In this episode, Episode K, we discuss kids and other family members in the business, and how they can impact your retirement plan designs. Do you have to cover your kids? What about your parents, your grandparents, aunts and uncles or any other family members? Is there a difference? What if the kids work there, but aren’t going to take over, does that matter? Does it matter if I don't own very much?
We talk through which family members may be considered owners solely because they're related to you, how this would impact the design of the plan, and some special rules for spouses. Instead of fun facts, we've scattered some jokes throughout the podcast, because if you can't laugh at your family, who can you laugh at?
Seriously though - knowing who's related to the owners, and adjusting / accounting for that, makes a huge difference in our plan designs, and can make a good plan into a great one. Listen here to find out how, and why.
In this episode, Episode K, we discuss kids and other family members in the business, and how they can impact your retirement plan designs. Do you have to cover your kids? What about your parents, your grandparents, aunts and uncles or any other family members? Is there a difference? What if the kids work there, but aren’t going to take over, does that matter? Does it matter if I don't own very much?
We talk through which family members may be considered owners solely because they're related to you, how this would impact the design of the plan, and some special rules for spouses. Instead of fun facts, we've scattered some jokes throughout the podcast, because if you can't laugh at your family, who can you laugh at?
Seriously though - knowing who's related to the owners, and adjusting / accounting for that, makes a huge difference in our plan designs, and can make a good plan into a great one. Listen here to find out how, and why.
Welcome to Retirement A to Z, I’m Sue Burnett w Monarch Financial Advisors, and this series focuses on Qualified Retirement Plans. There are a lot of moving pieces with these plans, and the rules are complicated and complex, so we’re going to break them into smaller pieces – 26 pieces, to be exact, from A to Z, with maybe a few extras thrown in for good measure.
This is Episode K, where we’ll be discussing kids and other family members in the business, and how they can impact your retirement plan designs. Do you have to cover your kids? What about your parents, your grandparents or any other family members? What if the kids work there, but aren’t going to take over, does that matter? Does it matter how much I own? Let’s talk it through.
Instead of fun facts, because we’re talking about family, I think it’s more than appropriate to throw a few jokes in here. So our first joke of the podcast: How are families like a batch of fudge? They’re mostly sweet, but usually have a few nuts.
First, let’s talk in general about ownership of a business when it comes to qualified plans. Then we’ll discuss how ownership is attributed to your family members, solely because they’re related to you, finally we’ll figure out how the family members – in particular, the children - could really help your plan design, whether they’re considered owners or not.
Determining who’s an owner is critical in a plan because the IRS has a lot of rules and testing that involves how much is given to an owner, versus how much is given to an employee. You can’t give too much to that owner relative to what you give to the employees. We generally design plans so that we get as much as possible to the owners – hopefully 80, 90%, or more of the total - and as little as possible to the employees, while still following all of the IRS regulations. Defining who the owners are, versus who is considered an employee, is an important step.
If you’re an owner, are your family members also owners? That depends on how those family members are related to you, how much you own, and who the other owners are.
There’s only certain family members that could have ownership attributed to them – your kids, spouse, parents, or grandparents. That’s it. Not step children, cousins, aunts, or inlaws – just your spouse, your kids, your parents and grandparents. Direct lineage, 2 up (parents and grandparents) and 1 down. Otherwise, no ownership would be allocated to them just by being your relative.
Speaking of relatives …. What is it called when you have your grandmother on speed dial? Insta-gram!
With that said, let’s talk about how much you own. If you’re not a majority owner - you own 50% or less – in general, there’s no attribution for your family members. If any of them work there, they’re considered employees, not owners. The only exception to this is your spouse – and we’ll get to spouses in a bit, because there are some funky rules with that. Your kids, parents, and grandparents though – they’d all be considered employees. Why would this impact your design? This could be really helpful for you – remember, our tests look at what’s given to the owners, relative to what’s given to the employees. If we are giving as much as possible to you and the other owners, the tests say we have to give at least a few employees an equivalent amount. If your family members are considered employees, you could give that extra amount to them to pass the testing. I’ve seen plans where there are a handful of family members, including inlaws, cousins, and uncles, in addition to the owner – and the way the numbers worked, the plan could exclude all of the employees that weren’t relatives.
What if you owned more than 50%? Then ownership would be attributed to your kids, parents, and grandparents automatically, so whatever you give to them in the plan would be considered an ‘owner’ contribution in our testing. This isn’t necessarily a bad thing – if your kids are owners solely because they’re your kids, but practically speaking, they’re really employees, you could give them nothing, which helps out the testing. Let’s take an example - what if you, your spouse, and your 2 kids work at a business, and you own the whole thing. All 4 of you would be considered owners. One of our tests – our ‘counts’ test – looks at how many owners are covered relative to how many employees. If you provide benefits to all 4 of you, then 100% of the owners are covered – and in some instances, you’d need to then cover 70% of the employees. That’s one of the rules. But what if you only provide benefits to you and your spouse, and NOT to your 2 kids – you’re only covering 50% of the owners. Which means you only need to cover 35% of the employees – 50% of the 70%. The more owners you cover, the more employees you have to cover – so having kids or parents that work at the business, but aren’t expected to benefit? Excluding them could help you exclude a bunch of employees, which reduces the cost for the employees in the plan.
Now let’s talk a bit about spouses. Most of the time, your ownership will be attributed to your spouse, regardless of how much you own. There is an exception though – there’s no attribution if your spouse doesn’t explicitly own any part of the business, if they don’t work there at all and you don’t have kids under the age of 21. For example, let’s say you own a law firm, and your spouse owns an accounting firm, but neither of you work at the other’s business at all and your kids are over 21. If so, there’s no attribution. As soon as one of you works for the other, or has any kind of direct ownership, even if it’s only 1%, then there’s ownership attributed to them. In addition, if your kids are under 21, ownership is attributed – even if you have separate businesses, even if neither of you work for the other’s business in any capacity. Ownership for a minor passes to both parents. This is one of the quirkiest rules I’ve ever seen – you could have ownership attributed to a spouse for years, and then their youngest turns 21, and there’s no more ownership attributed to the spouse – not because they did anything differently – it’s solely because they no longer have minor children.
Strange? Yes, but I’ve long given up trying to understand WHY the rules are written the way they are – I just know what the rules are, and how to follow them!
Time for our final joke – why is a computer so smart? It listens to its mother board. Yep, I’m a mom. And yep, that’s the truth.
Wrapping it all up – kids spouses, and grandparents could all have a significant impact on your plan design, whether they’re considered owners or not. We specialize in using their status to help the plan meet your goals and objectives, whether it’s excluding them from the plan if they’re owners, or including them and giving them additional benefits if they’re not. The first step is determining how to include them – and this is where we can help. These rules are complex, and we can hash it through with you and your CPA to be sure that everyone is being counted the right way, and treated the right way, with regard to our testing.
Wanna learn more? Tune into the other a to z podcasts where we continue to break down these wonderful and complex plans into bite size pieces. Remember, how do you eat an elephant? 1 bite at a time. Have any questions? Shoot me an email at MonarchFinAdvis@gmail.com. Thx for listening in and have a great rest of your day!