Controlled Group Analysis
The Internal Revenue Code established its Controlled Groups Provisions as part of the Revenue Act of 1964. They were initially issued as part of a tax reform package intended to encourage small businesses, which operated in the corporate form. Over time some medium and large businesses began taking advantage of the lower tax rates afforded small businesses by organizing their structure into multiple corporate forms.
The Employee Retirement Income Security Act of 1974 (ERISA) added sections 414(b) and (c). These sections required that all employees of commonly controlled corporations, trades or businesses be treated as employees of a single corporation, trade or business. These Code provisions used the statutory definition of controlled groups found in section 1563(a) of the Code. Section 1563(a) provides mechanical ownership tests, which are used in determining if a controlled group situation exists.
Sections 414 (b) & (c) did not cover many of the arrangements devised by employers who attempted to avoid coverage of employees. Congress enacted section 414(m) pursuant to section 201 of the Miscellaneous Revenue Act of 1980.
IRC sections 414(b) & (c) were added to the Code because, in the words of the Senate Committee Report on ERISA: ” The Committee, by this provision, intends to make it clear that the coverage and nondiscrimination provisions cannot be avoided by operating through separate corporations instead of separate branches of one corporation.”
A plan that is maintained by an employer, within a group of employers that are under common control, must meet the requirements of IRC section 401(a) as if a single employer employed all employees of the group.