Navigating Change: Some Changes to the Attribution of Ownership Rules

As a plan sponsor, it is important to understand your organization’s ownership structure to ensure compliance with the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Neglecting a controlled group or affiliated service group member can lead to failed compliance testing resulting in steep penalties or even plan disqualification.

What are Controlled Groups and Affiliated Service Groups?

When two or more companies are connected through their ownership structure, it may be determined that they are part of a controlled group or affiliated service group. While there are several differences between these two, for “coverage” compliance testing, all employers within a controlled group or affiliated service group are considered to be a single employer. These rules are in place to protect employees and prevent owners from fragmenting a single company into multiple entities to circumvent nondiscrimination requirements.

What are the Attribution of Ownership Rules?

Applying ownership attribution is required when a person is related to an owner, including spouses, parents, children, and even grandparents.

For example, if a husband and wife each own 30% of their company, each spouse is considered to own 60% (30% direct + 30% attributed).

Modifications under SECURE 2.0
With SECURE 2.0, two changes have been implemented:

1. Community Property States: This update disregards community property laws in determining ownership for spouses with separate businesses in community property states. This change was made so that uniform property laws will apply to spouses regardless of their state of residence.

2. Minor Children: Attribution to minors of parents with separate, unrelated businesses will no longer cause these entity relationships to be considered controlled or affiliated (minor children are defined as individuals under age 21).

Looking Forward
These long-awaited changes should reduce the number of unintended related employers. The American Retirement Association lauds this change as a correction that “corrects and modernizes the outdated and unfair family attribution rules to ensure women business owners are not penalized if they happen to have minor children or live in a community property state.”

Please contact your Alliance Pension Consultants representative with any questions regarding your company’s ownership structure and how these updates may impact your plan.