LLC members & cafeteria plan participation.

[Guest JimD-EBR]

Does how an LLC is taxed affect whether or not a LLC member may participate in a cafeteria plan? If a member is a less than 2% owner and the LLC is taxed as an S-Corp, may the member particpate in the LLC's cafeteria plan? If the LLC is taxed as a partnership, is there any minimum level of ownership that a member may hold and still participate in the cafeteria plan? Cite references would be appreciated.

[sloble@crowleyfleck.com]

To the extent members of an LLC are treated/taxed as partners in a partnership or as self-employed, they may not participate in a cafeteria plan. With respect to the LLC members who are treated as "employees" for tax purposes, there is no IRS guidance I know of. I know the EBIA recommends not allowing LLC members to participate in a cafeteria plan regardless of how it is taxed because of the lack of guidance.

[Guest fhatchett]

May the spouse of a PLLC, who is a W-2 employee of the PLLC participate in a 125 plan?

fhatchett

[Guest bosco]

Here's another twist for someone out there. I have an LLC group coming on as a take-over for 125 adminstration, 10/1, and they've been employees of a PEO. The partners were allowed to participate in the 125 through the PEO. All the partners are 5% owners and are now going to be W-2 employees of their LLC. I say they cannot participate by EBIA's standard, but they are insistent on participating because of their past administrator. Funny thing is they've never even received SPD's from their current adminstrator. Should I cut my losses and walk away or is their being W-2 employees let them participate and I can continue

[GBurns]

I am not sure what happens if an LLC is taxed as a C Corp.

But, if an LLC is taxed as either a Parnership or an S Corp, neither partners nor 2% or greater shareholders can participate 125(d)(1)(A), 1.125-1 Q7A 4 etc. You might want to read what the IRS says:

Re 2% Shareholders etc:

http://www.irs.gov/faqs/page/0,,id=83301,00.html#27

Cafeteria Plans FAQ:

http://www.irs.gov/faqs/page/0,,id=83301,00.html#4

Introduction to Cafeteria Plans:

http://www.irs.gov/pub/irs-utl/introductio...aplans10-02.pdf

fhatchett,

As for a spouse of a PLLC who is a W2 employee. I have not done any research but my first impression is No. Is she a bona fide employee? Very likely not. Is there any attribution of ownership? Very possibly.

bosco,

I doubt that partners can also be W2 employees and even so they are still partners and therefore not eligible. Salary paid to partners are regarded as guaranteed payments subject to SE tax since they are regarded as being self-employed. See: http://www.irs.gov/faqs/faq12-1.html

[sloble@crowleyfleck.com]

fhattchett: Code 318 rules do not apply to make the spouse of a self employed individual by attribution, so it is possible that the spouse could participate. (401©, which defines "self-employed individual" does not incorporate the 318 rules--thus and employee/spouse of a self-employed individual can participate in acafeteria plan.) However, you do need to make sure the spouse is a bona fide employee (See Haeder TC Memo 2001-7), and also make certain the spouse is not self-employed.

bosco: I agree 100% with GBurns--partners are simply not eligible.

[SLuskin]

So, maybe I have been doing this wrong. I thought Section 318 attribution also applied to S Corp shareholders (self-employed). So, for example, since I own this company and it is an S corp, I thought that my spouse and adult non-dependent children could not participate in the Cafeteria Plan that I offer to my employees. I will take any input here. Thank you.

[Lisa Hand]

SLuskin, you are correct. S corp, partnership ect, Section 318 attribution applies. The only structure with an exception is the spouse of a sole proprietor who is a bonified employee and the IRS looks at those real closely.