Section 414 Controlled Group and Affiliated Service Group Rules: How Multiple Businesses Can Sabotage Your 401(k)

You open a side consulting LLC. Your spouse runs a small clinic on the other side of town. You also own a stake in your brother-in-law's marketing shop. Each is a different EIN, a different bank account, a different set of W-2s. On paper, three independent businesses.

To the IRS, they may be one employer.

Section 414(b), (c), and (m) of the Internal Revenue Code sweeps related companies together for retirement-plan purposes, regardless of how separately you run them. Owners discover this the hard way — usually during a 401(k) audit, sometimes years after the fact, when a "compliant" plan suddenly looks discriminatory and the IRS proposes to disqualify it. The penalty isn't just paperwork: a disqualified plan can mean immediate taxation of every vested dollar, blown deductions, and 10% excise taxes layered on top.

This guide walks through the controlled-group and affiliated-service-group rules in plain English, the attribution traps that catch family-owned businesses, and the practical steps a multi-business owner should take before opening another retirement plan.

What Section 414 Is Trying to Do

Congress designed the qualified-plan rules (coverage testing, nondiscrimination, top-heavy minimums) so that a 401(k) can't quietly become a tax shelter for the owner while excluding rank-and-file workers. But once those rules applied company-by-company, owners realized they could split their workforce into two entities — owner in one, employees in the other — and game the system.

Section 414 closes the loophole. It defines when separate legal entities must be treated as a single employer:

• 414(b) — controlled groups of corporations, by stock ownership.
• 414(c) — controlled groups of trades or businesses under common control, covering partnerships, LLCs, sole proprietorships, and other unincorporated entities.
• 414(m) — affiliated service groups, which catch related service businesses even when ownership is well below the controlled-group thresholds.
• 414(o) — a catch-all anti-abuse authority that lets Treasury treat almost any arrangement designed to evade these rules as a single employer.

If two or more entities fall under any of these, every employee across the group counts for coverage, nondiscrimination, top-heavy, contribution-limit, and compensation-cap testing on every qualified plan any of them sponsors.

The Two Flavors of Controlled Group

Under 414(b) and (c), a controlled group is either parent-subsidiary, brother-sister, or a combined version of the two.

Parent-Subsidiary Controlled Group

One entity owns 80% or more of another. If Holdco owns 85% of Opco, the two are a parent-subsidiary controlled group and their employees aggregate. Chains extend: if Holdco owns 80% of Sub1, and Sub1 owns 80% of Sub2, all three are in the same group.

This catches private-equity-style holding structures, family holding companies, and the all-too-common pattern where a profitable operating company sets up a "management entity" or "IP holdco" and routes ownership through it.

Brother-Sister Controlled Group

This is the one that catches small business owners by surprise. A brother-sister controlled group exists when five or fewer common owners (individuals, estates, or trusts) satisfy both of the following:

1. 80% common ownership test — the same five-or-fewer people together own at least 80% of each entity.
2. 50% identical ownership test — looking at each owner's smallest ownership stake across the entities, those minimums add up to more than 50%.

A worked example shows how easily this trips:

Common ownership is at least 80% in every company (85/80/95), and the identical ownership tally (35 + 25 + 15) is 75% — well above the 50% threshold. All three companies are a single employer. Any 401(k), any cash-balance plan, any SEP-IRA at any of them must pass coverage testing using the entire combined workforce.

Combined Controlled Group

Three or more entities can be linked when at least one is in a brother-sister group and at least one is a parent of another entity in that group. The rules then aggregate everyone in the chain.

Affiliated Service Groups: The Lower-Threshold Trap

414(m) was added because professional-service firms found ways around the controlled-group rules. A doctor would form a "practice corporation" that owned 10% of a "services LLC," then push most of the staff into the LLC and most of the profits into the corporation. Ownership was below 80%, so 414(b) didn't apply — but the entities were functionally one business.

Affiliated service group (ASG) rules sweep these in. Three categories matter:

A-Org Affiliated Service Group

A "First Service Organization" (FSO) — typically a professional firm — has an A-Org affiliate when another service organization:

1. is a partner or shareholder in the FSO, and
2. regularly performs services for the FSO or is regularly associated with the FSO in performing services for third parties.

There is no minimum ownership percentage. A 1% interest can do it.

B-Org Affiliated Service Group

A B-Org exists when another organization:

1. derives a significant portion of its business from performing services for the FSO (or for an A-Org of the FSO),
2. those services are of a type historically performed by employees in the FSO's field, and
3. 10% or more of the B-Org is owned by highly compensated employees of the FSO (or its A-Orgs).

The classic example: a law firm partner sets up a separate "support services" LLC that bills the firm for paralegal and billing work. If the LLC's revenue comes mostly from the firm and the partner holds at least 10%, it's a B-Org and the firm's plan and the LLC's plan must aggregate.

