How to Attribute Family Ownership When 401(k) Plan Testing Blog Feature
Eric Droblyen

By: Eric Droblyen on November 27th, 2019

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How to Attribute Family Ownership When 401(k) Plan Testing

Testing | Plan Design | Plan Setup

It’s impossible to complete annual 401(k) plan testing accurately without a clear understanding of the plan sponsor’s ownership structure. This information is used to determine the company’s controlled or affiliated service group status as well as the Highly Compensated Employee (HCE) and key employee status of plan participants. To make these determinations properly, certain “family attribution” rules must be applied correctly. These IRS rules exist to thwart ownership structures that would otherwise permit a 401(k) plan to discriminate in favor of business owners.

The family attribution rules applicable to 401(k) plan testing generally fall under two sections of the Internal Revenue Code (IRC) - Sections 1563 and 318. If you’re a business owner, I recommend you understand both rules. This knowledge can help ensure you give your 401(k) provider the company ownership information they need to accurately complete plan testing.

Ownership attribution basics

Attribution is the concept of treating a person as owning an interest in a business that is not actually owned by that person. For purposes of 401(k) plan testing, attribution involves adding the ownership interest of certain family members to the direct ownership of an individual. For example, if a husband and wife each own 40% of a company, both spouses would be treated as owning 80% of that company (40% direct + 40% attributed).

The IRC section 1563 attribution rules apply to controlled group determinations while IRC section 318 apply for other testing purposes. These rules are written in terms of stock ownership, but the same principles also apply to unincorporated companies.

“Double attribution” – or multiple tiers of attribution - is not permitted under either rule. Once an individual is attributed ownership from a family member, that interest can not be attributed again from the individual to another family member.  For example, if a daughter is attributed her father’s ownership interest in a company, her spouse can’t be attributed her attributed ownership.

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The IRC section 1563 rules

The IRC section 1563 family attribution rules apply when determining whether or not a company is part of a controlled group. A controlled group is defined as two or more companies with common ownership. When 401(k) coverage testing, all members of a controlled group are considered a single employer. That means all employees of the controlled group must be tested together to confirm a nondiscriminatory group of employees is covered. The controlled group rules exist so business owners can’t subdivide their company into separate companies - one employing HCEs and the other employing non-HCEs – to discriminate in favor of HCEs.

Omitting a controlled group member from a 401(k) coverage test can be a costly mistake should the issue trigger a test failure. Correcting a failed test usually involves retroactively covering the employees of the omitted company. Since the new participants can’t retroactively make salary deferrals, non-HCEs must receive a Qualified Nonelective Contribution (QNEC) to correct their “missed deferral opportunity.” They must also receive any missed employer contributions.

Summary of the 1563 rules:

Family member

Attribution requirement


Is generally attributed their spouse’s ownership unless all of the conditions listed in IRC §1563(e)(5) are satisfied


Is attributed the ownership of a minor child (under age 21)

Is attributed the ownership of an adult child (21 or older) only if the parent owns (directly or by other attribution) more than 50% of the company.


Are not attributed the ownership of other siblings


A minor child is attributed the ownership of a parent

An adult child is attributed a parent’s ownership only if the adult child owns (directly or by other attribution) more than 50% of the company.


Is attributed a grandchild’s ownership (regardless of age) only if the grandparent owns (directly or by other attribution) more than 50% of the company.


A grandchild (regardless of age) is attributed a grandparent’s ownership only if the grandchild owns (directly or by other attribution) more than 50% of the company.

The IRC section 318 rules

The IRC section 318 rules are more straightforward. They apply when determining:

Failing to correctly apply the 318 rules can lead to false 401(k) test results and/or discriminatory contribution allocations. These issues can be expensive to fix if they are found in later years, or worse, during an IRS audit.

Summary of the 318 rules:

Family member

Attribution requirement


Is attributed the ownership of their spouse.


Is attributed the ownership of a child, regardless of the child’s age.


Are not attributed the ownership of other siblings


Are attributed the ownership of a parent, regardless their age.


Is attributed the ownership of a grandchild.


Is not attributed the ownership of a grandparent.

Staying out of trouble is easy with the right help!

401(k) plans offer valuable benefits to employers and employees alike. To access these benefits, however, a 401(k) plan must meet IRS plan qualification requirements. One major requirement is not discriminating in favor of HCEs. A 401(k) plan meets this requirement by passing annual IRS-mandated testing.

An experienced 401(k) provider can complete this testing in their sleep. That said, to accurately complete these tests, the provider will need company ownership information from the plan sponsor. If you’re responsible for providing this information, you must give them the family information they’ll need to properly apply the 401(k) attribution rules. In general, this information is easy to understand with some basic education.

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About Eric Droblyen

Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.

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