Husband-Wife each owning businesses

[John Feldt ERPA CPC QPA]

For about a decade, a husband (100% owner) sponsored a qualified 401(k) for his office, covering his employees.

For the last 8 years, the wife (100% owner) offered a SIMPLE for her business, covering her employees.

1. They have a minor child

2. They live in a community property state

Under §1.414©-3(d)(6)(i), they have a problem. Can this be fixed by just renouncing community ownership in these two assets (the businesses)?

[PensionPro]

I am assuming they meet the conditions for the noninvolvement exception under IRC §1563(e)(5). It is possible to enter into a legally binding agreement renouncing community property. At the very least each party should be represented by separate legal counsel experienced in the community property laws of that state. It is possible, but may not (or may) be worth the effort. An improper agreement may result in unintended consequences in the event of divorce, death, etc.

[John Feldt ERPA CPC QPA]

And the minor child issue? §1563(e)(5) lists spousal exceptions. §1563(e)(6) does not list exceptions for the kids.

[Jim Norman]

Still a brother sister CG, minor child deemed to own both:

http://benefitslink.com/modperl/qa.cgi?db=...ployer&id=9

[John Feldt ERPA CPC QPA]

We agree. The business owners are receiving counsel otherwise, so we will ask for their citations/support to that opinion. I have only disgreed with Derrin one time, this is not that time.

[QDROphile]

Are you asking for citations out of curiosity, concern for compliance with some rule applicable to you, or because you are the sheriff of something?

[PensionPro]

There was a recent thread on this subject as well ...

http://benefitslink.com/boards/index.php?showtopic=48687

[John Feldt ERPA CPC QPA]

Are you asking for citations out of curiosity, concern for compliance with some rule applicable to you, or because you are the sheriff of something?

Right, I'm a sheriff.

No, we brought up the issue when we were asked to propose a new plan design for one of the businesses. Our questions revealed that a potential problem existed, one that the employer was not aware of. The problem (to me) is that they are asking for opinions only from the same people that put them into this situation to begin with, and the response has basically been "it's not a problem, you can retroactively renounce the community property, and minor kids are not an issue once you renounce that property."

Obviously they can choose the same counsel that put them into this arrangement, but due to our relationship with this prospect, they want our advice as well, knowing it does not carry the weight of a legal opinion.

[QDROphile]

I was just asking about what was at stake in the matter. You have seen examples on these Boards of serious battles over what is right or who is right, and that is all that mattered. Sometimes you need to know what is right because you are responsible for some sort of compliance or reporting, and not getting it right can have adverse personal consequences or liability. Sometimes you don't have direct personal consequences riding on what is right, but you don't want to be associated with something that is egregiously wrong. You think something is wrong and seem to care a lot when it does not look like you have any potential liability for following instructions based on the wrong position. I was hoping to learn if I was missing something about responsibiity for following instructions. For example, if you are a fiduciary, you usually cannot rely on instructions and have to be satisfied that you are taking reasonable actions. Or you might have responsibility for reporting and cannot take a postion that you do not believe is reasonable. Or you might be so digusted with your client (or afraid of its judgment and recklessness) that you are considering firing the client or putting the client at a greater distance. Also, I like to know what makes service providers tick, so I can either work with them better or fight with them better.

[John Feldt ERPA CPC QPA]

QDROphile,

Thanks for the reply. It's similar to the "know your audience" basics - those are definitely good points to consider. I am a plan compliance/plan design geek working for a service provider (sometimes called a TPA).

I appreciate the response.

-John