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Navigating Change: Important Updates to the Family Attribution Rule

As a plan sponsor, it is important to understand your organization’s ownership structure and controlled group status. This will help your qualified plan remain compliant with the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Neglecting a controlled group member or attribution of ownership can lead to a failed coverage test resulting in steep penalties or even plan disqualification.


What is a Controlled Group?

A controlled group of corporations often includes two or more companies typically connected through stock ownership by related persons. This controlled group is considered as one employer for the purposes of 401(k) coverage testing. The rules concerning the controlled group are in place so that a company does not bypass the nondiscrimination rules by dividing the companies into multiple entities.

Understanding the Family Attribution Rule

Attribution is the perception of treating a person as owning an interest in a business that is not actually owned by that person. Rather they are an owner because they are related to the owner of the stock (or profits or beneficial interests). An individual’s ownership can be attributed to his or her spouse, parents, children and grandparents.

Regarding 401(k) plan testing, attribution involves adding ownership interest of certain family members to the direct ownership of the individual. As an example, if a husband and wife each own 30% of their company, both spouses would be treated as owning 60% of that company (30% direct + 30% attributed).

The family attribution rules applicable to qualified plan testing generally fall under two sections of the Internal Revenue Code (IRC):

  • IRC Section 1563 – Identifies related companies that are part of a controlled group.
  • IRC Section 318 – Identifies related companies that are part of an affiliated service group.

SECURE 2.0 Updates the Family Attribution Rule

Under the IRC, certain related businesses must be aggregated when performing the coverage and nondiscrimination tests. The aggregation rules are generally based on the degree of common ownership of the businesses. Currently, in states where community property rules apply, each spouse would be considered to own the other spouse’s separate business and that business would be considered related.

Effective for plan years beginning in 2024, Section 315 of SECURE 2.0 updates two stock attribution rules.

  1. Community Property Rules – The first update addresses inequities where spouses with separate businesses reside in a community property state when compared to spouses who reside in separate property states. Therefore, community property laws will be disregarded when determining ownership.
  2. Minor Child – The second update modifies the attribution of stock between parents with a separate and unrelated business and their minor children in that it will not result in related employers. (Minor children are defined as individuals who have not attained the age of 21.)

Looking Ahead to 2024

These new rules are a long-awaited change especially for sole proprietor small businesses. Now the number of unintended related employers will be reduced. The American Retirement Association recognized this provision in a letter of support stating that it “corrects and modernizes the outdated and unfair family attribution rules to ensure women business owners are not penalized if they happen to have minor children or live in a community property state.”[1]

Plan Sponsors should work closely with their service providers and a qualified ERISA attorney to navigate these changes successfully. This could involve revisiting plan documents, communication strategies, and administrative procedures to align with the updated rules. Please contact your local ABG representative with any questions regarding your company’s ownership structure and how these important updates to the family attribution rule may impact your plan.


[1] Letter of Support for the Securing a Strong Retirement Act, American Retirement Association (May 3, 2021)

Advisory products and services offered through Pension Advisory Services, Inc., (“PCA”), a Registered Investment Advisor. The information in this article is for informational purposes only and should not be considered as investment advice or as a recommendation of any particular strategy or investment product. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about PCA, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov