501(c)3 and LLC

[Guest hpaine]

I have a client that is a wholly owned subsidiary of a 501©3 and is a "for-profit" organization. The question has come up regarding a "controlled group" situation (even though there is no ownership in the 501©3) and the fact that each entity offers their own retirement plan. Does ERISA consider "for-profit" employees under their LLC or are they considered employees of the 501©3? Does ERISA or the IRS provide guidance on how to make that determination? Thanks!

[jpod]

If the LLC is wholly-owned by the 501©(3), they are either a 414(B) group or a 414© group or both. Moreover, unless the LLC has elected to be treated as a corporation for tax purposes, then it would be a "single purpose" entity that basically does not exist for any tax purpose, in which case there is only one entity for tax purposes, rather than a 414(B) or © group.

[E as in ERISA]

There is an old GCM (general counsel's memo) regarding "controlled group" status for these situations. If I recall correctly, it usually depends on the degree of control that the board or employees of the exempt organization have over board of the taxable entity. If there are no outsiders, it is likely that they would be considered controlled by the exempt organization.

[Guest hpaine]

jpod, thanks for your response. My understanding of 414(B)© groups is a little on the weak side. Could you elaborate on that?

Second, if the "for profit" does not exist for a tax purpose, then those employees would be considered under the "non-profit" structure, thus could not offer their own 401(k) plan?

How could a company exist with no tax purposes but have salaried employees?

Thanks!

[jpod]

To Katherine:

There is no basis in the law or regulations for the GCM. But, even assuming the GCM is correct, it has no application to this situation, because the "parent" 501©(3) truly does own the "subsidiary" LLC.

To HPaine:

I'm afraid I can't do a summary of 414(B) and © at this time. But, to answer you're question: it is because "tax is stranger than fiction."

[Guest hpaine]

Jpod - so you're saying that the "for profit" org. would be considered a control of the 501©3 and for purposes of the 401(k), each entity cannot offer their own seperate retirement plan? Therefore, the "for profit" employees could only participate in the 501©3's plan?:confused:

[jpod]

You said that the for-profit entity was your client. What is your profession?

[Guest hpaine]

I work for a PEO in the 401(k) department. I've not been exposed to this type of situation and the impact that it could have on their 401(k) plan.

[mbozek]

Lets make this simple: the c3 can maintain a 403(B) plan which must provide immediate salary reduction availability for all its employees who work more than 20 hrs a week. The profit making entity can establish a 401k plan for its employees. Or employees of both employers can participate in a 401k plan. Only c3 employees can participate in the 403b plan.

[E as in ERISA]

The 501©(3) generally has to make the 403(B) salary reduction available to all employees over the dollar threshold (the $200 as indexed). I believe that the only 20 hour a week exception is for students.

[mbozek]

no. See IRC 403(B)(12)(A)- all students who are not subject to FICA are excluded as well as ee working less than 20 hours a week

[E as in ERISA]

My brain must not be working this week!