(b)lines Ask the Experts – Plan Participation by Related LLCs

March 11, 2014 (PLANSPONSOR (b)lines) – “Our college, a tax exempt 501(c)(3) organization, maintains a separate offsite center in Washington, D.C. to allow our students to experience a semester away from our main campus.

“Because there is a risk that someone visiting the center could get injured and sue the college, the center and its activities are organized as a separate legal entity – a single member limited liability company (LLC). Can the LLC participate in our 403(b) plan?  If so, could the LLC also be the ‘plan sponsor’ rather than a ‘participating employer’?” 

David N. Levine, Groom Law Group, answers:

A single member LLC is usually classified as a “disregarded entity” for federal income tax purposes unless it elects to be treated differently, such as a “C” corporation.  As a result, the Internal Revenue Service (IRS) has, in the past, ruled that employees of a single member LLC may participate in the tax-exempt owner’s 403(b) plan.  Please note though that the IRS ruling the Experts have in mind is called a “private letter ruling” and can only be relied on by the person to whom it was issued.  As such, you may want to obtain your own ruling from the IRS.

However, because the LLC is a “disregarded entity”, the Experts believe it is unlikely that the LLC could serve as plan sponsor for the 403(b) plan—because it is not a tax “entity” that is a not-for-profit entity that stands on its own. Of course, if you submit your own ruling request you could ask the IRS this question as well in the chance the Experts are being too conservative!


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.