Ownership Attribution - AutomatedPensions.com
Ownership Attribution
Categories:Defined Benefit Plan Issues   Defined Contribution Plan Issues   Glossary   Qualified Retirement Plan Issues  
Updated: 8/Nov/06 14:56:38 (c) 2006 AutomatedPensions.com
Outline

Ownership Attribution

Summary
To determine a person's ownership interest in a company, the percentage ownership of a person's family members may have to be added to their own direct interest.

When evaluating an owner's percentage ownership interest in a company, family members' ownership interests may have to be added to their own direct interest. This process of adding together a person's direct ownership percentage and their family members' percentages is called Ownership Attribution.

In addition to family relationships, stock ownership by corporations, partnerships, estates, or trusts can also result in Ownership Attribution.

Ownership Attribution is also called Constructive Ownership.

A person's ownership interest in a business is relevant to Qualified Retirement Plans in two broadly different ways. The first regards the status of one employee in relation to other employees, where ownership is a key indicator used for certain nondiscrimination-related definitions, namely Highly Compensated Employee, Key Employee, and Substantial Owner definitions. In these definitions, the owners in question are employees.

The second reason for determining ownership is for control-related issues, determining whether several businesses are related and must be tested as a single employer. The business may form either a Controlled Group or an Affiliated Service Group. In these definitions, the owners in question are not necessarily employees.

Two definitions of Ownership Attribution are found in separate sections of the code--and differ substantially, as presented below.

Section 318: HCE, Key Employee, Affiliated Service Group

For Highly Compensated Employee (HCE) determination as used for nondiscrimination tests, and for Key Employee determination as used in determining whether Top Heavy benefits are required, Ownership Attribution as defined in Section 318 is used (read IRC 318).

In addition, the definition of ownership used in Affiliated Service Group determination also references Section 318.

Summary of Section 318:

  • Family Attribution:
    • Ownership is attributed FROM:
      • from spouse to employee
      • from a child to employee
      • from a parent to employee
      • from a grand-child to employee
      • (but note that ownership is NOT attributed from a grand-parent to the employee)
    • Notes:
      • Age and/or dependency is NOT an issue
        • if child-owner is age 55, attribution still takes place
      • There is NO DOUBLE attribution
        • in the case of a step-child-owner, attribution goes from the child to their parent, but is not subsequently attributed from the parent to the step-parent.
      • Legal relationships matter
        • attribution occurs across adoption-relationships, but not step-child relationships
        • attribution occurs across marriage, but not to significant others
        • attribution does not occur if legally separated
      • community property laws are an issue
        • In a community property state (unless a special non-ownership agreement is permitted and in place), each spouse automatically owns an interest in the other spouse's business .
  • Stock Options: are counted as stock owned
  • Attribution from Partnership: a partner in a partnership that owns stock is considered to own a proportionate share of the stock
  • Attribution from Estate: a beneficiary in an estate that owns stock is considered to own a proportionate share of the stock
  • Attribution from Trusts: a person who has an actuarial interest in a trust that owns stock is considered to own a proportionate share of the stock
  • Attribution from Corporations: a ≥50% owner of a corporation that owns stock is considered to own a proportionate share of the stock
  • Attribution to Partnership: stock owned by a partner in a partnership is considered to be owned by the partnership
  • Attribution to Estate: stock owned by a beneficiary in an estate is considered to be owned by the estate
  • Attribution to Trust: stock owned by a person who has >5% actuarial interest in a trust is considered to be owned by the trust
  • Attribution to Corporation: stock owned by a person who has ≥50% actuarial interest in a corporation is considered to be owned by the corporation

Example 1

  • Facts:
    • Husband and Wife are both employees
    • Both Husband and Wife own 3% interest in the business
  • Conclusions:
    • They are both deemed to be 6% owners:
      • Husband's 3% is attributed to Wife, so Wife has 3% + 3% = 6%
      • Wife's 3% is attributed to Husband, so Husband has 3% + 3% = 6%
    • They are both HCEs and Key Employees
      • both definitions are automatically satisfied for any 5 Percent Owner --anyone who owns more than 5% of the business

Example 2

  • Facts:
    • Gary (age 55), his wife Wanda (age 52), and his step-son (Wanda's son) Steve (age 31) all work for Widgets, Inc.
    • Gary is Vice-President of Widgets, Inc. and owns 11% of the company.
    • Neither Wanda nor Steve have any direct ownership in Widgets, Inc.
  • Conclusions:
    • Gary is a 5 Percent Owner by his direct ownership, so he is automatically both an HCE and a Key Employee.
    • Gary's interest is also attributed to Wanda, so she too is a 5 Percent Owner and is deemed to be both an HCE and a Key Employee.
    • Steve, however, is not deemed to be an owner:
      • he is not Steve's child
      • his mother's ownership interest came only through attribution and cannot be attributed a second time to him--that would double attribution

Section 1563: Controlled Groups, Substantial Owner

For determination of Controlled Group status , Ownership Attribution as defined in Section 1563, the same section that defines Controlled Groups (read IRC 1563).

