We’ve compiled our year end census information, and we are now turning out attention to the accompanying questionnaire. I’m being asked for additional information such as ownership percentages, family relationships, ownership in other businesses and more.
How much of this “additional information” do you really need? If my census and related financial information are complete, do these details really matter?
Bet you already know what our answer is going to be on this one. We understand that gathering this information can be a pain, so we thought we would explain the “why” behind it all.
Let’s take a quick look at a few of these items, and work through them together. Think, once you’re done with this step, you’re done with the census for a whole year. That’s cause for celebration!
Why do you ask for ownership percentages and titles year after year? Don’t you have this information from last year?
Fair question. Ownership percentages and officer status drive a number of elements that are critical to your plan’s overall compliance. These elements include identification of highly compensated and key employees as well as determining whether there are any related companies that must be taken into account. These, in turn, directly impact all nondiscrimination testing.
The questionnaire includes questions about our family relationships. It feels a little intrusive, especially questions about our children – how can that possibly matter?
We promise that we’re not just being nosey; there’s a good reason. There are rules that attribute one person’s ownership in the company to certain other family members, including spouses and children. For some purposes, the rules change depending on whether a child is a minor or an adult. For example, if you own 50% of your business and you have a child, the ownership is always attributed to your child, making him or her an HCE when it comes to nondiscrimination testing. However, your child’s age (along with some other factors) will drive whether there is any attribution when it comes to determining whether there are any companies that are related to yours. More on that in a minute.
The bottom line here is that the attribution rules dictate to whom and from whom ownership is attributed and for what purpose. This is why we ask the detailed questions about who is related and how. Want more information on the attribution rules? We’ve got it for you right here.
You’ve mentioned “related companies” a couple of times now. What do you mean by that?
This is a big one! A few decades ago, Congress was concerned that business owners might try to avoid providing benefits to their employees by setting up separate companies to employ their workers while keeping only themselves in the “primary” company that offers all the benefits. So, they created a set of rules that require companies with certain degrees of overlapping ownership to be treated as if they are one big happy family. Such companies are referred to as being related. They may be part of either a controlled group or an affiliated service group.
The first step is to gather the ownership details for your company. The next step is to find out the details on any other companies those owners own. If there is enough overlapping ownership for two or more companies to be related in this context, we have to take into account all of the employees of all related companies when it comes to testing each year.
Let’s look at a quick example that combines this with the attribution concept we mention above. Simon and Daphne each own separate businesses, and neither one is involved in the other’s company. They are not married, so there is no spousal attribution of Simon’s ownership in his company to Daphne, or vice versa. A couple of years later, they have a child together. Because minor children are always attributed their parents’ ownership interests, the child is now deemed to own 100% of both Simon’s and Daphne’s business. That makes the two companies part of the same controlled group and legally related. That means all of the employees of both companies would have to be counted in the annual nondiscrimination testing.
As ownership and business relationships change, it’s entirely possible that a once-related entity is no longer part of a controlled group. If that happens and both companies are participating in the same plan, that plan automatically becomes what is called a Multiple Employer Plan (MEP) (a plan that covers the employees of more than one unrelated business). Since there are some critical differences in how MEPs are tested for nondiscrimination each year as compared to plans covering related companies, obtaining current ownership information each year is critical. It’s nothing to be alarmed about, but definitely something you want to get right. Providing the detailed information requested allows your consultant to work through these determinations and provide the appropriate action steps from year to year.
Last question, you want me to share if there are any upcoming changes too all this. Who can know?
It’s okay if you don’t know at this point. But we ask because if you already have some changes on the horizon, we want to know about them as soon as possible so that we can help you plan ahead for them. The earlier we learn about changes in ownership, mergers and acquisitions, or your interest in offering additional plans, the better able we are to provide you some guidance and the more options you have with regards to the benefits you offer. Don’t let this question stress you…if there are no changes in the near future, no problem. Just let this question serve as your friendly reminder to keep your TPA in the know so they can have your back.
We promise that the information we request each year is truly necessary to complete accurate compliance testing and provide ongoing plan consulting. There’s no Lady Whistledown type intention going on behind the scenes. We know a lot of this can seem confusing, especially the company and ownership structures. We're happy to get on the phone to help you sort through it all and make sure the information provided is just what’s needed.