Question 111: Husband and Wife are both doctors. Each owns 100% of an unincorporated medical practice. The two practices are totally separate. Husband maintains a 401(k) plan covering all 5 of his employees. Wife has 10 employees but she does not sponsor a retirement plan. Are both employers required to be aggregated for testing purposes?
Answer: It depends. Here is a straightforward way of analyzing the situation:
1. Do they have any children under age 21? If the answer is yes, then the two corporations are in a controlled group. Why? Because the child is deemed to own 100% of Wife's business and 100% of Husband's. If the answer is no, go to question 2.
2. Are the businesses community property? If so, the ownership of the two is identical. Each owns 50% of each business (whether or not legal registration says so), and so the two businesses are under common control. If no, go to question 3.
3. Are the parties divorced (final or interlocutory) or legally separated? If they are, then there is no spousal attribution and accordingly no common control. Otherwise, go to question 4.
4. Is either business community property? (Note the difference between this and question 2. Question 2 asked if both were community property, while this asks if either is community property.) If so, then the two businesses are under common control. Why? Suppose Husband's business is community property and wife's is separate property. Wife thus actually owns 50% of Husband's business, and is deemed to own the other 50% by attribution. Hence she actually owns 100% of her own business and is deemed to own 100% of Husband's business. Only if (i) both businesses are separate property, (ii) there are no children under age 21, and (iii) the parties are neither legally separated nor divorced do you go to question 5.
5. Are the four requirements in IRC 1563(e)(5) met so that we can avoid spousal attribution? Husband, for example, is deemed to own Wife's business unless: (i) Husband doesn't actually own any part in the business; (ii) Husband is not an employee or director of Wife's business and doesn't participate in management; (iii) less than half of the business's income comes from rents, royalties, annuities, etc.; and (iv) there are no ownership restrictions running in favor of Husband or Husband's minor children. If all four of those conditions are satisfied for both business, then common control does not exist. If just one of those conditions is not satisfied for either business, then the two are under common control.
If the two businesses are under common control, then they must be tested together for most all plan purposes, included coverage issues under IRC 410(b).
These issues are discussed in more detail, with examples and diagrams, in Chapter 7 of my book, Who's the Employer?.
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