IRC 414 Controlled Group, Affiliated Service Group, and Leased Employee Rules: Practitioner Guide

Overview: The IRC 414 Gating Analysis

Every qualified plan compliance review begins with the same threshold question: who is the employer? The answer is never simply the entity that adopted the plan. Under IRC 414, Congress directed that multiple related entities be treated as a single employer for qualified plan purposes, so that owners of multiple businesses cannot provide tax-favored retirement benefits to themselves and a narrow class of highly compensated employees while excluding the broader workforce they effectively control.

The IRC 414 gating analysis must be completed before any IRC 401(a) qualification review begins. If you apply the nondiscrimination tests, minimum coverage rules, or annual additions limits without first resolving the IRC 414 aggregation question, you are running the tests on the wrong employer. Plan disqualification can result from a controlled group determination made incorrectly, ignored entirely, or applied only after the fact during an IRS audit.

IRC 414(b): Controlled Group of Corporations

IRC 414(b) provides that all employees of corporations that are members of a "controlled group of corporations" (as defined in IRC 1563(a), modified as described below) are treated as employed by a single employer for qualified plan purposes. The controlled group rules thus prevent the use of separate corporate subsidiaries to segregate plan populations and avoid nondiscrimination testing.

Parent-Subsidiary Controlled Group

A parent-subsidiary controlled group exists when a common parent corporation owns at least 80% of the total combined voting power of all classes of stock entitled to vote, or at least 80% of the total value of all classes of stock, in one or more subsidiary corporations, and each subsidiary in turn meets the same 80% threshold either with respect to the common parent or with respect to another subsidiary in the chain. The chain analysis cascades downward: a parent that owns 100% of a midstream holding company, which in turn owns 80% of an operating subsidiary, creates a three-tier parent-subsidiary controlled group encompassing all three entities.

Brother-Sister Controlled Group

The brother-sister test under IRC 1563(a)(2) is the more operationally complex of the two corporate tests. It applies a two-part ownership analysis to two or more corporations:

• 80% breadth test: Five or fewer individuals, estates, or trusts must together own at least 80% of the total combined voting power or total value of shares of each corporation in the group.
• More than 50% effective-control test: Taking into account only the lowest ownership percentage held by each common owner in any one corporation in the group, the same group of individuals, estates, or trusts must together own more than 50% of each corporation.

Both prongs must be satisfied simultaneously. A common practitioner trap is concluding that a brother-sister group exists based solely on common ownership of 80% or more of each entity, without confirming that the second, more restrictive prong is also met.

Constructive Ownership Under IRC 1563(e)

For purposes of the brother-sister and parent-subsidiary tests under IRC 414(b), IRC 1563(e) imposes attribution rules that treat a person as owning stock held by certain related parties and through certain entity arrangements:

• Option attribution: An individual is treated as owning stock subject to a currently exercisable option to purchase that stock.
• Family attribution: An individual is treated as owning stock owned by their spouse (with limited exceptions for divorced spouses meeting certain conditions), minor children (under age 21), and grandchildren (under age 21 if the individual's child is also in the group).
• Entity attribution: Ownership through partnerships, estates, trusts, and corporations is attributed proportionately to the beneficial owners or partners.

The IRC 318 family attribution rules also apply to S-corporation stock ownership determinations under IRC 414(b), because S-corporations are corporations for federal tax purposes. As a result, an S-corporation shareholder's spouse and minor children may be constructively treated as owning the shareholder's S-corporation shares, affecting the brother-sister analysis when the same family members hold interests in other entities. Verify the current attribution rules and their interaction with IRC 318 at IRS.gov.

IRC 414(c): Trades or Businesses Under Common Control

IRC 414(c) extends the controlled group concept to organizations that are not corporations: partnerships, sole proprietorships, LLCs taxed as partnerships or as disregarded entities, and combinations of any of the above. The regulations under Treas. Reg. 1.414(c) apply tests that parallel those in IRC 1563 for the corporate context, adapted for the ownership mechanics of non-corporate entities.

For a parent-subsidiary common-control group in the non-corporate context, an organization must own at least 80% of the profits interest or capital interest in a partnership, or 80% of the beneficial interest in an estate or trust, for a chain-of-control relationship to exist. For a brother-sister common-control group of non-corporate organizations, the same two-prong analysis applies (80% breadth test and more than 50% effective-control test), with ownership measured by profits interests or capital interests rather than share voting power or value.

