Single member LLC also owner of partnership

[Guest Peter Buck]

Mr. John has a single member LLC. That LLC is partner in Bay Partnership. Bay pays Mr. John LLC for services. Can Mr. John have a pension plan either in the name of the Mr. John LLC or in his own name?

If Mr. John LLc is also partner in other partnerships (always minority partner, if that matters) can the revenue that comes into Mr. John LLC be used in the calculation of a pension plan?

[JAY21]

You probably need to add a few more facts. What exactly is the ownership interest of the LLC in the other partnership (This matters for 1 of the affiliated service group tests) ? Also what "services" are being performed for the partnership and are there any employees in the LLC that help provide the services to the other partnership ? I think you'll find most of these situations are highly dependent on the specific facts-and-circumstances so even if you get a good answer on the specifics of this question you can't apply them to another situation unless it's exactly the same situation.

[Guest Peter Buck]

There are real services being performed, consulting on products, it's not just passive ownership. There are no other employees in the LLC. Mr. John LLC owns 50% of Bay Partnership, but it also owns smaller percentages of other partnerships, in each case performing services.

[JAY21]

Are there employees in the Bay Partnership ? (I realize that's not your focus area but helps flush out all the facts).

[Guest Peter Buck]

No employees. Could be in the future but not for now.

[JAY21]

OK. The plan needs a company sponsor so that would be Mr. John, LLC as the sponsor, not him personally since the business is structured as an LLC, although for tax deduction purposes there isn't much distinction as he'll deduct his retirement contribution on his personal 1040 tax return even though the plan will be sponsored by the LLC. If he had any employees the employees pension expense would be deducted by the LLC.

From the facts presented It seems pretty clear he can sponsor a plan under Mr. John, LLC, but some of my questions are trying to get at a different issue that being is there an Affiliated Service Group with one or more outside entities where you might not WANT to sponsor a plan under the LLC as it might require coverage of employees under the other entities (very costly). If none of the other entities he has partial ownership in has any employees, you probably don't care if it's an Affiliated Service group currently, but should have a precautionary 1 or 2 year eligibility waiting period in case employees are hired later in case the relationship between the entities IS considered an Affiliated Service Group which means the employees of the other entities would eventually become eligible. The fact he is a minority partner does not get him out of an Affiliated Service Group (ASG) as all of the 3 possible ASG "traps" require 10% or less ownership (not a high threshold). My "sense" is that it very easily could be an ASG but you might not care (currently) if there are no other employees so you may wish to still proceed with the plan but use the 2-year eligibility. Get some use out of the plan until employees eventually are hired under one of more of the other entities and potentially become eligible after 2 years. At that time you can revisit the ASG issue or just play it conservatively and terminate or freeze the plan at that time.

[Guest Peter Buck]

I'm pretty comfortable with the ASG situation for now.

A single member LLC is "disregarded for tax purposes" which means the income flows through to the personal tx return with no partnership return. But does it exist for plan sponsorship purposes?

The $ that flows from Bay Partnership to Mr John LLC is usable in an earned income calc for Mr John LLC Retirement Plan? I'm told the new K-1 requires the recipient's soc ses number instead of the single member LLC tax id number.

[GBurns]

The K-1 from Bay Partnership should be in the name of the partner which you said is Mr John LLC and would use the Mr John LLC FEIN and not the SS# of Mr John.

Why would you so easily be comfortable with the ASG issue? It might not be prudent to gloss over it too easily.

[Guest Peter Buck]

The accountant for Bay says the individual's ss# goes on the k-1.

If an individual as a partner (say of Bay) wants a qualified plan the partnership must be the sponsor - not the individual. So there is some concern about the full effect of the Mr John LLC one member LLC being disregarded "for tax purposes". What are the full ramifications?

There is a period of time for which there is no asg problem. They want this to work now and we'll be/get prepared for asg issues in the future

[JAY21]

I can't say I'm familiar with this "disregarded for tax purposes" issue. I'm still inclined to think the plan should be sponsored by the "legal entity" that exists (presumably the LLC) as the legal entity has to execute the legal plan documents on behalf of the entity. However, I can see where it's hard to know where "disregarded for tax purposes" begins and ends (i.e., does it apply to qualified plans or just income taxes).

If I was in a hurry on the issue and was running out of time to research this I might be tempted to use a "shotgun" approach and have both the LLC and Mr. John as a "sole proprietorship" both co-sponsor the plan (via a supplemental participation agreement). Presumably that way you're covered under either scenario and I don't think there are any negative ramifications associated with the fact that either the LLC or the Sole Prop is really not a sponsor (it's really one or the other) you just can't tell which it is. However, that would be in "rush" situation.

Perhaps someone else will chime in with some add'l info or opinion.