Original Content by: Cameron Dabir, QKA, President of The Pension Source
In this post, we will touch on a recent change that SECURE 2.0 made to rules regarding Controlled Groups (specifically Section 315 of SECURE 2.0).
Under the tax Code, certain related businesses must be aggregated when performing the coverage and nondiscrimination tests. The intention on these regulations is when a person has multiple businesses, he or she cannot establish a retirement plan at only one entity to disproportionately benefit the business owner without covering any of their employees. Without these rules, there could be a scenario where only the business owner receives a contribution (and resulting tax deduction) with no contribution to the company’s employees. Congress would not like that.
Unfortunately, Controlled Group regulations can be complex, not straightforward, and time-consuming to deal with. We will spare you the full details in this blog post and only talk about a specific scenario we come across quite frequently: a husband and wife each owning a separate business.
Under prior law, this couple is not considered a Controlled Group and could establish a plan at their respective businesses independently if they met the following criteria:
- Each spouse has no ownership in the other’s business
- Neither spouse is a director or employee or manager of the other’s business
- Not more than 50% of either business entity’s gross income was derived from passive investments (dividends, interest, royalties, rents or annuities)
- Spouse that owns the business can dispose of the stock at any time, without restrictions
However, if the husband and wife had a child under the age of 21, their respective ownership is attributed to their child. They would then be considered a Controlled Group given there is now shared ownership, violating criteria #1 above.
For example, let’s say we have a husband that runs a successful construction company and a wife that runs her own medical practice. There is no shared ownership and they meet all of the requirements above. If they had no children together, there would be no Controlled Group issues. If they had a child together that was under the age of 21, they would be considered a Controlled Group and their plans would be combined for testing purposes.
Fortunately, Congress realized this does not make a lot of sense and effective 1/1/24, the rule regarding minor children no longer applies in this specific scenario. In other words, a minor child will not cause a husband and wife to become a Controlled Group if all the criteria above are still met. Husband and wife business owners everywhere should rejoice (ok, maybe only we get excited about IRS rule changes like this)!
If all of this makes your head spin, don’t fret. At The Pension Source, we’re here to assist with your retirement needs and ensure you are getting a tailored tax-advantaged solution that meets your desires.
Our passion is improving retirement outcomes for small business owners and their employees. Reach out if you’d like to learn more at sales@thepensionsource.com.