Cross-test group question

[BG5150]

One of my X-test groups is "Owners."

Situation 1:

Jim owns 100% of the company. Is Mrs. Jim in the "Owners" group, too?

Situation 2:

Jim owns 4% of company. Rest is owned by passive investors. Is Mrs. Jim in the "Owners" group, too?

[Bill Presson]

Based on what you've written here, I say yes. If the wording in the document is changed to something like "employees with direct ownership" then no.

This is one reason we've had all our plans redesigned with everyone in their own group.

[12AX7]

Agree with Bill to have everyone in their own group, however there is no mention of 318 or other attribution in the definition of the Owner Group. Does the plan doc have a definition of "Owner?" How was the plan operated in this respect during prior plan years?

[Bird]

Jim owns 100% of the company. Is Mrs. Jim in the "Owners" group, too?

I'd say no. If a word is not defined in the document, and I doubt "Owners" is, then I'd use the common definition of that term, which wouldn't assume attribution. If it said "More Than 5% Owner", which is defined in the document, then yes.

Jim owns 4% of company. Rest is owned by passive investors. Is Mrs. Jim in the "Owners" group, too?

Again, no.

As discussed, better to have everyone in their own group (or name names).

[ETA Consulting LLC]

I think we could agree that this is a document preparation issue. When defining allocation groups, the descriptions should be as unambiguous as possible and avoid overlap (one participant in more than one group). Since that did not happen, it is an interpretational issue; where the Plan Admininstrator (presumably) has the responsibility for interpreting the terms of the plan.

This leaves open the possibility that in two distinct plans with the exact same language, one plan will consider owners to include owners by attribution while the other plan will not consider attributed owners as owners. From the IRS's viewpoint, it is fine as long as the plan is not operated in an arbitrary and capricious fashion.

Good Luck!

[John Feldt ERPA CPC QPA]

And, does it matter if the owner and spouse are in a community property state, where the spouse is automatically considered to be a 50% owner of everying their spouse owns?

[12AX7]

These questions go back to the intent of the employer and how the provisions of the plan document are interpreted on a consistant basis each year. Because the definition of Owner was not drafted as clear as it could have been, I would suggest that the resolution for the 2012 contribution is drafted with clarification to the restrictions of which participant(s) get grouped in the Owner category. If not too late, amend the plan for 2013.