A practical complexity arises when a business owner operates both corporate and non-corporate entities: the common-control tests apply within each category (IRC 414(b) for the corporations; IRC 414(c) for the non-corporate entities), and the results are then combined under the single-employer rule. A sole proprietor who also owns 90% of a corporation is in a common-control group encompassing both the proprietorship and the corporation, even though they are different entity types. Verify the current common-control regulations and combination-entity guidance at IRS.gov.

IRC 414(m): Affiliated Service Groups

The affiliated service group rules address a structural gap in the controlled group framework: because the IRC 414(b) and (c) tests are ownership-threshold based, service-industry employers can sometimes arrange their businesses to avoid common ownership while effectively operating as an integrated workforce. Congress enacted IRC 414(m) to close this gap by extending the single-employer concept to service organizations that are functionally integrated but not commonly owned at the IRC 1563 threshold levels.

A-Organization (A-Org) Arrangements

An A-org affiliated service group consists of a first service organization (FSO) and one or more other service organizations (the A-organizations). An organization is an A-org if:

• It is a service organization (the principal business of which is the performance of services);
• It is a shareholder or partner in the FSO; and
• It regularly performs services for the FSO, or is regularly associated with the FSO in performing services for third parties.

The A-org test captures the classic law firm or medical practice structure where a service company (the FSO) uses professional corporations owned by individual practitioners as partners or shareholders. Each professional corporation that regularly provides services through the FSO is an A-org affiliated with it. Verify the current A-org test requirements and IRS guidance at IRS.gov.

B-Organization (B-Org) Arrangements

A B-org affiliated service group exists where an organization regularly performs services for the FSO (or for the FSO and an A-org together), and more than 10% of that organization is owned by persons who are HCEs of the FSO. The B-org test is specifically designed to capture arrangements where an HCE of the FSO has set up a captive service company to which the FSO outsources certain functions, and where the HCE-owned company's workforce would otherwise be excluded from the FSO's plan testing. The 10% ownership threshold is a relatively low bar and can be met through indirect ownership. Verify the current B-org test mechanics and the 10% threshold at IRS.gov.

Management Organizations Under IRC 414(m)(5)

IRC 414(m)(5) extends the affiliated service group concept to any organization whose principal business is performing management functions for the FSO (or for the FSO and related organizations), whether or not it meets the ownership tests under the A-org or B-org rules. The management function test looks to the substance of the services provided: if the organization primarily manages or administers the FSO's business operations, payroll, HR, accounting, legal, or similar functions, it is treated as part of the affiliated service group regardless of the ownership relationship between the two organizations. This provision specifically targets the management company structure commonly used in the healthcare and hospitality industries. Verify the current management function test and any applicable IRS guidance at IRS.gov.

IRC 414(n): Leased Employees

IRC 414(n) addresses the leased-employee arrangement, in which a recipient organization obtains workforce services through a staffing or employee leasing company rather than hiring workers directly. Without IRC 414(n), an employer could exclude a substantial portion of its working population from qualified plan participation by characterizing those workers as employees of a staffing agency rather than as employees of the recipient.

The Deemed Employee Rule

A person is treated as a leased employee of the recipient organization (and therefore as an employee for qualified plan purposes) if three conditions are all met:

1. The services are performed by the person pursuant to an agreement between the recipient and a leasing organization;
2. The person has performed services for the recipient on a substantially full-time basis for a period of at least 12 months (the 12-month look-back period); and
3. The services are performed under the primary direction or control of the recipient.

The "substantially full-time" standard is defined in the regulations as 1,500 hours of service per year, or 75% of the hours that a comparable employee performing the same services in the same location would be expected to perform. The "primary direction or control" test is a facts-and-circumstances determination based on who sets work schedules, instructs the worker on the manner and means of performance, and disciplines or evaluates the worker. Verify the current substantially full-time and direction or control standards at IRS.gov.

Consequences of Leased Employee Status

A leased employee is treated as an employee of the recipient for purposes of IRC 401(a) nondiscrimination requirements, IRC 410(b) minimum coverage, IRC 416 top-heavy rules, and IRC 415 annual additions limits. Service performed as a leased employee is counted for eligibility and vesting purposes in the recipient's plan, even if the leased employee is not actually enrolled in the plan. Failure to count leased employees can cause a plan to fail the minimum coverage or nondiscrimination tests, potentially triggering plan disqualification. Verify the current consequences of leased employee status and the method for counting service at IRS.gov.

