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%
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)):
spouse does not own stock directly during year
spouse is not
director
employee
participating in management of the company
≤50% of the company revenues are from royalties, rents, dividends, interest, and annuities
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.
in 2 entities (Consulting Group and Rise & Shine) they own 100%
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
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%
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.
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