Disregarded LLC employees may join parent's 403(b) plan

Plain-English summary

A section 501(c)(3) hospital system wholly owned a home-health LLC that had not elected corporate tax treatment. The parent asked whether the LLC's employees could participate in its section 403(b) plan. The IRS treated the single-member LLC as a disregarded branch or division of the exempt parent, so its workers were employees of an eligible section 501(c)(3) employer for section 403(b) purposes. Their participation was permitted, and the universal-availability rule generally required offering them elective deferrals unless an exception applied.

Ruling snapshot

• Question: Could employees of a disregarded single-member LLC participate in its exempt parent's section 403(b) plan?
• Outcome: Approved
• Key authorities: IRC §§ 403(b), 501(c)(3), 7701; Treas. Reg. §§ 1.403(b)-2, 1.403(b)-5, 301.7701-2, 301.7701-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201538020
Third Party Communication: None
Release Date: 9/18/2015 Date of Communication: Not Applicable

Index Number: 403.04-00, 7701.00-00 Person To Contact:
--------------------------, ID No. ----------------
---------------------- ----------------
---------------------------------------- Telephone Number:
------------------ --------------------
------------------------------------ Refer Reply To:
--------------------------------------- CC:TEGE:EB:QP4
PLR-T-102497-15
In Re: ------------------
Date:
June 18, 2015

Company A = ------------------

Company B = --------------------

Plan C = -------------------------------------

Dear -----------------------:

   This is in response to your request dated September 4, 2013, submitted by your

authorized representative, in which you request a ruling that employees of Company B,
a single-member LLC that is treated as a disregarded entity under § 7701 of the Internal
Revenue Code (the “Code”), will be treated as employees of Company A, the single
member of Company B, and thus eligible to participate in Plan C, a § 403(b) plan
maintained by Company A.

   The following facts and representations have been submitted under penalties of

perjury in support of the ruling requested:

   Company A is nonprofit corporation described in § 501(c)(3) and is exempt from

tax under § 501(a). Company A is a multi-hospital health system. Company A
maintains Plan C, a defined contribution plan intended to comply with the requirements
of § 403(b) that provides for employee elective deferrals and employer matching
contributions.

  Company B is a limited liability company established in 1998, which provides

home health care services. Company B originally had two members, Company A and

PLR-T-102497-15 2

another entity. However, in October 2000, Company A became the sole member of
Company B.

    You represent that Company B is not a corporation, as defined in

§ 301.7701-2(b) of the Procedure and Administration Regulations (the “P&A
Regulations”, and has not filed a Form 8832 (Entity Classification Election) to change its
classification for tax purposes. Company B has also not filed a Form 1023 (Application
for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code).

 You represent that under the default classification rules of § 301.7701-3(b) of the

P&A Regulations, Company B is disregarded as an entity separate from its sole
member, Company A, for federal tax purposes.

   Company B established a § 401(k) plan for its employees in 1999, before

Company A became its sole member. Company B’s § 401(k) plan was amended to
freeze participation and contributions, effective February 28, 2013.

    Plan C was amended to allow Company B’s employees to participate in that plan,

effective March 1, 2013.

   Based on the foregoing facts and representations, you have requested a ruling

that the employees of Company B will be treated as employees of Company A and will
be eligible to participate in Plan C.

   Section 403(b) provides, in relevant part, that if an annuity contract is purchased

for an employee by an employer described in § 501(c)(3) which is exempt from tax
under § 501(a), then contributions by such employer to the contract are excluded from
the employee’s gross income, if specified conditions are met.

   Section 1.403(b)-3(a) of the Income Tax Regulations (the “Regulations”) provides

that amounts contributed by an eligible employer for the purchase of an annuity contract
for an employee are excluded from the employee’s gross income if certain conditions
are met.

   Section 1.403(b)-2(b)(8)(i)(B) of the Regulations defines an “eligible employer” as

including a § 501(c)(3) organization with respect to any employee of the § 501(c)(3)
organization.

  Section 1.403(b)-2(b)(8)(ii) of the Regulations further provides that:

         [a] subsidiary or other affiliate of an eligible employer is not
         an eligible employer under paragraph [(b)](8)(i) of this
         section if the subsidiary or other affiliate is not an entity
         described in paragraph [(b)](8)(i) of this section.