The IRC 414(n)(5) Safe Harbor

Leased employees are excluded from the deemed-employee rule if:

• The leased employees are covered under a money purchase pension plan maintained by the leasing organization that provides for a nonintegrated employer contribution of at least 10% of compensation (verify the current safe harbor contribution percentage at IRS.gov);
• The leasing organization's plan provides for immediate participation and full and immediate vesting; and
• Leased employees do not constitute more than 20% of the recipient's non-highly compensated workforce.

The 20% workforce limitation is a common trap: if the recipient relies heavily on leased workers (as is common in the healthcare, technology, and hospitality industries), the safe harbor may not be available even if the leasing organization maintains a qualifying pension plan, because the leased workforce may exceed the 20% cap. Verify the current safe harbor requirements and the workforce percentage calculation at IRS.gov.

IRC 414(o): Other Arrangements

IRC 414(o) grants the Secretary of the Treasury authority to prescribe regulations applying principles similar to those in IRC 414(b), (c), and (m) to other arrangements not specifically addressed by those subsections. Congress included this provision to prevent avoidance through novel structures that fall outside the literal scope of the enumerated tests. The Secretary has exercised this authority to address certain multi-employer arrangements, reciprocal service relationships, and other functional integration schemes that do not fit neatly within the A-org, B-org, or management organization categories under IRC 414(m). Practitioners advising clients in unusual multi-entity structures should review any applicable regulations under IRC 414(o) and any relevant IRS guidance. Verify the current scope of IRC 414(o) regulatory authority and any outstanding guidance at IRS.gov.

IRC 414(q): Highly Compensated Employee Definition

The highly compensated employee (HCE) definition under IRC 414(q) is the anchor for the nondiscrimination rules that run through the entire qualified plan framework. Every ADP test, ACP test, IRC 401(a)(4) general nondiscrimination test, and top-heavy key-employee determination depends on correctly classifying each plan participant as either an HCE or a non-highly compensated employee (NHCE).

The Two-Prong HCE Definition

Under IRC 414(q), an employee is an HCE for a plan year if they satisfy either of two tests:

1. Ownership test: The employee was a 5%-or-more owner of the employer (applying the attribution rules under IRC 318) at any time during the current plan year or the preceding 12-month period.
2. Compensation test: The employee received compensation from the employer in excess of the applicable dollar threshold during the preceding plan year. Research indicates the 2026 threshold is $155,000; verify the current inflation-adjusted amount at IRS.gov.

An employee who satisfies the ownership test is always an HCE, regardless of their compensation level. The compensation test applies to the preceding year's compensation, meaning the HCE determination for the current plan year looks back to the prior year. Verify the current HCE compensation threshold and any applicable look-back period elections at IRS.gov.

Top-Paid Group Election

An employer may elect to limit the compensation-test HCE group to the top 20% of employees, ranked by compensation (the "top-paid group election" under IRC 414(q)(3)). When the election is in effect, only employees who both exceed the compensation threshold and are in the top 20% by compensation are classified as HCEs under the compensation test. This election can significantly reduce the HCE count for a large employer with many employees earning near the threshold, improving nondiscrimination test results. The election must be consistently applied and is an annual decision. Verify the current top-paid group election mechanics at IRS.gov.

Controlled Group Compensation Aggregation

For purposes of the IRC 414(q) compensation test, compensation from all members of the controlled group, affiliated service group, or other arrangement covered by IRC 414 is aggregated. An employee who earns $90,000 from one controlled group member and $70,000 from another is treated as having received $160,000 in compensation from the combined employer, which would exceed the research-indicated 2026 threshold of $155,000 (verify the current threshold at IRS.gov). Practitioners advising multi-entity clients must aggregate compensation across all controlled group members before classifying any employee as an HCE or NHCE.

IRC 414(u): Uniformed Services (USERRA)

IRC 414(u) implements the qualified plan provisions of the Uniformed Services Employment and Reemployment Rights Act (USERRA) and ensures that employees who leave employment to perform military service are not penalized in their retirement plan accumulations as a result of that service.

