Disregarded Entities

[Guest mcw]

I have a client that has a several single member LLC subs. The employees of the subs are covered under the parent's 401(k) plan. Do the LLCs have to adopt the parents plan or are they automatically covered? My thinking is that because the LLCs are disregarded entities and the employees are technically employees of the parent, no adoption or participation agreement is needed by the LLCs. Any thoughts on this?

[g8r]

It really depends on how the LLCs are treated for state law purposes. You indicate that the individual LLCs are disregarded, but I'm not sure what you mean by that. Just b/c they are a controlled group for plan purposes, doesn't mean they are disregarded for purposes of state law purposes. If state law doesn't recognize these individual LLCs as separate legal entities, then they don't need to adopt the plan. Otherwise, they need to adopt it the plan.

[chris]

Under the §7701 Regs. a single member LLC may be treated as you said as a disregarded entity, i.e., if the owner is an individual it will be treated like a sole-proprietorship, if the owner is a corporation, then it will be treated like a division. Clearly, the entities are recognized as separate legal entities under state law, hence the filing of Articles of Organization. there may be an issue however as to how single member LLC's are categorized, i.e., does the state follow the federal view as set out in the 7701 Regs.....??

[E as in ERISA]

An LLC is treated consistently for all tax purposes. So if it "checks the box" to be a division, then technically it is supposed to be considered a division for all tax purposes.

However, the reality is that the LLC is a separate legal entity. And plans are affected by a number of other laws. So I would respect the separate legal status and have them sign adoption agreements, etc.

[Guest mcw]

Thanks for your responses. To answer several of the questions raised, LLCs are disregarded for state tax law purposes but are separate legal entities for all other state law purposes. To be safe, I am going to have them adopt the plan.