Reps. Jimmy Panetta (D-CA) and Jodey Arrington (R-TX) introduced legislation—a proposal championed by the American Retirement Association—in the U.S. House April 27 that would modernize current tax law that penalizes small businesses in community property states and disproportionately affects women business owners.
Under existing tax law, spouses in the nine community property states (which include California and Texas) are automatically considered to own half of all property obtained during the marriage. As a result, business owners must bundle their business with those of their spouse when performing retirement plan coverage and nondiscrimination tests.
However, as noted by Panetta and Arrington, this undermines the plan design of the growing number of women-owned businesses, especially if there is a dispute in a family or separation, since the businesses are forced to interact and be considered joint-owned under the attribution rule. This requirement also undermines small business owners whose spouses’ businesses do not offer retirement plans or have poorly managed retirement plans. Their bill, the Family Attribution Modernization Act, would eliminate this attribution rule to ensure business owners are not unfairly penalized.
Notably, the bill also addresses the problem of attribution from parent to minor child and back to the other parent, which currently prevents using the non-involvement provisions for a non-community property state to treat the businesses of the spouses separately.
“Small business owners, and most specifically women small business owners, have too long been constrained by well-intentioned, but archaic rules that no longer apply in today’s economy. The Family Attribution Modernization Act will not only help small business owners expand retirement plan coverage to more hard-working Americans, it acknowledges the realities of today's increasingly diverse business ownership," said Brian Graff, CEO of the American Retirement Association.
“At a time when women-owned small businesses are growing, their success can be stunted by antiquated family attribution rules,” said Panetta. “This bipartisan legislation would modernize those rules and ensure compliance with retirement plan laws so that owners are not adversely impacted by their spouse’s business. The Family Attribution Modernization Act would provide this long overdue change to help ensure that the growing number of women-owned businesses are not held back by outdated tax laws.”
“Making it easier for workers and families to save for retirement, and incentivizing businesses to offer plans for their employees is a bipartisan priority. There should be parity in this endeavor across the board,” said Arrington. “Unfortunately, antiquated rules and inequities in the tax code prevent certain small business owners from offering retirement benefits to workers, based on the state in which they reside along with marital and parental status. I am proud to join my colleague, Congressman Panetta, in introducing the bipartisan Family Attribution Modernization Act that will eliminate these disparities while complimenting the SECURE Act and additional landmark retirement legislation to follow.”