Husband and Wife Controlled Group

[Dougsbpc]

Have a physician that sponsors a defined benefit plan. His wife is also a physician who owns 50% of a separate medical practice. Since we are in a community property state I believe we have a controlled group.

I know we need to test for 401(a)4 and 410(b) as though the two entities were one. I don't see where the defined benefit plan needs to consider all employees of both entities for 401(a)26. Does anyone believe this is correct / not correct?

Thanks.

 

[C. B. Zeller]

There needs to be 80% common ownership for a controlled group to exist. If the wife only owns 50% of another business, and the other 50% is owned by an unrelated party, then I don't see how a controlled group exists. If the businesses provide services to each other, or are regularly associated in providing services to third parties, then you could have an affiliated service group, but that is a different question.

As to your other question, the term "Employer" for 401(a)(26) purposes is defined in 1.401(a)(26)-8 which references 1.410(b)-9. That section says

Quote

Employer means the employer maintaining the plan and those employers required to be aggregated with the employer under sections 414(b), (c), (m), or (o). An individual who owns the entire interest of an unincorporated trade or business is treated as an employer. Also, a partnership is treated as the employer of each partner and each employee of the partnership.

Hence the term "employer" for 401(a)(26) purposes includes all other employers in the same controlled group or affiliated service group.

[Dougsbpc]

C.B. Zeller

Thank you for your reply.

Here is what we have:

	Wife		Husband		Identical
Owner	Med Practice		Med Practice		Ownership
Husband	0.00%	50.00%	100.00%		0.00% 50.00%
Wife	50.00%		0.00%	50.00%	0.00% 50.00%
Non-Related Owner Wife	50.00%		0.00%		0.00%
Non-Related OwnerHusb	0.00%		0.00%		0.00%
Total	100.00%		100.00%		0.00%100%

Since we are in a community property state the exception does not apply.

- The same 5 or fewer own at least 80% of the stock of each corporation. Controlling Interest

1) The identical ownership of the husband is 50% since he is deemed to own his wife's stock.

2) The identical ownership of the wife is 50% since she is deemed to own her husband's stock.

3) #1 + #2 = $100% Effective Control

It appears we have a controlled group when taking into account the deemed ownership of the husband and wife?

Am I missing something here?

Thanks again.

 

[cathyw]

Yes, you are missing something.  Refer to the Vogel Fertilizer decision of the Supreme Court from 1982.  The "same 5 or fewer" owners must each own something in both/all companies that you are analyzing for control.  Since non-related owner wife does not own anything in Husband medical practice, she is not included as one of the same 5 individuals.

By the way, prior to Vogel the IRS regulations included any 5 individuals (not necessarily the same) for the 80% threshold -- the same interpretation that you are now making.  I was practicing back in 1982 and the Vogel decision was a big deal...many groups that were deemed to be controlled all of a sudden found out that they were not!! 

[Belgarath]

Also worth noting that effective 2024, the community property attribution rule is changed. See Section 315 of SECURE 2.0.

[Inquiring Mind]

I believe you do need to consider the ownership of both if they have children under 21 per the stock attribution rules. If they do, I think they would be a controlled group.

[Belgarath]

Effective for plan years beginning 2024, this also was changed by Section 315 of SECURE 2.0.