Foreign Corporation and Controlled Groups

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  

A recent call with a financial advisor from Pennsylvania is representative of a common inquiry related to a controlled group of employers. The advisor asked: “I just discovered that two U.S. companies that I work with are owned by a common parent company that is foreign. Should I be concerned?”    

Highlights of the Discussion

It is possible that because of the common parent company (despite being a foreign entity), the two U.S. subsidiaries could be part of a controlled group of businesses, which would impact the operation of their retirement plans. It would be prudent for the owners of the companies to seek a legal determination on controlled group status. 

Under Internal Revenue Code Section (IRC §) 414(b) a controlled group of businesses exists when any two or more entities are connected through common ownership in a parent-subsidiary, a brother-sister, or a combination of the two controlled groups. For this purpose, entities could be foreign. The code section references the definition of controlled group that appears in IRC §1563(a) alone (and not subsection (b), which would have allowed the exclusion of foreign corporations). Tax court case Fujinon Optical, Inc., v. Commissioner, 76 T.C. 499 (1981) and others support the finding that U.S. businesses related only through a common foreign parent could be a single employer for purposes of IRC §414(c).  

It is important to determine whether a group of businesses is a “controlled group” because the IRS requires that all employees of companies in a controlled group be treated as employed by a single employer for qualification requirements of IRC §§ 401 (general qualifications), 408(k) (simplified employee pension or SEP plans), 408(p) (saving incentive match plan for employees or SIMPLE plans], 410 (minimum participation standards), 411 (minimum vesting standards), 415 (limits on benefits and contributions), and 416 (top-heavy determination). 

Conclusion

The IRS’s controlled group rules pull in foreign entities with common ownership in U.S. businesses. This may catch some U.S. subsidiaries off guard. Controlled group status has several ramifications for the involved businesses’ retirement plans. Because an accurate controlled group determination is critical, businesses should seek guidance from their legal advisors.