When establishing a plan and asking an employer if the company is part of a controlled group, may the employer’s spouse owning a company affect the answer? Perhaps. Here is an example.
Rev. 10/26/07, E-mail Alert 2007-14

A taxpayer owned less than 80% of the company but bought out the other partners and owned 100% of the company as of October 1, 2009. The taxpayer’s spouse worked for him. In addition, the spouse owned her own business 100%. They were unrelated businesses. The couple had children who were all minors. Having minor children requires the family attribution rules to apply for controlled group purposes, even if these are two unrelated types of businesses.

To further complicate this example, let’s say that the taxpayer’s company has a safe harbor 401(k) plan with immediate eligibility for deferrals, discretionary match and a nonelective contribution. He has eight employees in the plan.

The spouse’s company has never had a plan for her sixteen employees.

As of October 1, 2009, the date the taxpayer owned more than 80% of his firm, there has been a controlled group in existence.

Hopefully, the plans can pass coverage separately for each of the years since 2009. If they can, then there is nothing owed to the employees of the spouse’s firm. Click here for an article on this.

If coverage cannot be passed separately, the spouse’s company must be included in the plan as of October 2009. Ergo, the taxpayer and spouse would need to make the employees in the spouse’s firm whole. The IRS Employee Plans Compliance Resolution System (EPCRS) Revenue Procedure 2006-27 contains the method of correction.

By the way, there is an exception to the rules requiring attribution between a husband and wife, if certain conditions are met. Click here for an article on that subject.