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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

HCE LLC Attribution

(Posted October 14, 2004)

Question 268: I have a plan whose corporate sponsor is 10% owned by an LLC. One of the employees of the sponsoring coprporation is a 50% owner of said LLC. He does not own any of the corporation directly. What ownership in the corporation, if any, would this employee be deemed to have for plan purposes (e.g., determination of HCEs)?

Answer: 5% exactly. I'll explain, including references to my book, Who's the Employer?. (Subscribers can click to view online the text of references to sections in the book.)

LLCs with multiple owners are taxed as partnerships or as corporations. The default is that they are taxed as partnerships. (See WTE 1:07.) You have not indicated how this LLC is taxed. I assume it is taxed as a partnership.

Each partner (or LLC member) is deemed to own his or her pro rata interest of whatever the partnership owns. (See WTE 14:09.) As such, the employee in your question owns 50% X 10% of the corporation, or 5%. His ownership is insufficient to make him an HCE or a key employee, although his compensation may do so. See IRC 414(q)(2), 416(i)(1)(B)(i)(I).

Although the reasoning would be different, on these facts the result would be the same if the LLC were taxed as a corporation. (See WTE 14:12.) This is pursuant to the IRC 318 attribution rules, which determine ownership for purposes of traditional HCEs, key employees, HCEs, and required minimum distributions. A different attribution system applies to determine ownership for purposes of the controlled group rules, but, again, it would reach the same result. (See WTE 07:10.)

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.