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I have a situation where Husband owns 100% of one business and Wife owns 100% of an unrelated business. They are considering setting up a defined benefits plan for their businesses. Operation of both businesses is kept completely separate and neither has any involvement in the others business. Further, neither is an employee or officer of the others business. They reside in Texas, a community property state. However, they have a post-nuptial agreement which provides that neither has ownership in the others business and that income from the businesses are also separate property so there appears to be no direct ownership issues. So long as the property is characterized as separate property, would the exception for aggregation under the control group rules for an independent spousal business apply?

I have a situation where Husband owns 100% of one business and Wife owns 100% of an unrelated business. Husband's business maintains a 401(k) plan for it's employees. Wife is an employee of Husband's business. They have a pre-nuptial agreement regarding the ownership of their own businesses, so there are no "direct" ownership issues. We have told them the two businesses are related because they do not qualify for the exception under IRC 1563(e) because the Wife is an employee of Husband's company. She is also a participant in the 401(k) plan her Husband's company maintains...probably the reason she's an employee in the first plan, but that is besides the point. They have come back an said the conditions under 1563(e)(5)(B) are satisfied even though the Wife IS and employee of Husband's business since she "does not participate in the management" of the Husband's business. Their interpretation is that the "and" underlined below means both conditions must be satisfied (employee and participate in management) for the condition to be considered not met. 1563(e)(5)(B) The individual is not a director or employee and does not participate in the management of such corporation at any time during such taxable year; I do not see anything in the Code or Regulations that clarifies this point. I have always interpreted this section to mean that if a spouse is an employee or director, the spousal attribution exception does not apply. I would read the part about not participating in the management as a separate condition. None of the articles I can find on the subject address the "management" language in 1563(e)(5)(B). Seems contrary to the general intent of the rules around spousal attribution to say the spouse can be an employee and participate in the plan, but the spousal attribution rules can be ignored as long as the sponsor is willing to say the spouse doesn't participate in the management of the sponsor. Anyone have thoughts on this? Authority for either position?