controlled group 5500 filing requirement

[Tom]

Husband has owner-only K and DB plans.  Spouse has her own owner-only K plan with a bundled provider for a couple years.  

Total assets exceed $250,000 so all plans are to file 5500s.  We are investigating if 5500 has been filed for her k plan.  I doubt that the bundled provider inquired as to whether she was part of a controlled group.

I don't know how far back her plan goes. She was added for coverage under his DB plan for a nominal benefit which I was told was required due to being a controlled group - maybe 401(a)(26).  That may have been the first year of her K plan.  I realize the max penalty is $1500 but hopefully someone doesn't have to go back a bunch of years to file.  I have a feeling we'd be asked to do that even though we have no role with the plan.  You know how things go - the record keeper will say they are investment platform only.

Thank you for any comments.

Tom

 

 

[Peter Gulia]

Has the spouse evaluated, applying Internal Revenue Code § 414 as amended by SECURE 2022 § 315, whether her business might not be a part of the same employer as her husband’s business? And, if so, might not have been a part of the same employer for plan years that began after December 31, 2023?

[Artie M]

This could potentially be a Brother-Sister Controlled Group but it might not be.  Brother Sister exists when 5 or fewer individuals own 80% or more of each company.  So H owns 100% of his business and W owns 100% of her business.  Because H and W are legally married, under 1563's general rule, they are automatically considered to have shared ownership of each other’s businesses and become a brother-sister controlled group.

However, under 1563(e)(5)(A)-(D) there is a spousal exception where any ownership attribution between spouses will not be attributed to the other spouse as long as all three rules below apply:

1. No direct ownership or participation in the management of such corporation at any time during the taxable year. Additionally, the spouse cannot be a member of the board of directors, a fiduciary, or an employee of such organization at any time during such taxable year.
2. No more than 50% of business gross income is from passive investments.
3. Stock is not subject to conditions that restrict a spouse’s right to dispose of the stock and that run in favor of the individual or his children under age 21."

Generally, this means that neither spouse can work for, be a board member of, or own any part of their spouse’s business, neither spouse’s business can have more than 50% of its revenue from passive income, and their children must be older than 21 years old. 

Also, I am not sure of the authority for this but we have also applied this exception only where neither spouse was listed in the other spouse’s plan documents and neither spouse participated in or was a trustee in their spouse’s plan(s).

If H and W meet the three criteria 1563(e)(5), they could qualify for a spousal exception, meaning that they might not be in a Brother-Sister Controlled Group. 

As @PeterGulia notes, the SECURE Act provides the guidance where spouses in community property states are treated similarly to spouses in separate property states.

Also, should make sure they are not in an Affiliated Service Group.