership is not attributed.
Direct ownership may be attributed to more than one family member, depending on the relationships and ownership percentages.
The 50% Rule Explained
For certain family relationships (parents/children over 21, grandparents/grandchildren), attribution depends on whether the individual already has effective control (more than 50% ownership, considering permissible attributions).
It is not simply a matter of adding percentages together. For example, if you and your adult child each own 20%, attribution does not apply since neither has effective control. But if you own 60% and your adult child owns 20%, then attribution rules apply because one party already has effective control.
Spousal Attribution Exceptions
A spouse’s ownership is usually attributed to the other spouse, but exceptions may apply if all of the following are true:
✅ The spouse has no direct ownership in the company.
✅ The spouse is not a director, employee, or participant in management during the taxable year.
✅ No more than 50% of business income comes from passive sources (rent, dividends, royalties, interest, annuities).
✅ The spouse’s stock is not subject to ownership restrictions in favor of the first spouse or their children under 21.
These rules ensure controlled group status reflects true ownership and control rather than nominal ownership through family members.
Organizational Attribution
Organizational attribution rules assign stock ownership from entities to individuals. This ensures ownership held through corporations, partnerships, estates, or trusts is counted for controlled group purposes.
How Organizational Attribution Works
- Corporations: If a corporation owns stock in another company, ownership is attributed to any individual who directly owns at least 5% of the corporation, proportional to their stake.
- Partnerships: When a partnership owns stock, each partner with a 5% or greater interest is attributed ownership proportionally.
- Partners: Stock held by a partner may also be attributed back to the partnership under Section 318 attribution rules.
- Estates and Trusts: If an estate or trust owns stock, each beneficiary with an actuarial interest of at least 5% is attributed ownership proportionally.
✏️ Hypothetical Example:
- A corporation, Corp A, owns 100% of Company X. Jane owns 20% of Corp A. Under organizational attribution rules, Jane is considered to indirectly own 20% of Company X.
- Similarly, if a trust owns 50% of Company Y and a beneficiary has a 30% actuarial interest in the trust, the beneficiary is treated as owning 15% of Company Y (30% of the trust’s 50% stake).
These rules prevent business owners from bypassing controlled group regulations by holding stock through entities instead of directly.
Affiliated Service Group Rules
Even if a business does not meet the parent-subsidiary or brother-sister tests, it may still fall under affiliated service group (ASG) rules. These rules prevent business owners from avoiding controlled group regulations by using service-based businesses.
How ASG Rules Work
If one company provides services for another, both could be treated as part of an ASG under IRC Section 414(m). For management affiliated service groups, common ownership is not required if the management company’s main business is regularly providing management services.
There are three main types of affiliated service groups:
✅ A-Organization (A-Org)
✅ B-Organization (B-Org)
✅ Management groups
First Service Organization (FSO)
A First Service Organization (FSO) is a company whose primary business is providing services in specific fields and receiving compensation for them. Common examples include:
- Health
- Law
- Engineering
- Architecture
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Insurance
A-Organization (A-Org)
An A-Org is a service organization that:
✅ Is a partner or shareholder in the FSO (directly or through attribution).
✅ Performs services for or with the FSO in serving third parties.
✏️ Hypothetical Example:
You own 100% of a medical practice and also have an ownership interest in a massage therapy business. If the two entities regularly work together to serve patients, the massage therapy business could be the FSO and the medical practice the A-Org — provided the ownership and service requirements are met.
B-Organization (B-Org)
A B-Org is a service organization that:
✅ Performs a significant portion of its business (generally ≥10% of receipts) for the FSO or its A-Orgs.
✅ Provides services historically performed by employees in the FSO’s field.
✅ Has at least 10% of ownership held in aggregate by highly compensated employees (HCEs) of the FSO or A-Orgs.
📝 Note: HCEs are typically employees who own at least 5% of the business at any time during the year.
✏️ Hypothetical Example:
Your medical practice contributes 15% of an accounting firm’s revenue. If 10% or more of the accounting firm is owned by HCEs of your practice, the accounting firm may qualify as a B-Org.
Management Affiliated Service Group
A management group exists when one organization’s main business is providing management services to another. Key points include:
✅ More than 50% of the management company’s revenue comes from the relationship.
✅ No ownership overlap is required.
✅ The IRS applies a two-year lookback to confirm management is the principal business, with an continuing 40% threshold once the rule is met.
Management services include business planning, daily operations, personnel, compensation, benefits, and related activities.
✏️ Hypothetical Example:
Your writing business outsources all management functions to a management company that earns nearly all its income from you. Both businesses would be treated as part of an affiliated service group, even without shared ownership.
In practice, ASG rules aggregate companies for retirement plan coverage and nondiscrimination testing, similar to controlled group rules, ensuring plans cannot favor owners over employees.
In Summary
Controlled group rules can be complex, and many business owners may not realize they are affected — either through ownership attribution or as part of an affiliated service group. These rules generally do not apply if you operate a single business with no related entities.
For owners with multiple business interests, understanding controlled group and affiliated service group rules is important. Consulting a plan provider, tax professional, attorney, or financial advisor can help ensure compliance and clarify retirement plan eligibility.
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