New IRS Guidance: Treatment of Disregarded Single Member LLC Employees in the 403(b) and 457(b) Plans of the Tax-Exempt Member of the LLC

by Bradley Arant Boult Cummings LLP
Contact

Bradley Arant Boult Cummings LLP

The Internal Revenue Service (IRS) recently released General Counsel Memorandum 201634021 (“Memorandum”) concluding that the employees of a disregarded single member limited liability company (SMLLC) (1) must be allowed to participate in the member’s Internal Revenue Code (“Code”) Section 403(b) plan, and (2) may participate in the member’s Code Section 457(b) plan. Until now, the necessity of having such employees participate in the member’s 403(b) plan, and the ability of such employees to participate in the member’s 457(b) plan, was unclear. The open question with respect to 457(b) plans was whether the employees of a SMLLC with a member that is an “eligible employer” for purposes of Code Section 457 could participate in the employer’s plan, even though the SMLLC itself could not be an eligible employer.

Background

The employees of almost any tax-exempt Code Section 501(c)(3) entity may participate in 403(b) plans or tax-sheltered annuities. The regulations under 403(b) further specify that a subsidiary or affiliate of an “eligible employer” for such plans (which includes, inter alia, tax-exempt entities) does not qualify as an eligible employer merely because of such affiliation. Treas. Reg. § 1.403(b)-2(b)(8)(ii).

To sponsor a 457(b) plan, an entity must be a tax-exempt “eligible employer,” as defined in Code Section 457(e)(1). That definition, while similar but not identical to the rules in Code Section 403(b), also includes tax-exempt entities.

As a general rule, unless a SMLLC affirmatively elects to be taxed as a corporation, the SMMLC is disregarded and treated as a branch or division of its member for all purposes under the Code. Treas. Reg. § 301.7701-2(a), 3(c). However, for some employment-related purposes, including employment taxes and certain excise taxes such as the assessable payments under the Affordable Care Act, a SMLLC is not treated as a disregarded entity. Treas. Reg. § 301.7701-2(c)(2)(iv), (v). This disparity, along with the regulation cited above regarding the status of the subsidiaries and affiliates of entities that are eligible employers for 403(b) plan purposes, has left the advisors of many non-profit entities that are the members of one or more SMLLCs questioning whether such SMLLCs are to be treated as disregarded entities for purposes of the eligible employer definitions applicable to such non-profit entities’ 403(b) and 457(b) plans.

New Guidance

The Memorandum answers this question and provides the following clarifications:

  • A SMLLC that does not elect to be taxed as a corporation is disregarded with respect to its member for purposes of the 403(b) and 457(b) eligible employer requirements. Therefore, if the SMLLC’s member is an eligible employer, then the SMLLC is also an eligible employer for both 403(b) and 457(b) plans.

  • Employees of a SMLLC generally must be allowed to participate in a 403(b) plan sponsored by the member in order to avoid violating the “universal availability” rule applicable to such a plan under Code Section 403(b)(12)(A)(ii).

  • Employees of a SMLLC may be allowed participate in a 457(b) plan sponsored by the member.

In light of this guidance, tax-exempt employers which are the member in one or more SMLLCs should review any situations in which the employees of any such SMLLCs have not been treated as the employees of the member. In certain cases, such employees must be allowed to participate in the member’s 403(b) plan and may be permitted to participate in the member’s 457(b) plan.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bradley Arant Boult Cummings LLP | Attorney Advertising

Written by:

Bradley Arant Boult Cummings LLP
Contact
more
less

Bradley Arant Boult Cummings LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.