Spouse employee of LLC member eligible to participate in 125?

[Guest pinsall]

Can the spouse employee and child employee of an LLC member participate in a 125 plan? LLC is taxed as a partnership?

Thanks

Pat Insall

[Guest Joe Vasko]

Under the rules of family attribution, these individuals would also be considered as owners/shareholders and would not be allowed to participate.

[Guest pinsall]

Thanks Joe

I was reading somewhere that this does not apply to the spouse of a sole proprietor however.

I always thought the 318 attribution rules applied to sole props as well as partnerships?

Why would a spouse of a sole proprietor be treated differently for 125 plan purposes that a spouse of a partner?

Thanks

Pat Insall

[Mary Kay Foss]

The deduction for medical insurance premiums and expenses for self-employed persons was okayed in TAM 9409006. The PPC Tax Action Memo reporting on it (TAM-337 4/5/94) warned that if an insured plan is offered through a cafeterial plan, the nondiscrimination rules for high=level employees must be complied with. The IRS Tech advice relied on Rev Rul 71-588.

This doesn't answer your question but it explains the sole proprietor angle.

[Guest]

Repectfully, I disagree with Joe Vasko to the extent that the LLC has shareholders. It does not have shareholders, it is a partnership for tax purposes. You need to look to the attribution rules as it impacts partnerships.

The TAM reflects and old 1964 or 1967 Revenue Ruling authorizing such family coverage in a sole proprietorship where the spouse is a bona fide employee.

[Guest pinsall]

Well, that is my question-

What are the attribution rules for partnerships (or LLC's taxed as partnerships) in the 125 arena?

Joe seems to be saying that the atribution rules under 318 apply here meaning that the spouses and lineal ascendants and descendents of a partner cannot participate in a 125 plan; the same is true for a 2% shareholder of an S-corp.

But strangely enough not to a sole proprietor

Does anyone have a cite for this on partner attribution in a 125 plan?

Thanks

Pat Insall