Code Section 414: Controlled Groups, Aggregation, and Testing

If you own more than one business, the IRS may treat them as a single employer for retirement plan purposes, and that treatment governs whether your plan passes its annual tests. The rules for controlled groups and retirement plans live in Internal Revenue Code Section 414, and they exist to stop owners from splitting a workforce across entities to keep rank-and-file employees out of a qualified plan. When aggregation applies, every employee across every business in the group counts as your employee for coverage and nondiscrimination testing. Ignore the rules and your plan can lose its tax-qualified status.

When Multiple Businesses Count as One Employer

Section 414(b) aggregates commonly owned corporations, and Section 414(c) applies the same logic to partnerships, sole proprietorships, and LLCs.¹ The tests are mechanical. You either meet the ownership thresholds or you don’t. There are three structures to check.

Parent-Subsidiary

A parent-subsidiary group exists when a parent owns at least 80% of a subsidiary, measured by either total combined voting power or total value of all classes of stock. The parent must directly own 80% of at least one subsidiary, and each additional subsidiary must be 80%-owned by one or more corporations already in the chain.² This is the cleanest of the three tests to run.

Brother-Sister

Brother-sister groups catch businesses owned by the same handful of people rather than by a parent entity. The test looks at five or fewer individuals, estates, or trusts, and for Section 414 purposes both of these must be true at once:²

Those five or fewer owners collectively hold at least 80% of the voting power or total stock value of each corporation.
The same owners collectively hold more than 50% of each corporation, counting each person only to the extent their ownership is identical across the corporations being tested.

The identical ownership piece is where most people miscalculate. If you hold 60% of Corporation X and 30% of Corporation Y, only 30% of your ownership counts toward the identical-ownership test, because that is the smaller of your two stakes. Sum each owner’s identical percentages, and the total must exceed 50%.

Combined Groups

A combined group exists when three or more corporations connect through both parent-subsidiary and brother-sister relationships. At least one entity must sit as the common parent of a parent-subsidiary chain and also belong to a brother-sister group. Everyone in that web is a single employer.

Ownership You Do Not Directly Hold

The 80% and 50% thresholds are not measured by what your name is on. Constructive ownership rules attribute other people’s stock to you, and that attribution runs first, before you test the thresholds. This is where closely held businesses often discover they had a controlled group without knowing it.

Family attribution catches the most people. Under Section 1563(e), you are treated as owning stock held by your minor children (under 21), and a minor child is treated as owning stock held by their parents. Spousal attribution also applies by default. It can be shut off for a specific corporation only if all four of these are true: the individual owns no direct stock in that corporation, is not a director or employee, the corporation does not derive more than half its income from passive sources, and no restriction on the spouse’s ability to sell the stock runs in favor of the individual or their minor children.² Stock owned by adult children (21 and older), grandchildren, and the parents of an adult individual is not automatically attributed under these rules.

Organizational attribution runs through entities. Stock held by a corporation, partnership, trust, or estate can be attributed up to its owners, and stock held by owners can be attributed down to the entity, following mechanical formulas. Run the attribution first, then test the thresholds.

Service and Staffing Arrangements That Also Trigger Aggregation

Common ownership is not the only way businesses get pulled together. Two other sets of rules capture arrangements that look like separate employers on paper but function as one workforce.

Affiliated Service Groups

Section 414(m) targets professional and service organizations that split operations across entities. The rules apply to “service organizations,” meaning any entity whose principal business is performing services. There are three relationship types.

An A-Org relationship exists between a First Service Organization (FSO) and another service organization that is a shareholder or partner in the FSO and either regularly performs services for the FSO or regularly works with the FSO in serving third-party clients.³ The textbook case: a medical practice partnership where each physician is separately incorporated. Every physician’s professional corporation is an A-Org, and all of their employees combine with the FSO’s for testing.

A B-Org relationship targets support entities. An organization is a B-Org if a significant portion of its business is performing services for the FSO or an A-Org that would historically have been done by in-house employees, and at least 10% of the B-Org’s ownership is held by highly compensated employees of the FSO or an A-Org.³ A billing company partly owned by doctors in the practice, doing work that used to sit with in-house staff, fits.

A management organization is an entity whose principal business is performing management functions on a regular and continuing basis for another organization or a group of related organizations. The management entity and the entity it manages are treated as a single employer with no common ownership required.¹ If you outsource day-to-day management to a company that exists mainly to manage you, aggregation applies regardless of who owns what.

Leased Employees

Section 414(n) requires a business that uses workers supplied by a staffing or leasing company to count those workers as its own employees for plan testing. The workers stay on the leasing company’s payroll; you count them anyway. All three of these must be true:¹

The services are provided under an agreement between the recipient and the leasing organization.
The worker has performed services for the recipient on a substantially full-time basis for at least one year. Substantially full-time generally means at least 1,500 hours over a 12-month period.
The recipient directs or controls how the work gets done.