Under IRC 414(u), a qualified plan must:

• Treat a returning veteran as if they had not taken leave, for purposes of eligibility, vesting, and benefit accrual -- the period of military service is credited as if the veteran had been employed throughout;
• Allow the veteran to make up elective deferrals, employee contributions, and employer contributions (if the plan provides employer contributions) for the period of military absence, within a catch-up window equal to three times the period of military service (not to exceed five years);
• Treat the make-up contributions as having been made during the period of military service for purposes of the IRC 415 annual additions limits applicable to those prior years; and
• Treat a veteran who dies or becomes disabled while performing military service as if they had resumed employment on the day before death or disability (the deemed death-in-service provision), for purposes of any plan death or disability benefits.

The IRC 414(u) obligations attach at the plan level and cannot be waived by plan amendment. USERRA reemployment rights and plan make-up requirements are enforced independently by the Department of Labor and the Department of Justice, in addition to the IRS. Verify the current IRC 414(u) plan requirements and USERRA guidance at IRS.gov and with qualified ERISA counsel.

IRC 414(v): Catch-Up Contributions and the Super Catch-Up

IRC 414(v) authorizes qualified plans to permit participants who are age 50 or older by the end of the calendar year to make elective deferrals in excess of the otherwise applicable IRC 402(g) deferral limit. Catch-up contributions under IRC 414(v) are explicitly excluded from the IRC 415 annual additions limit and from the ADP test numerator, which means they do not count against the plan's overall contribution limits and are not tested for nondiscrimination purposes (provided the plan is otherwise a safe harbor plan or passes the ADP test without counting catch-up amounts).

The Standard Age-50 Catch-Up

For plan years beginning in 2026, the standard age-50 catch-up contribution limit is the lesser of the applicable dollar limit (verify the current inflation-adjusted limit at IRS.gov) or the participant's compensation reduced by their regular elective deferrals. Research indicates the 2026 age-50 catch-up limit is approximately $7,500; verify the current inflation-adjusted amount at IRS.gov before advising any client.

SECURE 2.0 and OBBBA: The Age 60-63 Super Catch-Up

SECURE 2.0 Act added an enhanced catch-up contribution for participants who reach ages 60, 61, 62, or 63 during the calendar year. This super catch-up is set at the greater of $10,000 or 150% of the otherwise applicable age-50 catch-up amount for the year (verify the current super catch-up limit at IRS.gov). The OBBBA modified certain aspects of the super catch-up rule, including the Roth catch-up requirement for HCEs earning above a compensation threshold and the plan amendment requirements for adopting the super catch-up. Because these provisions are recently enacted, verify at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

Key Practitioner Applications

Application 1: OBBBA Mandatory Automatic Enrollment (IRC 401(k)(15))

The OBBBA mandatory automatic enrollment requirement for new 401(k) plans is applied at the controlled group employer level. Before a plan sponsor can determine whether a new 401(k) plan must include QACA automatic enrollment features, the IRC 414 analysis must be complete. If the new entity is part of an existing controlled group that already maintains a compliant 401(k) plan, the new entity may be added as a participating employer in the existing plan by plan amendment, and the existing plan's grandfathered status (if applicable) may extend to the new entity's participants. If no existing compliant plan covers the controlled group, and the new entity (or the new controlled group) is establishing its first plan after the OBBBA effective date, the QACA auto-enrollment mandate applies. Verify at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

Application 2: ACA Employer Mandate (IRC 4980H)

IRC 4980H(c)(2)(C)(i) expressly incorporates IRC 414(b), (c), (m), and (o) aggregation for purposes of determining applicable large employer (ALE) status under the ACA. The full-time employee and full-time equivalent (FTE) counts from all controlled group and affiliated service group members are combined for the ALE threshold determination. If the combined group meets the threshold (verify the current applicable large employer threshold at IRS.gov), every separate entity in the controlled group is itself an ALE and must independently offer minimum essential coverage and file Forms 1094-C and 1095-C. The practical implication: a physician practice with multiple professional corporations, each below the ALE threshold individually, may be an ALE as a combined affiliated service group. Verify the current ALE threshold and aggregation rules at IRS.gov.

