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Repeal of Family Aggregation Does Not Eliminate Controlled Group
(Posted January 18, 2000)
Question 41: What was the intent of section 1441 of SBJPA '96, which lifted the "special aggregation" rules for plans covering owner-employees of unincorporated businesses? Would this allow husband and wife Schedule C businesses to sponsor separate plans covering their respective employees if one of the owner-employees is a common-law employee (treated as such on Form W-2) of the other spouse's business (and hence does not get the spousal exemption under controlled group attribution rules)? In other words, the controlled group plans would not need to be considered as being sponsored by a single employer for purposes of coverage/non-discrimination?
Answer: Nope. This question comes up more often than you would imagine.
Before SBJPA, the Internal Revenue Code had a provision under which family members of a "highly compensated employee" ("HCE") would be treated as though they were all one HCE. Especially when you had husbands and wives working togehter and earning more than the 401(a)(17) limit, this could significantly reduce contributions.
The provision was confusing and created some unusual inequities, and this author did not mourn its departure from our statute books thanks to SBJPA.
But while SBJPA got rid of "family aggregation" (treating family members as though they were one person), it did not eliminate "family attribution" (treating one family member as though they owned stock or other business interests held by other family members). So, for affiliated service group purposes, spouses are still considered to own each other's stock. For controlled group and common control purposes, spouses are considered to own each other's stock unless an exception applies. Family aggregation did not change that at all.
So, let's put the example clearly. Husband owns an unincorporated retail business. He also works part-time as a secretary for his wife, who owns her own legal practice. Assume the businesses are separate property and there are no minor children. Assume further that the wife is not involved in any way in the husband's business. That being the case, because of one of the exceptions, the wife owns 100% of her own business and is not deemed to own any of her husband's business. However, that exception doesn't apply to her law firm, because her husband is employed there. Hence, husband owns 100% of his shop and is deemed to own 100% of the law firm. The two are a controlled group because ownership of her firm is attributed to him. SBJPA did not change this at all. The form of the entity, as a corporation, partnership, propetorship, LLC, or other is essentially irrelevant here.
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