Management Affiliated Service Group

Under 414(m)(5), a management organization performing services for another company is treated as part of the same employer when its principal business is providing management services on a regular and continuing basis. Notably, no common ownership is required for this category — pure functional integration is enough.

Attribution: Why "My Spouse's Business Has Nothing to Do With Mine" Is Wrong

The ownership tests above are not based purely on stock you hold personally. Section 318 (with modifications under 1563(e) for controlled groups) attributes ownership across family members and entities. Two attribution rules cause the most damage to small business owners:

Spousal Attribution

A spouse is presumed to own the other spouse's stock unless all four of the following are true:

1. The spouse does not directly own any stock in the corporation.
2. The spouse is not a director, officer, or employee, and does not participate in management.
3. No more than 50% of the company's gross income is passive (rents, royalties, dividends, interest, etc.).
4. There are no restrictions transferring the stock that run in favor of the spouse or minor children.

Miss any one — including the surprisingly easy-to-trip "doesn't participate in management" prong — and the spouses are treated as owning each other's businesses entirely.

This is what defeats the Solo 401(k) for many married entrepreneurs. The owner of a one-person consulting LLC assumes the spouse's medical practice (with five employees) is irrelevant. Spousal attribution makes the practice's employees count, the consulting LLC fails the "no employees other than spouse" requirement for a one-participant 401(k), and what looked like a clean Solo plan needs to be converted to a full 401(k) with discrimination testing.

Minor Children Attribution

A parent is treated as owning all stock owned by children under 21. Adult-children attribution applies only when the parent owns more than 50% of the company. Grandparents, parents, children, and grandchildren can chain attribution through entities in ways most owners don't anticipate.

A common surprise: parents transferring shares to children "to start gifting early" still see those shares attributed back when the children are minors, so the parent's controlled-group footprint doesn't shrink at all.

What Happens When You're a Controlled or Affiliated Group

Once 414 aggregation applies, several testing regimes look at all entities combined:

Coverage Testing (IRC 410(b))

A plan must cover a sufficient ratio of non-highly-compensated employees (NHCEs) compared to HCEs. The denominator includes every employee of every aggregated entity, even if that entity doesn't sponsor a plan. A plan that covers 100% of one company's workforce can fail coverage spectacularly once a sister company's larger NHCE staff is added.

Nondiscrimination Testing (IRC 401(a)(4))

Benefits, rights, and features must not discriminate in favor of HCEs across the combined group. Owner-favored plan designs that pass within one entity can fail when sister entities' employees are pulled in.

Top-Heavy Rules (IRC 416)

A plan is top-heavy when key-employee account balances exceed 60% of total plan assets. Aggregation often pushes plans over the threshold because owners' balances loom much larger relative to the combined NHCE balances. Top-heavy plans must provide minimum 3% contributions to all non-key employees — even those at sister companies who weren't otherwise getting a benefit. That cost surprises a lot of owners.

Annual Limits (IRC 415, 401(a)(17), 402(g))

The $23,500 elective-deferral limit (2026 figures may differ — confirm against the current IRS COLA notice), the $360,000-ish compensation cap, and the $69,000-ish defined-contribution annual addition limit apply per-employer. If you're aggregated, two related companies don't give you two limits.

Catch-All Consequence: Plan Disqualification

If a plan fails coverage or nondiscrimination on a controlled-group basis and the failure isn't self-corrected, the IRS can disqualify the plan retroactively. That means:

• Every participant's vested balance becomes immediately taxable.
• The trust loses its tax exemption and pays tax on earnings.
• Employer contribution deductions can be disallowed.
• 10% additional tax may apply to early distributions.

Plans rarely actually get disqualified — but the threat is real, and remediation under the IRS's Employee Plans Compliance Resolution System (EPCRS) is expensive.

Common Pitfalls That Catch Multi-Business Owners

After enough audits, the same patterns recur. Watch for these:

1. The "Side Hustle" Plan. You have a W-2 day job and start a consulting LLC. You assume you can stack a Solo 401(k) on top of your day-job 401(k). Fine — until your spouse's clinic and your kid-owned LLC enter the picture and aggregation rolls them all in.

2. The Spousal Workaround. Owner moves equity to the non-working spouse to "fix" controlled-group status. Doesn't work — spousal attribution puts the stock right back where it started unless the four-part exception is met (and active spousal participation in either business usually fails it).

3. The Family Holdco. Parents create a family holding company that owns multiple operating businesses for asset-protection reasons. The holding structure is exactly what triggers parent-subsidiary aggregation across all the operating companies.

4. The Acquired Plan. You buy another business. You're in a transition window — under IRC 410(b)(6)(C), a special coverage rule gives roughly until the end of the year following the year of acquisition. After that, the acquired plan must satisfy coverage on a combined basis, or you have to terminate, merge, or amend.

