Spousal Attribution and Controlled Groups

By Jason Watson, CPA
Posted Saturday, November 5, 2023

Spouses generally have attribution to the other spouse by virtue of marriage. For example, a 5% shareholder cannot receive educational benefits from a corporation and by virtue of marriage neither can your spouse.

However, spouses may have separate businesses with separate 401k plans without violating controlled group rules. This also allows each plan to be tested separately. For example, one spouse could have a business with employees and offer a 401k plan with safe harbor provisioning. The other spouse could also have a solo 401k plan for his one-person S Corporation.

Here is the snippet from 26 CFR 1.414(c)-4-

(5)Spouse –

(i)General rule. Except as provided in paragraph (b)(5)(ii) of this section, an individual shall be considered to own an interest owned, directly or indirectly, by or for his or her spouse, other than a spouse who is legally separated from the individual under a decree of divorce, whether interlocutory or final, or a decree of separate maintenance.

(ii)Exception. An individual shall not be considered to own an interest in an organization owned, directly or indirectly, by or for his or her spouse on any day of a taxable year of such organization, provided that each of the following conditions are satisfied with respect to such taxable year:

(A) Such individual does not, at any time during such taxable year, own directly any interest in such organization;

(B) Such individual is not a member of the board of directors, a fiduciary, or an employee of such organization and does not participate in the management of such organization at any time during such taxable year;

(C) Not more than 50 percent of such organization’s gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and

(D) Such interest in such organization is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouse’s right to dispose of such interest and which run in favor of the individual or the individual’s children who have not attained the age of 21 years. The principles of § 1.414(c)-3(d)(6)(i) shall apply in determining whether a condition is a condition described in the preceding sentence.

Drool. Let’s cook the previous legalize down to two major bullets-

• Spouses don’t have direct ownership in each other’s business (mine is mine, yours is yours), and

• Spouses don’t meddle in each other’s business affairs.

Don’t get too wrapped up in controlled groups or affiliated service groups- just understand the basic premise of what you offer in one must be offered in others if a controlled group exists. We can help identify the problem and then steer you to people smarter than us on this extremely narrow topic.