IRS ownership and family attribution rules affect how your 401(k) plan runs — from compliance testing to identifying highly compensated employees (HCEs) and key employees. This article explains how constructive and attributed ownership works and what you need to report to Gusto Retirement.
While ownership of a business may seem straightforward, the rules can be complex. Ownership affects all aspects of running a 401(k) plan, so it's important to get it right.
A participant's ownership interest is the highest level of vote or value held at any point during the year. A participant who holds restricted stock or an exercisable option to acquire stock is treated as owning that stock.
General rules about constructive ownership include:
Stock options — stock is considered owned by the individual who has an option to purchase it (this should not be confused with a right of first refusal, which is not attributed).
Partnership ownership — stock owned by a partnership is considered owned by a partner, in proportion to the partnership interest.
Estate or trust ownership — stock owned by an estate or trust is considered owned by a beneficiary, to the extent of actuarial interest (determined by assuming maximum exercise of discretion in favor of the beneficiary).
Grantor trust ownership — stock owned by a grantor trust is considered owned by the owner of the grantor trust.
Corporation ownership — stock owned by a corporation is considered owned by an owner of the stock of that corporation.
For employees who hold vested options or restricted stock, these holdings should generally be included in determining ownership percentage. Because determining ownership percentages can be complex, we recommend working with your tax advisor.
Determining ownership does not stop at calculating direct ownership of stock — family attribution must also be considered. Attribution means a person is considered to be an owner simply because they are related to the actual owner of the stock.
If one family member owns all or a portion of a business, a close relative is deemed to own the same amount as the actual stock owner. The definition of "close relative" varies depending on why ownership is being considered.
Double attribution is not permitted. For example, Sam owns 50% of Ood Enterprises where his child, Jamie, also works. While Jamie does not own any shares, she is attributed Sam's 50% ownership and is therefore also considered to own 50% of Ood Enterprises. Jamie's spouse, Robert, is also employed at Ood Enterprises and does not own any shares. Because ownership is only attributed to immediate family members, Robert is not considered an owner of any portion of Ood Enterprises.
Note: For attribution purposes, a child can be natural-born or adopted.
One of the most important determinations for keeping your plan compliant is identifying who qualifies as an HCE or key employee. Family attribution can have a major impact on this determination, which is why we ask for this information each year as part of the compensation task.
When determining ownership for HCE, key employee, and required minimum distribution (RMD) purposes, an actual owner's shares are attributed to their:
Spouse (excluding legally separated or divorced).
Child (including legally adopted children, regardless of age).
Parent.
Grandparent.
Ownership for the above purposes is not passed along to grandchildren or siblings.
Note: Ownership — attributed or actual — does not mean that an individual is eligible to participate in the plan. Only family members employed by your company who have met all eligibility requirements are eligible to participate in your 401(k) plan.
If someone owns all, or part of, a business, their spouse, children, parents, and grandparents — if any of them are participants in the plan — are also considered owners. They would be designated as HCEs and/or key employees with the same ownership percentage as the actual owner.
This also means that the family member of a more than 5% owner who has reached their RMD age will still need to take the RMD, even if they are still employed (since that family member is also treated as a more than 5% owner).
Example: If the owner of the company (who owns more than 5%) employs their spouse, adult child, and niece as part-time employees, the spouse and child should both be listed as more than 5% owners. The niece does not need to be listed, as that relationship is not considered under the family attribution rules.
When determining ownership for legally related group (LRG) status, an individual's ownership is attributed to their:
Spouse (excluding legally separated or divorced).
Child, if the child is under age 21.
Child, regardless of age, if the individual owns (directly or through attribution) more than 50% of the stock.
Parent, if the individual is under age 21.
Parent, regardless of age, if the individual owns (directly or through attribution) more than 50% of the stock.
Grandparent, only if the individual owns (directly or through attribution) more than 50% of the stock.
Grandchild, only if the grandchild owns (directly or through attribution) more than 50% of the stock.
There are several exceptions to the attribution rules for LRG status. As of 2024, marital property laws can be disregarded when determining actual ownership. An LRG will also not exist solely because two individuals have a minor child in common. Learn more about exceptions to LRG status.
Because ownership rules can affect your 401(k) plan, it's important to confirm that all employees — including owners, children, and spouses of owners — have been identified correctly within your plan.
Plan ownership must be accurate to support correct nondiscrimination testing results, profit-sharing allocations, and more.
Family attribution for LRG status is not stored in the Gusto Retirement system and does not need to be reported to Gusto Retirement (we do not determine LRG status of plans).
Ownership for HCE, key employee, and RMD purposes must be reported. When you report ownership percentages of owners to Gusto Retirement, you must also report ownership by attribution.