The sole owner/employee of LLC #1, which sponsors a DB plan, also owns 50% of LLC#2. The DB plan has paid LLC #2 to assign his 50% ownership in LLC #2 to the plan. I'm guessing that both LLCs are a controlled group due to the effective control rule since the owner of #1 would still be considered owning the 50% interest in #2 since he's the only participant in the plan, not to mention that the "assignment" was probably a prohibited transaction. As a result, the employees of #2 could be eligible for benefits under the plan due to the CG situation. Is all this a correct interpretation?

Another issue (that may be very small compared to the PT and CG ones) is whether this assignment runs afoul of the rules regarding how much of an employer a plan can own. It's my understanding that a plan can hold qualifying employer securities if their value doesn't exceed 10% of the plan's assets at the time of the transaction (assignment was more than 10%). But since qualifying employer securities are defined as either stocks, marketable obligations or public partnership interests and both LLCs are small, privately-held firms, does this rule not apply here? Thanks in advance for all help.

I'd start with the PT issue. Unless the owner worked with an ERISA attorney when he did the transaction, it is very likely the sale of his interest in LLC#2 to the plan is a PT. The correction of the PT will include a reversal of the transaction. Owner needs to consult with an ERISA attorney.

I'm not seeing a controlled group here. There are two parts to the brother-sister controlled group determination. Both parts have to apply before the two LLC's are a controlled group. One is that the same 5 or fewer persons own at least 80% of both entities. They have to own part of both entities to be one of the 5 or fewer persons. Ignoring the sale to the plan, the owner has 100% of LLC#1, but only 50% of LLC#2. The other part is that those 5 or fewer persons own more than 50% of both when you only consider identical ownership in each entity. From what you have described, the identical ownership would be 50%. Unless you rounded down, that would not be more than 50%.

You might still have an affiliated service group, depending on what the LLC's do and what kind of relationship they have with each other.