Controlled group - married couple-separate business

[Tom]

We have a client who maintains a safe harbor 401(k) for 2017.   His spouse has a separate business and she wants to maximize a plan.  They do not participate in each other's businesses in any way.  The have a child who turned 21 in July 2017.

Spouses are considered a controlled group for testing purposes when there is a child under age 21.  The spouse has not opened her SEP or solo K yet and so at this time there is no child under 21.  But I will advise them that I assume the rule for 2017 is - a child under age 21 AT ANY TIME of the year unless I find otherwise.  I'm not able to find anything definitive yet.

Comments?  I was hoping to have her open a solo-k plan for 2017 and maximize if not a controlled group.  If deemed to be a controlled group, then I will have her sign a participation agreement with her husband's plan.  But that leads to another questionable item - can she defer $24,000 in this plan as her business is just now adopting his plan effective back to 1-1-2017 as a sole proprietor.  Or would her deferral be subject to ADP testing?

Tom

 

 

[Tom Poje]

one article (assuming it is correct) has the following

Although for some plan purposes (like determining Key employees and Highly Compensated Employees (HCEs)), family attribution rules require that an individual be treated as owning stock that is owned by his/her spouse, the attribution rules of Internal Revenue Code (IRC) Section 1563(e)(5), which are used to determine controlled groups, provide an exception to the attribution of stock from an individual to his/her spouse if these conditions are satisfied: 

• Each spouse has no ownership in the other’s business;

• Neither spouse is a director or employee or manager of the other’s business;

• Not more than 50% of either business entity’s gross income was derived from royalties, rents, dividends, interest, and annuities; and

• The spouse that owns the business can dispose of the stock at any time, without restrictions.

  Suppose a husband and wife each own separate, unrelated businesses.  If the exceptions above are met, each individual will be considered to have sole ownership over their respective companies, without any attribution of ownership to the spouse.  In that case, the two businesses will NOT be in a controlled group and each company can sponsor its own retirement plan without having to take into consideration the employees of the spouse’s company for coverage testing purposes. 

  However, when the spouses in question have a child under age 21, the exceptions above won’t matter because a controlled group will be deemed to exist due to the fact that the minor child is attributed stock in each company, creating a scenario in which there is now common ownership across both businesses.  This ownership attribution will remain until the child is no longer considered a minor.  If both companies are considered part of a controlled group because of the child’s ownership, it may be difficult to demonstrate compliance with the 70% coverage testing if only one company is providing retirement benefits to its employees.

   

  http://www.consultrms.com/Resources/40/Controlled-Groups/71/Coverage-Testing-When-Spouses-Each-Own-a-Business

the reg cite is 1.414(c)-4(b)(5)

[ETA Consulting LLC]

What I would caution against is making the initial plan year for the solo (k) a full 12 months.  I would run the first year from August through December in order to avoid an overlapping period during which both companies maintained plans while in controlled group status.  This may cut your 415 limit to 5/12th.  Just a thought.

Good Luck!

[K2retire]

Or make the new plan a 7/31 plan year end.

[Mike Preston]

No can do. Check the overlap rules of 1563/414.

[Rhiannon]

On 12/14/2017 at 11:30 AM, Tom Poje said:

one article (assuming it is correct) has the following

Although for some plan purposes (like determining Key employees and Highly Compensated Employees (HCEs)), family attribution rules require that an individual be treated as owning stock that is owned by his/her spouse, the attribution rules of Internal Revenue Code (IRC) Section 1563(e)(5), which are used to determine controlled groups, provide an exception to the attribution of stock from an individual to his/her spouse if these conditions are satisfied: 

• Each spouse has no ownership in the other’s business;

• Neither spouse is a director or employee or manager of the other’s business;

• Not more than 50% of either business entity’s gross income was derived from royalties, rents, dividends, interest, and annuities; and

• The spouse that owns the business can dispose of the stock at any time, without restrictions.

  Suppose a husband and wife each own separate, unrelated businesses.  If the exceptions above are met, each individual will be considered to have sole ownership over their respective companies, without any attribution of ownership to the spouse.  In that case, the two businesses will NOT be in a controlled group and each company can sponsor its own retirement plan without having to take into consideration the employees of the spouse’s company for coverage testing purposes. 

  However, when the spouses in question have a child under age 21, the exceptions above won’t matter because a controlled group will be deemed to exist due to the fact that the minor child is attributed stock in each company, creating a scenario in which there is now common ownership across both businesses.  This ownership attribution will remain until the child is no longer considered a minor.  If both companies are considered part of a controlled group because of the child’s ownership, it may be difficult to demonstrate compliance with the 70% coverage testing if only one company is providing retirement benefits to its employees.

   

  http://www.consultrms.com/Resources/40/Controlled-Groups/71/Coverage-Testing-When-Spouses-Each-Own-a-Business

the reg cite is 1.414(c)-4(b)(5)

Question - Using the above example, what would happen if the the couple buys another business that they each own 50% of?  Husband owns 100% of A, Wife owns 100% of B, and Husband/Wife each own 50% of C, no children.

[Rhiannon]

Question - Using the above example, what would happen if the the couple buys another business that they each own 50% of?  Husband owns 100% of A, Wife owns 100% of B, and Husband/Wife each own 50% of C, no children.