PLR-T-102497-15 3

   Section 1.403(b)-5(b)(1) of the Regulations provides for a universal availability

requirement for § 403(b) plans. Under universal availability, all employees of an eligible
employer must be permitted to make elective deferrals if any employee of the eligible
employer is permitted to make elective deferrals to the § 403(b) plan.
Section 1.403(b)-5(b)(4) provides that a plan will not fail to satisfy the universal
availability requirement merely because it excludes employees who (i) are eligible to
make elective deferrals under another § 403(b) plan, a § 457(b) eligible governmental
plan, or a § 401(k) plan of the employer, (ii) are non-resident aliens, (iii) are students
performing services described under § 3121(b)(10), or (iv) normally work less than 20
hours per week.

   Section 301.7701-1(a) of the P&A Regulations states that the classification of

various organizations for federal tax purposes is determined under the Code, and does
not depend on whether the organization is recognized as an entity under local law.

   Section 301.7701-2(a) of the P&A Regulations provides that for purposes of such

section and § 301.7701-3, a business entity with only one owner is either classified as a
corporation or is disregarded; if the entity is disregarded, its activities are treated in the
same manner as a sole proprietorship, branch, or division of the owner.

    Section 301.7701-3(a) of the P&A Regulations provides that a business entity

that is not classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or
(8) (an “eligible entity”) can elect its classification for federal tax purposes, as provided
in such section. Section 301.7701-3(a) further provides that an eligible entity with a
single owner can elect to be classified for federal tax purpose as an association (which
is treated as a corporation) or to be disregarded as an entity separate from its owner.

  Section 301.7701-3(b)(1) of the P&A Regulations provides, in relevant part, that

unless the entity elects otherwise, a domestic eligible entity is disregarded as an entity
separate from its owner if it has a single owner.

    Section 301.7701-3(c)(1)(i) of the P&A Regulations provides, in part, that an

eligible entity may elect to be classified other than as provided under § 301.7701-3(b),
or to change its classification, by filing Form 8832 (Entity Classification Election) with
the Service.

   Section 301.7701-2(c)(iv) of the P&A Regulations provides exceptions to the

disregarded entity rules for certain specific purposes, generally including employment
taxes and certain excise taxes. No exception is provided for § 403(b).

     In this case, you have represented that Company B is a single-member limited

liability company, is not a corporation (as defined in § 301.7701-2(b) of the P&A
Regulations), and has not elected under § 301.7701-3(c) to be classified as a
corporation using Form 8832. As a limited liability company with a single member which

PLR-T-102497-15 4

has not elected a different classification, Company B is treated as a “disregarded entity”
under § 301.7701-3(b)(1). As a disregarded entity, Company B is treated as a branch
or division of Company A.

  We therefore conclude that, for purposes of § 403(b), the employees of Company

B are treated as employed by a branch or division of Company A, an organization
exempt from tax under § 501(c)(3). Because the employees of Company B are treated
as employed by a branch of division of Company A, the inclusion of such employees in
Plan C is permissible under § 403(b).

   Moreover, employees of Company B are subject to the universal availability

requirement of § 1.403(b)-5(b)(1) of the Regulations because they are considered
employees of Company A. Accordingly, unless an exception to universal availability
applies, employees of Company B must be permitted to make elective deferrals under
Plan C because employees of Company A are permitted to make elective deferrals
under Plan C.

   This ruling letter expresses no opinion on whether Plan C complies with the

requirements of § 403(b).

  This ruling letter expresses no opinion on whether Company A’s treatment of

Company B as a disregarded entity adversely affects, or will adversely affect, the
§ 501(c)(3) status of Company A. This ruling is based on the assumption that the
§ 501(c)(3) status of Company A is not and will not be adversely affected.

  The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Additionally, no opinion is expressed as to the tax treatment of
the transaction described herein under the provisions of any other section of either the
Code or regulations which may be applicable thereto.

   This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited by others as precedent.

PLR-T-102497-15 5

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                Sincerely yours,




                                Jason E. Levine
                                Senior Tax Law Specialist,
                                Qualified Plans Branch 4
                                (Tax Exempt & Government Entities)

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