In addition, in the determination of Substantial Owners (10 Percent Owner /partner, etc.) for PBGC coverage determination (ERISA 4021, 4022(5)(A)), the same rules of IRC 1563(e) are used, except for the exclusion of 1563(e)(3)(C).

Summary of Section 1563(e):

  • Family Attribution:
    • Ownership is attributed FROM:
      • from spouse to spouse
      • from minor children (< age 21) to parent
      • from parent to minor children (< age 21)
    • In addition, in the case of a majority owner (already owns >50%t interest), additional ownership is attributed FROM:
      • from child over 20 to majority owner
      • from parent to majority owner
      • from grand-child to majority owner
      • from grand-parent to majority owner
    • Notes:
      • adoption counts
      • legal relationships matter
      • age (except as specified above) and/or dependency is NOT an issue
      • there is NO DOUBLE family attribution
      • community property laws are an issue
        • In a community property state (unless a special non-ownership agreement is permitted and in place), each spouse automatically owns an interest in the other spouse's business; this makes the following exception unavailable because of clause #1: the spouse does have a direct interest during the year by community property rights.
    • Exception for Spouse - no attribution from an owner to their spouse if all of the following apply true during the year (1563(e)(5)):
      1. spouse does not own stock directly during year
      2. spouse is not
        • director
        • employee
        • participating in management of the company
      3. ≤50% of the company revenues are from royalties, rents, dividends, interest, and annuities
      4. stock in such corporation is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the owner’s right to dispose of such stock and which run in favor of the spouse or spouse's minor children (< age 21)
  • Stock Options: are counted as stock owned
  • Attribution from Partnership: a 5% partner in a partnership that owns stock is considered to own a proportionate share of the stock
  • Attribution from Estates or Trusts: a person who has a 5% actuarial interest in an estate or trust that owns stock is considered to own a proportionate share of the stock
  • Attribution from Corporations: a 5% owner of a corporation that owns stock is considered to own a proportionate share of the stock

Example 1

Paul and Mary are 2 professionals who were married fresh out of college and had a baby named Peter. They got divorced after only 1 year of marriage. Now, 10 years later, both Paul and Mary have started their own professional consulting firms, and each of them is interested in adopting a qualified retirement plan for their respective businesses. They are each 100% owners of their respective firms, and each has several employees.

Because Peter is a minor, by the Family Attribution rules above, ownership is attributed from each parent to Peter. So, Peter is deemed 100% owner of Paul's firm and also of Mary's firm, thus making them form a Controlled Group.

Because of 10-year old Peter's 100% controlling interest in both firms, the 2 divorcees' firms must be treated as a single entity for testing purposes in consideration of establishing a retirement plan for either firm.

That is, when designing a qualified plan for one of the divorcee's plans, the design of the plan (if any) sponsored by the other divorcee's firm must be taken into account.

This is a clear case of the letter of the law violating the spirit of the law. But the letter is clear, and unfortunately, lawyers would quote the courts who say if the law is clear, the intent is irrelevant.

Example 2

For detailed example and application to Controlled Group determination, see Controlled Group Extended Examples.

  1. Here is
    • key players are Jorge and Victoria (Husband/Wife)
    • the 4 CGs are:
      1. in 2 entities (Consulting Group and Rise & Shine) they own 100%
      2. in 2 (On-the-Run, MO and On-the-Run, TX) Jorge owns 79%
        • note there is NO attribution to/from a brother or sister
      3. in 2 (JV and JF) Victoria's Father is 50% owner
        • note there is NO attribution from a parent to child over 21 unless ownership is > 50%
      4. in 2 (John's Office Supply and City-Wide Couriers) the second owner is unrelated
    • Therefore, CG #1 can have a 412i plan, CG #2 can have a 401k plan, and these are not affected by the other CGs. Also, 415 limits are counted separately in each CG.

More Info

Here are some case studies in articles from an attorney specializing in ownership and control questions.