SECURE 2.0 Loosens Ability to Maximize Highly Compensated Spouse’s Contributions

Originally Published on 5/2/24by Prof. Robert Bloink and Prof. William H. Byrnes

The SECURE Act 2.0 made changes that made a widespread impact on retirement plans, especially in the small business context. While some changes, including changes to the required beginning date age and the “Rothification” of catch-up contributions for higher earnings have gained significant attention, one commonly overlooked change is expected to make it easier for closely held businesses to satisfy existing retirement plan nondiscrimination rules. Under pre-SECURE 2.0 law, 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—and unintended consequence. SECURE 2.0 created two important exceptions that can now help closely held business owners offer retirement plans without running afoul of the IRS.

Family Attribution: Background

The government prohibits business owners from establishing retirement plans that primarily benefit highly compensated employees (HCEs) while excluding other less highly compensated individuals. To prevent businesses from using multiple entities to provide benefits primarily to HCEs and pass the anti-discrimination tests, the law treats certain related entities as a single entity for nondiscrimination testing purposes.