Quick Controlled Group Question

[metsfan026]

I didn't think this was an issue, but the client was told something by a friend so I wanted to be clear:

Company 1 - Owned 100% by husband (wife not on the books)
Company 2 - Owned 100% by wife (sole employee)

She was told that since they have minor children, this would be a controlled group and needed to be tested together.  I didn't think so, but I just wanted to be clear.

The only complication is that Company 2 is a law firm that does do work for Company 1.  I'm not sure that it's the sole work that they do, but while that could create issues it shouldn't be a controlled group issue.

Thanks in advance!

[shERPA]

Listen to your friend.   https://benefitslink.com/cgi-bin/qa.cgi?db=qa_who_is_employer&n=44

[metsfan026]

8 minutes ago, shERPA said:

Listen to your friend.   https://benefitslink.com/cgi-bin/qa.cgi?db=qa_who_is_employer&n=44

Thanks!  That's extremely helpful.

So if Company 2 wanted to do a Cash Balance Plan, they essentially couldn't because they'd have to include all the employees of Company 1?

[Bill Presson]

1 hour ago, metsfan026 said:

Thanks!  That's extremely helpful.

So if Company 2 wanted to do a Cash Balance Plan, they essentially couldn't because they'd have to include all the employees of Company 1?

As always, it depends. Can you pass 401a26 and 410b while excluding Company 1? Excluding the husband helps.

[metsfan026]

17 hours ago, Bill Presson said:

As always, it depends. Can you pass 401a26 and 410b while excluding Company 1? Excluding the husband helps.

The problem is the goal is to only cover the wife (who is the sole employee) in the Cash Balance Plan.  There are 6 eligible employees from Company 1 (1 HCE and 5 NHCE).  Wouldn't excluding all 6 fail the testing, even though they'd be benefiting under Company 1's plan?

[Bill Presson]

1 hour ago, metsfan026 said:

The problem is the goal is to only cover the wife (who is the sole employee) in the Cash Balance Plan.  There are 6 eligible employees from Company 1 (1 HCE and 5 NHCE).  Wouldn't excluding all 6 fail the testing, even though they'd be benefiting under Company 1's plan?

It would appear so.

[Bri]

Put those minor children to work on the payroll!  It's their fault!

[metsfan026]

9 minutes ago, Bri said:

Put those minor children to work on the payroll!  It's their fault!

Ha!  Honestly, I understand the theory behind the rule but I'm not sure I agree with it.  Makes it harder for two young parents, who are successful and run their own businesses, to create plans that work for their companies.

[Bri]

Of course I was kidding, but if they're teenagers cleaning the office bathrooms on the weekends, it's not expensive to provide a 0.5% accrual to a kid making $2,000 over the summer.  Then exclude them from everything else.

I wonder what the underlying "scheme" was that made the IRS determine this somehow needed to be codified to prevent abuse.  I had to VCP married doctors in separate disciplines, because they had their own SIMPLEs but small children.

[C. B. Zeller]

1 hour ago, Bri said:

Of course I was kidding, but if they're teenagers cleaning the office bathrooms on the weekends, it's not expensive to provide a 0.5% accrual to a kid making $2,000 over the summer.  Then exclude them from everything else.

I wonder what the underlying "scheme" was that made the IRS determine this somehow needed to be codified to prevent abuse.  I had to VCP married doctors in separate disciplines, because they had their own SIMPLEs but small children.

Not the IRS to blame this time - it's Congress. This comes from the statute. Some googling tells me that this particular section (attribution to minor children) was part of the original text of section 1563 which was added by the Revenue Act of 1964.

It's worth noting that ARA has been trying to get this fixed in legislation, and at least one of the bills that was drafted (but has not been passed) does include a provision to fix this.

https://www.asppa.org/news/browse-topics/what’s-new-secure-act-20

Quote

Family Attribution Rules: Another item championed by the ARA corrects and modernizes the outdated and unfair family attribution rules to ensure that women business owners are not penalized if they happen to have minor children or live in a community property state. Under existing tax law, spouses in the nine community property states are automatically considered to own half of all property obtained during the marriage. As a result, business owners must bundle their business with those of their spouse when performing retirement plan coverage and nondiscrimination tests, which can be particularly troublesome if there is a family dispute or separation. Instead, the legislation addresses two inequities in the stock attribution rules by removing attribution:

• for spouses with separate and unrelated businesses who reside in community property states; and
• between parents with separate and unrelated business who have minor children.

This provision would apply to plan years beginning on or after the date of enactment.

 

[Jakyasar]

Follow up question 

If no minor children but Law firm does work for wife's company, what are the issues, if any?