The Secure 2.0 Act has had a widespread impact on retirement plans, especially in the small-business context. Changes to the beginning age for required minimum distributions and the "Rothification" of catch-up contributions for higher earnings have gained significant attention.
One commonly overlooked adjustment is expected to make it easier for closely held businesses to satisfy existing retirement plan nondiscrimination rules.
Before the 2022 legislation, two spouses who each have ownership interest in separate businesses often ran into problems trying to pass nondiscrimination testing due to the family attribution rules. This often limited the flexibility of businesses offering retirement benefits solely due to state community property laws or the existence of minor children.
While much of the law is beyond the scope of this article, Secure 2.0 created two important exceptions that can help owners of closely held businesses offer retirement plans without running afoul of the Internal Revenue Service.
Family Attribution: Background
The government prohibits business owners from establishing retirement plans that primarily benefit highly compensated employees while excluding other less highly compensated individuals. To prevent businesses from using multiple entities to provide benefits primarily to highly compensated employees and pass the anti-discrimination tests, the law treats certain related entities as a single entity for nondiscrimination testing purposes.
These "controlled group" rules evaluate the ownership structure of related entities. If enough common ownership exists, the entities are deemed to be a single business for retirement plan testing purposes. Similarly, when applying the law, individuals may be regarded as owning business interests owned by certain family members — including spouses and minor children.
Before Secure 2.0, one spouse was always viewed as owning the business interests that were owned by their spouse unless a spousal exception applied.
