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

Plain-English summary

A tax-exempt health system planned to convert a nonprofit hospital subsidiary into a single-member limited liability company. The LLC would not elect corporate status and therefore would be disregarded for federal tax purposes under the entity-classification regulations. The IRS ruled that, for section 403(b), the LLC's employees would be treated as employees of a branch or division of the exempt parent and could continue participating in the parent's plan. Those employees also would be subject to the plan's universal-availability rule unless an exception applied.

Ruling snapshot

• Question: Whether employees of a disregarded single-member LLC could participate in its exempt parent's section 403(b) plan
• Outcome: Approved
• Key authorities: I.R.C. §§ 403(b), 501(c)(3), 7701; Treas. Reg. §§ 1.403(b)-2, 1.403(b)-5, 301.7701-1 through 301.7701-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201539031 Third Party Communication: None
Release Date: 9/25/2015 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

Attn: PLR-T-102506-15

Date:
June 18, 2015

Employer A =
Company H =
Hospital R =
Hospital S =
Plan P =
State S =

Dear :

This is in response to your request dated November 25, 2013, and followed by
correspondence dated November 16, 2014, submitted by your authorized
representative, in which you requested a ruling that employees of Company H, a single
member LLC, that is treated as a disregarded entity under § 7701 of the Internal
Revenue Code (“Code”), will be treated as employees of Employer A, a § 501(c)(3)
nonprofit organization which is the sole member of Company H, and thus, eligible to
participate in Plan P, a § 403(b) plan maintained by Employer A.

The following facts and representations have been submitted under penalties of
perjury in support of the ruling requested:

Employer A is a § 501(c)(3) nonprofit corporation exempt from taxation under
§ 501(a). Employer A is a multi-facility health system providing medical services to the
general public.

Employer A was the sole member of Hospital R, a § 501(c)(3) nonprofit
corporation exempt from taxation under § 501(a). Employer A is also the sole member
of Hospital S, a § 501(c)(3) nonprofit corporation exempt from taxation under § 501(a).


PLR-T-102506-15 2

Employer A maintains Plan P, a defined contribution plan intended to comply with
the requirements of § 403(b). Plan P covers employees of Employer A, Hospital R,
Hospital S, and other affiliated entities described under § 501(c)(3) that are eligible to
participate in Plan P.

Effective January 1, 2014, Employer A merged Hospital R into Hospital S with
Hospital S being the surviving legal entity. Employer A will convert the surviving entity
501(c)(3) corporation, Hospital S, into Company H, a nonprofit single member limited
liability company under the laws of State S, but not under § 501(c)(3), whose sole
member will be Employer A.

You represent that Company H is intended to be a disregarded entity for federal
tax purposes pursuant to the default classification rules under § 301.7701-3(b) of the
Procedure and Administrations Regulations (“P&A Regulations”) and will not file Form
8832 (Entity Classification Election) to change its classification for tax purposes.
Company H will not file separate tax returns or a Form 1023 (Application for Recognition
of Exemption Under Section 501(c)(3) of the Internal Revenue Code).

Based on the foregoing facts and representations, you have requested a ruling
that the employees of Company H, formerly employees of Hospital R and Hospital S,
will be treated as employees of Employer A and will be eligible to continue to participate
in Plan P.

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 specific 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) 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-102506-15 3

Section 1.403(b)-5(b)(1) of the Regulations provides a universal availability
requirement for § 403(b) plans. Under the universal availability requirement, 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 fewer 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 (and
thus a corporation under § 301.7701-2(b)(2)) or to be disregarded as an entity separate
from its owner.

Section 301.7701-3(b)(1) of the P&A Regulations provides that, except as
provided in § 301.7701-3(b)(3), 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 H will be a single-member
limited liability company and that Company H will not be classified as a corporation (as
defined in § 301.7701-2(b) of the P&A Regulations), nor will Company H file an election

PLR-T-102506-15 4

under § 301.7701-3(c) to be classified as a corporation using Form 8832. As a limited
liability company with a single member, which has not elected a different classification,
Company H is treated as a “disregarded entity” under § 301.7701-3(b)(1). As a
disregarded entity under the P&A Regulations, Company H will be treated as a branch
or division of Employer A.

We therefore conclude that for purposes of § 403(b), the employees of Company
H will be treated as employed by a branch or division of Employer A, an organization
exempt from tax under § 501(c)(3). Because the employees of Company H will be
treated as employed by a branch or division of Employer A, the inclusion of such
employees in Plan P is permitted under § 403(b).

Moreover, employees of Company H will be subject to the universal availability
requirement of § 1.403(b)-5(b)(1) because they will be considered employees of
Employer A. Accordingly, unless an exception to universal availability applies,
employees of Company H must be permitted to make elective deferrals under Plan P if
employees of Employer A are permitted to make elective deferrals under Plan P.

This ruling letter expresses no opinion on whether Plan P complies with the
requirements of § 403(b).

This ruling letter expresses no opinion on whether Employer A’s treatment of
Company H as a disregarded entity adversely affects, or will adversely affect, the
§ 501(c)(3) status of Employer A. This ruling is based on the assumption that the
§ 501(c)(3) status of Employer 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 the Code,
the P & A Regulations, or the Regulations which may be applicable thereto.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.


PLR-T-102506-15 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,

Jason E. Levine

Senior Tax Law Specialist

Qualified Plans Branch 4

(Tax Exempt and Government Entities)