When married spouses each own and operate their own separate business entities, navigating retirement plan rules can become surprisingly complicated.
A seemingly straightforward scenario—a husband and wife owning different businesses—raises important questions about whether their entities must be treated as related for purposes of compliance testing. Spouses each running distinct companies might have thought they were free to adopt separate retirement plans without concern.
In this article, we’ll unpack the key rules, explain how they apply when two spouses each operate distinct businesses, and highlight the planning steps savvy business-owners should consider.
Understanding Controlled Group and Affiliated Service Group Rules
The tax-code rules governing related businesses and plan coverage are designed to prevent business owners from establishing generous retirement plans for themselves while excluding employees.
Under the tax code, certain related businesses must be aggregated when performing the coverage and nondiscrimination tests. The regulations aim to prevent business owners with multiple businesses from establishing a retirement plan at just one entity. Otherwise, the owner could receive disproportionate benefits without covering any employees.
Without these rules, owners could get contributions and tax deductions while employees get nothing. Such an outcome would conflict with legislative intent.
Controlled Group regulations are complex, time-consuming, and difficult to navigate. IRS rules determine when businesses are related for tax or benefits purposes. This discussion will not review every detail but will focus on a typical scenario: a husband and wife each owning a separate business.
When Separate Spousal Businesses Can Be Treated Independently
Under prior law, a married couple like this is not a Controlled Group. Each spouse can independently start a plan for their business if:
- They have no ownership in the other’s business.
- Neither spouse is a director, employee, or manager of the other spouse’s business.
- Not more than 50% of the gross income for either business can come from passive investments. For this rule, passive investments generally refer to income sources where the business owner is not materially involved, such as dividends, interest, royalties, rents, or annuities. Active income from operations is not included as passive income.
- They are not employed by each other’s businesses.
- They have no affiliated services between the businesses.
- Each business owner can dispose of the stock at any time without restrictions.
If a married couple had a child under 21, the child’s ownership is treated as ownership by both spouses. The spouses then become a Controlled Group, so they do not meet criterion #1.
Consider a husband who runs a construction company, and his wife, who manages a medical practice. They have no shared ownership and meet all the listed requirements. If they have no children, there is no controlled group issue. If they have a child under 21, they become a controlled group, and their plans are combined for testing.
Business owners must still examine their ownership structure, working relationships, passive-investment income thresholds, and the ability to dispose of stock without restriction.
How the 2024 Rule Change Impacts Aggregation Requirements
Under prior law, if neither spouse owned or worked in the other’s business and other criteria were met, they could treat the businesses as independent. However, a key wrinkle was the treatment of children under age 21 and how their ownership triggered aggregation rules—effectively converting what appeared to be two separate businesses into one “controlled group” for plan-testing purposes.
The rules changed effective January 1, 2024, removing the child-under-21 aggregation barrier when the other criteria are satisfied. But while one door opened, many remaining requirements still demand careful analysis.
Congress found this provision illogical. As of January 1, 2024, the rule about minor children no longer applies. A minor child will not make a husband-and-wife couple a Controlled Group if all the criteria above are met.
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Final Thoughts
Navigating retirement-plan rules becomes more complex when spouses each own their own business, but the benefits of getting the structure right are significant. Cash balance plans offer powerful tax deferral opportunities, yet they must be implemented within the framework of the controlled-group and affiliated-service-group rules.
The 2024 changes eliminated one of the most confusing hurdles by removing the automatic aggregation tied to young children. Still, many factors remain—such as ownership restrictions, working relationships, and passive-income limitations—that determine whether two businesses can be treated independently.
For many couples, proper planning opens the door to maximizing retirement contributions while keeping each business’s obligations clearly defined. When the facts support separate treatment, cash balance plans can be powerful tools for long-term wealth building.
