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Attribution between husband and wife


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A husband receives income as a sole proprietor from one entity and his wife receives income as a sole proprietor from a different entity.
 
Are they considered a controlled group based on attribution?
 
Can they have one DB plan that includes both of them?
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It depends - if neither has any involvement in the other's business and there isn't a minor child, then my understanding is there is not a control group. If there is minor child, if I remember correctly (other posters can confirm or correct me), then there is attribution and a control group. Whether or not CG, you can have one DBP covering both - it's a matter of whether it would be a single or multiple employer plan. The bigger concern with a CG is if either of the businesses has non-excludable employees.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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This is one of those questions where I ask: what do you want to do?

If what you want is to have one DB plan that covers both sole props, then you can absolutely do that.  And if there are no rank in file employees, then you can structure the benefits for each of them any way you want (that is, they don't have to have the same benefit formula apply to each of them).

The above comments about both the non-involvement provision and the minor children and community property states are all correct.  But if what you want to do is cover them both with one plan, none of that matters.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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6 minutes ago, Bri said:

And if it IS a controlled group, the DB plan MUST cover both of them (for 401a26 purposes, presuming no other employees to consider)

True; and that's why you can have a minimal benefit for one (say, 1/2 of 1% per year) and the maximum 415 for the other and it will work. But you do have to cover both of them for a26 reasons.

But again, I always ask what they want to do; and if what they WANT to do is have one plan covering both of them, I don't necessarily talk about 401(a)(26) since it doesn't matter in their situation. (I also won't talk about the minor children issue or community property state complications.)  I will talk about what they want for benefits for each of them or what they can afford (same issue generally) since they generally will not know that we can lawfully discriminate like heck between them! :-)

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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My recommendation is that you look at the rules in Treas. Reg. 1.414(c)-4(b)(5), apply them, and see if there are any additional issues that need to be resolved.  As the other commentators have intuited, the exception in -4(b)(5)(ii) will likely result in there being no controlled group, but you will not know for sure until you apply all the rules therein (see below). 

(ii)Exception. An individual shall not be considered to own an interest in an organization owned, directly or indirectly, by or for his or her spouse on any day of a taxable year of such organization, provided that each of the following conditions are satisfied with respect to such taxable year:

(A) Such individual does not, at any time during such taxable year, own directly any interest in such organization;

(B) Such individual is not a member of the board of directors, a fiduciary, or an employee of such organization and does not participate in the management of such organization at any time during such taxable year;

(C) Not more than 50 percent of such organization's gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and

(D) Such interest in such organization is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouse's right to dispose of such interest and which run in favor of the individual or the individual's children who have not attained the age of 21 years. The principles of § 1.414(c)-3(d)(6)(i) shall apply in determining whether a condition is a condition described in the preceding sentence.

 

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On 4/20/2018 at 5:24 PM, JamesK said:

My recommendation is that you look at the rules in Treas. Reg. 1.414(c)-4(b)(5), apply them, and see if there are any additional issues that need to be resolved.  As the other commentators have intuited, the exception in -4(b)(5)(ii) will likely result in there being no controlled group, but you will not know for sure until you apply all the rules therein (see below). 

(ii)Exception. An individual shall not be considered to own an interest in an organization owned, directly or indirectly, by or for his or her spouse on any day of a taxable year of such organization, provided that each of the following conditions are satisfied with respect to such taxable year:

(A) Such individual does not, at any time during such taxable year, own directly any interest in such organization;

(B) Such individual is not a member of the board of directors, a fiduciary, or an employee of such organization and does not participate in the management of such organization at any time during such taxable year;

(C) Not more than 50 percent of such organization's gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and

(D) Such interest in such organization is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouse's right to dispose of such interest and which run in favor of the individual or the individual's children who have not attained the age of 21 years. The principles of § 1.414(c)-3(d)(6)(i) shall apply in determining whether a condition is a condition described in the preceding sentence.

 

Remember, the question asked was whether they can have a DB plan that covers them both.  And regardless of the situation of the controlled group, the answer is still YES.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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  • 4 weeks later...

I don't know how the DB world works, but when I have this situation with a DC plan, if both spouses do want to be covered under the same plan, I still need to have a conversation with them about children, involvement, etc.  Those things do matter because if there is a control group, then the plan is a single employer plan.  If there is not a control group, then it is a multiple employer plan.  So assuming both spouses want to be under one plan, I need to know whether I am indicating in the document that it is single employer or multiple employer and the 5500 is filed differently, depending on what type of plan it is.  

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