Controlled Group or Affiliated Service Group? What That Means for Your 401(k) Plan Compliance

If you’ve recently discovered your business may be part of a Controlled Group (CG) or an Affiliated Service Group (ASG)—or assumed you weren’t and got it wrong—your 401(k) plan could face significant compliance issues.

This misstep isn’t just a technical error. It can lead to plan disqualification, costly corrective contributions, IRS sanctions, and employee frustration. But the good news? These issues can often be fixed—if you act early.

Let’s walk through what happens, how to fix it, and how to protect your plan from audit risk.

Why Controlled and Affiliated Group Status Matters

Under Internal Revenue Service code and regulations, CGs and ASGs are treated as a single employer for retirement plan purposes. That means:

• Compliance tests apply across all related entities
• Errors affect the entire plan—not just one company
• Plan misclassification can result in disqualification, penalties, and corrective actions

This is one of those areas where it pays to get it right before the IRS comes calling.

Scenario 1: Mistaken Controlled Group Status and 401(k) Compliance Risks

You believed your entities were part of a Controlled Group and set up your 401(k) plan as a single employer plan. But now you’ve discovered they’re not in a CG. That means you’ve unintentionally created a Multiple Employer Plan (MEP)—without following the rules.

What Can Go Wrong:

• Plan documents may be missing the required MEP language or weren’t properly adopted by all employers. This creates both a plan document failure and an operational failure.
• Employees from non-CG companies may have participated in the plan when they shouldn’t have.
• Minimum coverage and non-discrimination testing must be redone separately for each employer. Plans that passed before may now fail and require corrective contributions and earnings.

If You’re Not Yet Under Audit:

You can fix these issues through the IRS Voluntary Correction Program (VCP). Steps include:

• Adopting a retroactive plan document with proper MEP language
• Having each employer formally adopt the plan
• Redoing the required testing
• Making corrective contributions, if needed
• Filing with the IRS and paying a VCP fee ($1,500–$3,500)

Once approved, these corrections shield you from plan disqualification if the IRS audits you later.

If You’re Already Under Audit:

You’ll need to correct all plan document and operational failures for every year the problem occurred. The IRS will also require payment of an audit sanction penalty, usually based on a negotiated percentage of the tax impact if the plan were disqualified.

Correcting early is simpler, less costly, and far less stressful.

Scenario 2: You Didn’t Think You Were in a Controlled Group—But You Are

In this case, you believed your entities were independent—but they actually qualify as a Controlled Group or Affiliated Service Group.

What Can Go Wrong:

• If one plan document applies to all entities but some employees weren’t included, you may need to retroactively cover those employees and make corrective contributions.
• If plans differ in type (traditional vs. safe harbor) or plan year-end, you can’t aggregate them for testing. Each plan must be tested separately, increasing the risk of failing compliance tests.
• If some CG members don’t sponsor a plan at all, the entities that do may have trouble passing testing without corrections.

Even when entities have separate plans, different benefit levels or participation rates can still cause compliance failures. Testing and corrections may be required.

When to Conduct a CG or ASG Analysis

To avoid these pitfalls, analyze your group structure any time the following occurs:

• Ownership changes across related entities
• One entity begins or stops providing services to another
• There is a business acquisition, divestiture, or restructuring
• You’re implementing or amending a retirement plan

If you haven’t performed a CG or ASG analysis—or it’s been a while—now is the time.

Don’t Wait for the “Oops” Moment

Whether you’re already under audit or just uncovering a potential issue, getting your Controlled Group or Affiliated Service Group status right is essential to protecting your plan and avoiding costly consequences.

If you’re unsure where your organization stands—or need help fixing existing issues—we’d love to start a conversation.

FAQs

Related Articles

• Employee Aggregation Rules: What You Don’t Know Can Hurt You
• Employee Aggregation Rules: Controlled Groups
• Employee Aggregation Rules: Affiliated Service Groups