Only Non-HCE excluded from coverage?

A husband and wife in a common law state (so a controlled group) have separate businesses and separate calendar year profit sharing only plans.  The husband has no employees, the wife has one employee that is eligible for her plan effective January 1, 2022.  The wife's plan requires 1000 hours and last day to be eligible for a profit sharing allocation.  The husband's plan requires last day or 500 hours of service to be eligible for a profit sharing allocation.

The wife's employee terminates in 2022 with less than 500 hours.

Am I correct that we can exclude the employee from coverage since they did not earn more than 500 hours of service, and thus not have to provide a profit sharing allocation?

Thanks very much.

In the wife's plan yes, in the husband's plan no.

You can treat an employee who terminates with less than 500 hours of service as excludable if they do not benefit, and they do not benefit solely because they terminated with less than 500 hours of service. In the case of the husband's plan, the reason they did not benefit was not solely because they terminated with less than 500 hours; they also did not benefit because their employer did not adopt the plan. Therefore the employee may not be treated as excludable with respect to the husband's plan.

Got it, that makes sense.  Thank you CB.

An interesting observation was made yesterday in the "Pensions on Peachtree" webinar. According to Ilene, (and I hope I'm not misquoting her) there is not AUTOMATICALLY a CG just because you are in a community property state. If the businesses were totally separate prior to the marriage, then they don't fall under the community property ownership rules. There was a term for this that I didn't quite catch. (Maybe one of the attorneys here can chime in with the appropriate terminology.) 

I toss this out as one more reason to have clients make the CG determination in consultation with their ERISA attorney! 

 I heard that too.  In this case both businesses were started after marriage.  "Noninvolvement" is usually the term that I see when reading on this topic.

unless husband and wife have a minor child, which means there is in fact a CG.

Although SECURE 2.0 may change that.

Is the noninvolvement rule an election, or does it automatically apply if all the criteria apply?  

I'm just curious what will happen if 2.0 passes and now spouses that have been treated as a controlled group in common law states, for example, are now no long a controlled group.  

2 hours ago, Gilmore said:

Is the noninvolvement rule an election, or does it automatically apply if all the criteria apply?  

I'm just curious what will happen if 2.0 passes and now spouses that have been treated as a controlled group in common law states, for example, are now no long a controlled group.  

Noninvolvement and community property are two different things. The bill as it currently sits in Congress would remove the attribution that causes a controlled group to exist solely because of state community property laws (or solely because of the existence of a minor child).

Noninvolvement means that the spouses are not involved in each others' businesses, which is broad enough to cover almost anything. If they talk about work over dinner that could violate noninvolvement and cause a controlled group to exist, regardless of whether they live in a community property state.

If the bill is signed into law in its current form, some businesses that are currently controlled groups will cease to be controlled groups. In most cases, that will be advantageous for the parties involved. If, for some reason, they want the controlled group to continue to exist, it should be easy enough for the spouses to become involved in each others' businesses in a way that the noninvolvement exception no longer apples, and they would maintain controlled group status.

That said, I'm sure there will be some unanticipated edge cases where things are not so simple. It is likely that, if this provision becomes law, the IRS will provide some sort of transition relief to give people to get this sorted out without jeopardizing their plan's qualified status.