Independent contractors who control how they deliver their services do not fall into this category. A safe harbor lets a recipient exclude leased employees when the leasing organization maintains a money purchase pension plan with a nonintegrated employer contribution of at least 10% of each participant’s compensation, full and immediate vesting, and immediate participation for all of the leasing organization’s employees. Even then, the safe harbor is available only if leased employees are no more than 20% of the recipient’s nonhighly compensated workforce.¹

What Aggregation Does to Your Testing

Aggregation matters because it changes the pool of employees your plan is measured against. Two categories of testing use that pool: minimum coverage and nondiscrimination.

Section 410(b) requires the plan to benefit a sufficient share of non-highly compensated employees (NHCEs) relative to highly compensated employees (HCEs). Under the most commonly used method, the ratio percentage test, the percentage of NHCEs benefiting must be at least 70% of the percentage of HCEs benefiting.⁴ Once you fold in the employees of every aggregated entity, that ratio can move sharply.

Section 401(a)(4) then tests whether contributions or benefits themselves favor HCEs.⁵ For 401(k) plans, the ADP and ACP tests add another layer. The 2026 elective deferral limit is $24,500.⁶

Before you can run any of these tests, you have to classify each worker in the aggregated group. An employee is an HCE if, in the current plan year or the look-back year, they were a 5% owner (using the same constructive ownership rules), or if their compensation in the look-back year exceeded the annual threshold. For plan years beginning in 2026, that compensation threshold is $160,000.⁷⁸ Employers may elect to further limit the compensation-based HCE group to the top-paid 20% of the workforce, applied year by year.

What Happens If You Get It Wrong

A plan that fails coverage or nondiscrimination when the correct aggregated pool is used, and that cannot be corrected, faces disqualification. The tax fallout hits from every direction.

For HCEs, disqualification means including the entire vested account balance (to the extent not already taxed) in income. NHCEs get somewhat better treatment when the sole reason for disqualification is a coverage or nondiscrimination failure: they include employer contributions in income only when those amounts are actually distributed.⁹

The employer’s side is worse. Deductions for plan contributions are lost. For defined benefit plans without separate accounts, no contributions can be deducted at all. The plan trust loses its tax-exempt status and must file Form 1041 and pay income tax on its earnings. Employer contributions become subject to Social Security, Medicare, and federal unemployment taxes. Distributions from the disqualified plan cannot be rolled over.⁹

Fixing an Aggregation Mistake

The IRS runs a formal correction framework called the Employee Plans Compliance Resolution System (EPCRS) for qualification failures, including aggregation errors. It has three programs:¹⁰

The Self-Correction Program lets the sponsor fix certain failures without contacting the IRS or paying a fee, generally for operational failures corrected promptly or considered insignificant.
The Voluntary Correction Program requires a user fee and a submission to the IRS before any audit begins. It produces a written agreement confirming the correction.
The Audit Closing Agreement Program resolves failures found during an IRS examination. Sanctions are higher, but the plan avoids disqualification.

Aggregation errors usually stretch across multiple years and multiple entities. Correction typically means retroactively bringing in the excluded employees, making contributions on their behalf, and rerunning testing for each affected year. Cost climbs with delay. If you own or acquire additional businesses, review your controlled group and affiliated service group status every year rather than waiting for an examination to surface it.

Transition Relief After an Acquisition

When a transaction changes who belongs to a controlled group or affiliated service group, the plan’s coverage numbers can shift on the day of closing. Section 410(b)(6)(C) gives a transition period so a plan that passed coverage before the deal is not immediately disqualified because of the membership change.⁴

The period runs from the date of the membership change through the last day of the first plan year beginning after that date. A calendar-year plan involved in a mid-2026 acquisition has relief through December 31, 2027. Two conditions apply: the plan must have satisfied coverage immediately before the transaction, and coverage and design cannot change significantly during the transition period other than the group membership change itself. Relief covers only the minimum coverage test. Section 401(a)(4), and the ADP/ACP tests for 401(k) plans, still must be passed during the transition window.

1
Office of the Law Revision Counsel. 26 USC 414 – Definitions and Special Rules
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Office of the Law Revision Counsel. 26 USC 1563 – Definitions and Special Rules
3
Wolters Kluwer CCH AnswerConnect. 26 USC 414(m) – Employees of an Affiliated Service Group
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Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards
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Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
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Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
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Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
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Office of the Law Revision Counsel. 26 USC 414 – Definitions and Special Rules
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Internal Revenue Service. Tax Consequences of Plan Disqualification
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Internal Revenue Service. EPCRS Overview