Husband and wife Companies

[Dougsbpc]

Husband and wife each own 100% of their own companies. His company has 10 employees and hers has about 20.

Since they are married each is deemed to own 100% of the others stock. So we have a controlled group.

If each sponsors its own cross-tested 401(k) plan, I would think both plans must be aggregated for the following:

401(a)4

410(b)

ADP / ACP tests

If any of the above do not require aggregation can they be permissively aggregated?

In this case, 401(a)4 and the ADP test will be helped by aggregation.

Thanks.

[Tom Poje]

'required aggregation' is a term generally used to refer to top heavy testing.

yes, it is true, if you have a controlled group, all employees are treated as being employed by one employer, so in that sense, all employees are aggregated (e.g. for coverage all show in the denominator) but that does not require you to aggregate the plans.In fact if plans had different plan years the regs forbid aggregation (1.410(b)-7(d)(5)). or if one plan was safe harbor and the other plan non safe harbor you can not aggregate for ADP testing (1.401(k)-1(a)(4)(iii)(B)) - or for that matter, you can't 'aggregate' deferrals with non deferrals.

but unless there is something else going on, generally you can permissively aggregate the plans.

of course, for purposes of average benefits percentage test all contributions are aggregated.

[mphs77]

Don't automatically think the spouses each "own" the other spouse's stock.

There is an exception under 1563(e)(5) that may apply.

[david rigby]

IRC 1563
https://www.law.cornell.edu/uscode/text/26/1563

[BG5150]

(5) Spouse

An individual shall be considered as owning stock in a corporation owned, directly or indirectly, by or for his spouse (other than a spouse who is legally separated from the individual under a decree of divorce whether interlocutory or final, or a decree of separate maintenance), except in the case of a corporation with respect to which each of the following conditions is satisfied for its taxable year—

(A) The individual does not, at any time during such taxable year, own directly any stock in such corporation;

(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;

© Not more than 50 percent of such corporation’s gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and

(D) Such stock in such corporation 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 stock and which run in favor of the individual or his children who have not attained the age of 21 years.

[Calavera]

Another things to check would be if they have a minor child (<21 years old), or if they live in the Community Property States.

[Dougsbpc]

Thanks all for the helpful responses.

It turns out that she owns 1% of the stock of his corporation. Under the spouse exceptions of 1563, A indicates that the individual does not , at any time own directly any stock in such corporation.

So it would appear they do not meet the exception and have a controlled group. This will work out fine in their scenario.

Does anyone disagree?

[Dougsbpc]

They do also live in a community property state.

[Calavera]

Then it is a controlled group, therefore see Tom's answer above.