For the non-plan business operations of a ROBS company, it is easy to identify the company owner—it’s the so-called “ROBS owner,” who is very likely a corporate director and chief employee. However, for certain plan purposes, ROBS participants are only counted as owners if they meet minimum ownership thresholds under technical compliance rules.
Isn’t a so-called “ROBS owner” always counted as an owner in the plan’s operational compliance?
—Not necessarily. For several key aspects of operational compliance, ownership by a ROBS plan is not attributed to the ROBS plan participant. As a result, with most ROBS plans owning a very large percentage (often 100%) of the company, ownership by the ROBS participant outside the plan may be so small that the owner rules may not apply to them.
Note, however, that family attribution rules do apply. Depending on the ownership structure of a ROBS company, the percentage owned by a spouse, child or parent may result in a ROBS participant being deemed to own enough outside the plan to be treated as an owner for compliance purposes.
The routine compliance matters affected by these rules, which are found at Internal Revenue Code Section 318, include coverage and nondiscrimination testing, determination of Affiliated Service Groups, and Required Minimum Distributions (RMDs).
Why do company owners need to be identified for plan purposes?
Qualified retirement plans must identify the owner-employees, who are counted differently from other employees for a variety of routine compliance tasks. Ownership percentages are also a factor in determining whether the company is defined as a Related Employer under the Internal Revenue Code; if a ROBS company is related to a different employer entity under these rules, the two companies would have to be treated as though they were a single employer for all plan compliance purposes.
For these reasons and more, accurately identifying ownership of a ROBS company is crucial to correct plan administration. Getting it wrong can result in disqualification of the plan’s tax deferred status and other compliance failures.
Both direct and indirect ownership of a ROBS corporation count.
For plan compliance calculations, both direct ownership and indirect ownership of stock (sometimes referred to as constructive or deemed ownership) are counted. Direct ownership is straightforward—the name on the stock certificate identifies a direct owner. In a typical ROBS corporation, the retirement plan is always a direct owner, holding title to its stock as, for example, “Name-of-the-Plan for the benefit of the Mr. Rob Participant.” Separate from the plan, the ROBS participant may also own stock in their own name. In most ROBS plans, the plan owns a very large percentage of stock and the ROBS participant owns a very tiny percentage, if any.
Indirect ownership is a legal fiction used by the Internal Revenue Code to identify shared control and other benefits of ownership that arise from a close familial or business connection. Under the Code, such indirect control is sufficiently close to be treated as constructive ownership for certain tax purposes. Three different Code sections describe such ownership attribution for qualified retirement plans; each provision applies to ownership for a different kind of plan compliance. It is the attribution rules found at IRC sec. 318 that are used to identify indirect ownership for many routine operational compliance matters, such as the following:
- Identifying Highly Compensated Employees (defined at IRC sec. 414(q)) and Key Employees (IRC sec. 416) for coverage and nondiscrimination testing;
- Determining the required beginning date under IRC sec. 401(a)(9) for minimum distributions; and
- Identifying a type of related employer group known as Affiliated Service Groups under IRC sec. 414(m).
Under Code sec. 318, ownership by the plan of employer stock is never attributed to a plan participant through the participant’s qualified retirement plan account. See the parenthetical language in IRC sec. 318(a)(2)(B)(i). Therefore, in the above determination and anywhere else that Section 318 attribution rules are used, stock ownership by a ROBS plan is not attributed to the ROBS participant.
However, Under Section 318, There May Be Family Attribution
With attribution via the ROBS plan out of the equation, let’s turn to family attribution rules of Section 318, which do apply for the above compliance purposes. Stock owned directly by one family member is attributed to another family member; the many detailed regulations about this are beyond the scope of this post but, generally, family attribution under Section 318 takes effect between spouses, between parents and their children, and between grandparents and grandchildren; there is no attribution between siblings.
For example, as is often the case with a ROBS corporation, if both spouses in a married couple hold stock in the company outside the plan (“Outside Stock”), the ownership of the Outside Stock held by one spouse is counted as being Outside Stock held by the other spouse. Accordingly, all Outside Stock ownership within the marriage is totaled up and attributed to each spouse for purposes of the HCE and Key Employee definitions, Affiliated Service Group status and RMD required beginning date. Therefore, even if one spouse is not employed by the company, their Outside Stock can cause the employed spouse to be an HCE and/or Key Employee for plan purposes.
Caveat: Other Attribution Rules Apply for Controlled Group Determination and for PT Rules
It is important to note that Section 318 is just one of three sets of attribution rules that apply to retirement plans. IRC section 1563 contains the attribution rules for determining whether employers must be aggregated, for plan compliance purposes, as a controlled group of entities; and IRC section 267(c) is used for the prohibited transactions rules.