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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Texas is representative of a common question facing business owners.
“If each person in a married couple owns a business, are the businesses considered a controlled group?”
A call from an advisor in Texas highlights the enhanced planning opportunities available to many entrepreneurial couples due to the SECURE Act 2.0 changes.
The couple, a veterinarian and an IT analyst, wanted separate retirement plans for their respective businesses. In this case, the wife wants to establish a SIMPLE-IRA, and the husband is considering a 401(k)/cash balance arrangement.
When couples own businesses in community property states, in certain circumstances, they are considered to own each business jointly (IRC §§ 1563(e)(5) and 318(a)(1)(A). For retirement plan purposes, IRC §414(b) provides guidance for determining whether certain ownership by family members is attributed to other family members, resulting in a controlled group. These rules are commonly known as family attribution rules. Jointly owned businesses are members of a controlled group. Businesses in a controlled group often have less flexibility when trying to optimize their retirement plan strategies.
Because the couple lives in a community property state—Texas—each is considered to own the other’s business. Before 2024, the IRS’s attribution rules applied, thus making the businesses a controlled group for retirement plan purposes. Being in a controlled group can limit planning opportunities for both organizations. (Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Alaska (if elected).
Fortunately, Section 315 of the SECURE Act 2.0 changed the family attribution rules under IRC §414(b). Beginning in 2024, couples in community property states are no longer considered to jointly own their spouse’s organization for purposes of the controlled group rules. Thus, the two businesses are not considered a controlled group, and each organization can establish a retirement plan suited to that organization without consideration of the other business.