Why do relationships in Controlled and Affiliated Groups matter?

The IRS wants to ensure fairness and prevent situations where a plan sponsor tries to bypass compliance testing or distribute employee benefits unfairly by separating eligible employees among different entities. To address this, the IRS requires that legally related entities be treated as a single employer for compliance testing purposes. This means that the entities within a controlled or affiliated group generally undergo testing as a group, rather than individually.

By treating these related entities as a single employer, the IRS aims to prevent any unequal allocation of benefits and ensure that compliance testing is conducted accurately and fairly. This approach helps maintain a level playing field and promotes consistency within the group.