Attribution Rules – The Family Tree

They say you don’t always get to choose your family, and the same holds true with family attribution rules.

Understanding a company’s ownership is vital for accurate nondiscrimination and top-heavy testing. Ownership is a principal factor when determining the highly compensated employees (HCEs) and key employees when running these tests.

While it may be easy to spot the employees who have direct ownership, it’s important to understand that some family members also have an indirect ownership, called attribution. Under the attribution rules, certain family members are considered “own” the same interest; effectively making them an owner without any actual ownership.

In general, Section 318 of the Internal Revenue Code says an individual shall be considered as owning the stock owned, directly or indirectly, by or for his spouse and his children, grandchildren, and parents.

*A legally adopted child is treated as the individual’s child for attribution purposes.

No double attribution is allowed (a son is deemed to own his parent’s stock, but his wife is not).

An individual’s interest may be attributed to more than one family member (ex:  3 children of one parent or 2 parents of 1 child).

Why does family attribution matter for testing purposes?

Attributing interest to family members increases the number of HCEs and key employees you will include in testing.  This could increase or decrease the HCE average deferral percentage which may impact your ADP results.  It will also determine whether or not your plan will be top-heavy; requiring minimum contributions and vesting.

If your plan is designed with a cross-tested profit sharing allocation, increasing the number of HCEs may result in higher contributions to the NHCEs.  Cross-testing uses both age and compensation when testing the contributions that are allocated.  Adding children or a spouse into the HCE class may cause the testing to fail unless more money is given to NHCEs.

It’s important to let your plan administrator know who the direct owners are and those family members who are on the payroll when submitting your annual census, discussing plan design or when ownership changes.  Attribution plays a critical role in both design and administration, so your plan needs to have good roots.

Please contact Watkins Ross if you have questions or would like to discuss ownership status in your plan. You can also tell us here if you have someone in your personal network that would like to discuss the attribution rules.