Application 3: Annual Additions Aggregation Under IRC 415

IRC 415(g) requires that annual additions to all defined contribution plans maintained by all members of the controlled group for a participant be aggregated and tested against the single IRC 415(c) limit. A participant who is employed by two controlled group members and receives contributions to defined contribution plans maintained by both entities can exhaust the IRC 415 limit across the combined contributions faster than the plan sponsor anticipates. This aggregation rule is particularly relevant in multi-entity professional practice groups where a key professional receives large profit-sharing or employer contributions from multiple controlled group plans. Verify the current IRC 415(c) dollar limit at IRS.gov and confirm that your plan administration system is configured to aggregate across all controlled group plans for affected participants.

Application 4: S-Corporation Attribution and IRC 318

When applying the brother-sister controlled group test or the ownership prong of the HCE definition to an S-corporation, the IRC 318 family attribution rules apply because S-corporations are corporations for federal tax purposes. As a result, a married couple in which one spouse owns 100% of an S-corporation and the other spouse owns 100% of a separate operating company may be in a brother-sister controlled group, even though neither spouse directly owns shares in the other's entity, because each spouse is constructively attributed 100% of the other's shares under IRC 318(a)(1). This result is counterintuitive and has caused plan disqualifications when practitioners assume that separate ownership by spouses creates separate, unrelated employers. Verify the current IRC 318 attribution rules and their application to S-corporation ownership under IRC 414(b) at IRS.gov.

Application 5: Separate Line of Business Exception (IRC 414(r))

An employer that operates two or more distinct lines of business may, in limited circumstances, satisfy the IRC 401(a)(4) nondiscrimination and IRC 410(b) minimum coverage requirements on a separate-line-of-business (SLOB) basis under IRC 414(r). The SLOB exception permits each line of business to be tested independently, provided the employer satisfies a series of conditions: the line of business must have at least 50 employees (or a different minimum in some circumstances; verify the current minimum at IRS.gov), must meet either a safe harbor ratio of 50/200 HCE concentration or demonstrate administrative separateness, and must be a genuine, separately managed division. The SLOB rules carry significant ongoing administrative obligations and do not reduce the controlled group determination requirement; the first question is still always whether a controlled group exists under IRC 414(b)-(c). Verify the current SLOB safe harbors and administrative requirements under Treas. Reg. 1.414(r) at IRS.gov.

Consequences of Missed Controlled Group Aggregation

The cost of an incorrect controlled group determination is not merely an administrative correction. When the IRS identifies that a plan was tested without including all controlled group members, the resulting nondiscrimination failures can have severe consequences:

• Plan disqualification under IRC 401(a). If nondiscrimination tests fail on a controlled group basis, the plan loses its qualified status. Disqualification causes all employer contributions and earnings to become immediately includible in participants' income, the employer loses the deduction under IRC 404, and the trust loses its tax-exempt status under IRC 501(a).
• Excise taxes under IRC 4979. Failure to timely correct ADP/ACP excise tax failures due to a missed controlled group aggregation triggers a 10% excise tax on excess contributions, in addition to the income tax consequences.
• IRC 4975 prohibited transaction exposure. If plan assets have been administered for an unrecognized controlled group member's benefit (for example, the plan covered only one entity's employees while the controlled group members' combined workforce would have failed coverage testing), a prohibited transaction may have occurred.
• EPCRS correction costs. While the IRS Employee Plans Compliance Resolution System (EPCRS) provides correction paths, the correction period and cost for multi-year controlled group failures can be substantial, including retroactive contribution requirements and excise tax payments. The IRS Voluntary Correction Program (VCP) fee schedule and correction methodology must be verified at IRS.gov for any specific correction plan.

Proactive identification of the controlled group at the plan design stage, and annual re-verification of the controlled group composition (particularly following mergers, acquisitions, dispositions, or changes in ownership structure), is far less costly than post-hoc correction after an IRS audit. Verify the current EPCRS correction options and VCP procedures at IRS.gov.

IRC 414 Aggregation Rule Comparison Table

The table below summarizes the key features of each IRC 414 aggregation rule. All figures are research-based for 2026; verify the current dollar thresholds, ownership standards, and plan design requirements at IRS.gov before relying on any figure in this table for client advice or plan documents.

All dollar thresholds, ownership percentages, and plan design requirements cited in this table are research-based for 2026 and must be verified at IRS.gov before use in plan documents, client advice, or controlled group analyses. OBBBA provisions (mandatory auto-enrollment, super catch-up, Roth catch-up requirement) carry additional uncertainty; consult independent ERISA counsel as implementation guidance may be pending.