IRS Compliance

Controlled Group 401(k) Rules for Multi-Entity & Franchise Owners

Q: What is a controlled group for 401(k) purposes?

A controlled group is two or more businesses with sufficient common ownership that the IRS treats them as a single employer for retirement plan testing. If your businesses form a controlled group, all of their employees must generally be considered together when testing the 401(k) plan.

If you own more than one business, the IRS may already treat them as a single employer for retirement-plan testing — whether you know it or not. Here is exactly how the rules work, and how to structure a plan that stays compliant.

The Short Version

A controlled group is two or more businesses with enough common ownership that the IRS treats them as one employer for 401(k) testing.
There are two types: parent/child (one company owns 80%+ of another) and brother/sister (five or fewer people own 80%+ of multiple companies with 50%+ identical ownership).
If the rules apply, every employee across all entities must be included in nondiscrimination testing together — separate payrolls don't change that.
Getting it wrong can mean failed testing, required corrections, excise taxes, and possible plan disqualification.
A single controlled group plan covers the related entities under one coordinated structure — from $110/mo + $30/mo per additional EIN.

A controlled group is a set of two or more businesses connected by enough common ownership that the IRS treats them as a single employer when testing a retirement plan. The rules are defined by ownership percentages — not by whether the businesses share staff, operations, or a brand name.

Many multi-entity franchise owners don't realize their separate LLCs or EINs may legally count as one employer. But the moment they do, every employee across those entities has to be considered together for 401(k) nondiscrimination testing.

Group Type 1

Parent / Child

80%+

A parent company owns at least 80% of another company. The parent's ownership is applied to the subsidiary, and both businesses are treated as a single employer for retirement-plan testing purposes.

Group Type 2

Brother / Sister

5 & 50%

Five or fewer individuals own at least 80% of two or more companies and together hold more than 50% identical ownership across all of them.

Why This Matters

Non-compliance is expensive — and avoidable.

If your businesses qualify as a controlled group and your plan doesn't account for it, nondiscrimination testing will fail — triggering required corrections, excise taxes, and, in serious cases, potential plan disqualification. The exposure compounds across every entity in the group, not just one.

When controlled group rules apply, the cleanest answer is usually a single controlled group plan covering the related entities: one shared start date, identical plan features across the businesses, and combined profit-sharing and contributions. One coordinated structure, tested correctly — instead of separate plans quietly failing in parallel.

First group — base monthly fee$110 / mo

Each additional EIN / group$30 / mo

Per participant$2–$7 / mo

AUM fee0.15%

Starting a new plan? Our team also completes IRS Form 8881 on your behalf so you can claim available SECURE 2.0 startup tax credits. If your entities are independently owned rather than commonly owned, a Syndicate group plan may be the better fit — see how it compares to a PEP. For the full picture on multi-entity franchise structures, visit Franchise 401(k) Solutions.

The Upside

Multi-entity ownership can mean a bigger tax shelter, not just more compliance work.

Owners with combined compensation across a controlled group are often strong candidates for a coordinated Profit Sharing and Cash Balance stack — the same strategy that may allow an asset-light franchise operator to legally shelter well over $150,000 a year in taxable income, depending on age, compensation, employee census, and nondiscrimination testing results. If you're already doing the work to test your entities correctly, it's worth modeling what the stack could add on top. See how the stack works.

What is a controlled group for 401(k) purposes?

A controlled group is two or more businesses with enough common ownership that the IRS treats them as a single employer for retirement-plan testing. If your businesses form a controlled group, all of their employees must generally be considered together when testing the 401(k) plan.

How do controlled group rules affect a franchise retirement plan?

If you own multiple businesses where ownership meets the IRS thresholds, every employee across those entities must be included in nondiscrimination testing together — even if the businesses run separate payrolls or operate independently.

What's the difference between parent/child and brother/sister?

A parent/child group exists when one company owns at least 80% of another. A brother/sister group exists when five or fewer individuals own at least 80% of two or more companies and together hold more than 50% identical ownership across them.

Do franchise owners need a separate 401(k) for each location?

Not always. When locations operate under separate EINs that form a controlled group, a single controlled group plan can cover the related entities under one coordinated structure with combined testing.

What happens if a controlled group doesn't comply?

If commonly owned businesses are tested separately when they should be tested together, nondiscrimination testing can fail — triggering required corrections, excise taxes, and, in serious cases, potential plan disqualification.

How much does a controlled group 401(k) plan cost?

A controlled group plan starts at $110 per month for the first group plus $30 per month for each additional EIN, $2 to $7 per participant per month, and a 0.15% AUM fee, which includes 3(16) and 3(38) services. Every plan also includes our investment advisory services, with a fee based on plan size.

Does owning a controlled group affect how much I can shelter with profit sharing or cash balance?

It can work in your favor. Owners with combined compensation across a controlled group are often strong candidates for a coordinated Profit Sharing and Cash Balance stack, since the underlying limits are tied to age and compensation. The same combined testing process that confirms compliance is a natural point to also model the larger tax shelter opportunity.

Let's Look at Your Structure

Find out if controlled group rules apply to you.

A 30-minute conversation can confirm whether your entities form a controlled group — and whether your current plan is testing them correctly.

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Capital Investment Company of Virginia and Franchise 401k Plans are trade names of Retirement Fiduciaries of VA, LLC. Investment advisory services are offered by J. Andy Ingram, an investment adviser representative of Sollinda Capital Management, a Registered Investment Adviser. An additional advisory fee applies for investment advisory services. This fee is separate from and in addition to the plan administration, recordkeeping, and AUM fees described on this site, and varies based on total plan assets and whether the engagement involves a new plan or a plan conversion. This website is for informational and educational purposes only and does not constitute an offer or solicitation to buy or sell any securities or investment products. Past performance is not indicative of future results. All plan design, consulting, and fiduciary services are subject to a formal written engagement agreement. Nothing on this site constitutes tax or legal advice. Please consult your tax professional or attorney regarding specific tax questions, including eligibility for federal tax credits under SECURE 2.0. Retirement plan consulting services are provided in connection with qualified plan platforms governed by applicable ERISA regulations.

Controlled Group 401(k) Rules for Multi-Entity & Franchise Owners

What is a controlled group?

Parent/Child & Brother/Sister

Parent / Child

Brother / Sister

Non-compliance is expensive — and avoidable.

How a controlled group plan is structured

Multi-entity ownership can mean a bigger tax shelter, not just more compliance work.

Controlled Group 401(k) FAQ

Find out if controlled group rules apply to you.