5. The Management LLC. You set up a single-purpose management entity to "centralize" services across a few of your businesses. Even without any common ownership, the management-ASG rules under 414(m)(5) can aggregate it with the entities it serves.

6. The Independent-Contractor Pass-Through. Hiring a "1099 contractor" who runs services through their own LLC can trigger ASG analysis if the contractor's LLC is largely dedicated to your business and either ownership or operational tests under 414(m) are met.

7. Foreign Parent, Multiple U.S. Subs. A non-U.S. parent owns several U.S. operating subsidiaries that run autonomously and don't know about each other. They're a parent-subsidiary controlled group anyway, and any U.S. 401(k) sponsored by one must consider employees of all.

How to Map Your Controlled-Group Footprint

Before adopting any new retirement plan — or annually for plans you already sponsor — work through this checklist:

1. List every entity you, your spouse, your minor children, and (if you own >50%) your adult children have any ownership in.
2. Note the ownership percentages, including options, warrants, convertible instruments, and any grantor-trust or partnership interests.
3. Apply attribution rules to add deemed-ownership rows for spouses, minor children, and any chained pass-throughs.
4. Run the 80% / 50% brother-sister test across each possible combination of entities, and the 80%-direct parent-subsidiary test for any holding structures.
5. For service businesses, ask whether any A-Org, B-Org, or management-ASG fact pattern is in play, particularly with any LLC or corporation that bills another of your entities.
6. For any aggregated group, look at the combined employee population, then evaluate coverage, nondiscrimination, and top-heavy implications for each existing or contemplated plan.
7. Document the analysis — keep the org chart, ownership table, and reasoning in the plan files. If you ever face an audit, this is the first thing the agent asks for.

Most owners with more than one entity benefit from a formal controlled-group study done by an ERISA attorney or experienced TPA. The cost is small compared to the cost of fixing a disqualification or paying corrective contributions for years of missed coverage.

Practical Strategies If You're Aggregated

Being a controlled or affiliated group is not the end of the world. You just need to design plans around it.

• Single plan covering the whole group — simplest path; one document, one TPA, one Form 5500 series filing (or a few related filings), tested as a unit.
• Multiple parallel plans designed to pass on a combined basis — feasible when entities have similar workforces; usually requires careful safe-harbor design.
• Safe-harbor 401(k) — paying a 3% nonelective or 4% match across the group exempts you from ADP/ACP testing and from most top-heavy minimums, drastically simplifying compliance.
• Cash-balance overlay — if owners are high earners, a cross-tested cash-balance plan with a 401(k)/profit-sharing companion can still concentrate benefits to owners while satisfying nondiscrimination on a combined basis. The math is touchy and requires a credentialed actuary.
• Qualified Separate Lines of Business (QSLOB) — under IRC 414(r), genuinely distinct business lines (each with 50+ employees and meeting other operational tests) can elect to test separately. The election is filed on Form 5310-A. Rarely useful for true small businesses; common in mid-market diversified groups.

The right answer is fact-specific. What's never the right answer: ignoring it.

Bookkeeping and Recordkeeping Matter More Than You Think

Plan testing relies on clean compensation, hours, and ownership data — across all the entities in the group, not just the one sponsoring the plan. When companies use different chart-of-account structures, different payroll vendors, or different fiscal periods, the year-end testing scramble gets expensive fast.

Three habits make life easier:

• Maintain a single, current org chart with ownership percentages and entity types. Update it any time equity moves.
• Use a consistent compensation definition across entities (W-2 Box 1, or 3401(a) wages, or 415 compensation) so testing data is comparable.
• Keep general-ledger entries that tie payroll runs to plan eligibility groups. If your TPA has to reconcile three payrolls against three GLs at year-end, you'll pay for that time — and any mismatches become audit risk.

Owners running multiple entities increasingly use plain-text accounting to keep this auditable. When every transaction lives in a version-controlled text file with clear account hierarchies (Assets:CompanyA:Operating, Expenses:CompanyB:Payroll:Salaries, etc.), you can produce consolidated and entity-level reports without exporting from a black-box system, and your TPA can ingest the data with a one-line script.

Keep Your Multi-Entity Books Audit-Ready

If you operate more than one business — or your spouse and children own shares in companies adjacent to yours — Section 414 is already shaping the universe of retirement plans you can adopt. The fastest way to stay out of trouble is to keep clean books across every entity and to document ownership the same way you document deductions.

Beancount.io gives multi-entity owners plain-text accounting that's transparent, version-controlled, and AI-ready — no proprietary file format, no vendor lock-in, and full audit trails you can hand to a TPA, ERISA attorney, or IRS agent without translation. Get started for free and see why developers and finance professionals running multiple businesses prefer plain-text accounting.