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Who's the Employer?

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

LLC Member as Employer

(Posted December 6, 2000)

Question 65: An LLC taxed as a partnership has four owners, three of whom are medical corporations and one is an individual doctor. The three corporations and the partnership are an affiliated service group. The LLC has one rank-and-file employee, who participates in a 25% money purchase pension plan. That plan excludes doctors from participating. The individual doctor owner would like a plan. Can he set one up?

Answer: Directly, no, but he does have options.

The doctor is a "self-employed individual" because he has earned income from the LLC. Under IRC 401(c), the LLC is deemed to be his employer. He is not deemed to be his own employer. Rather, his LLC is. This means that if he sets up his own plan, it would be disqualified for failure to satisfy the exclusive benefit rule. These issues are discussed at great length in Chapter 1 of the second edition of my book, Who's the Employer?.

What can the doctor do? Here are a couple of possibilities:

Incorporate. Then, the corporation can set up a plan covering the doctor.
Have the LLC set up a defined contribution plan covering the doctor.

Again, the modification of IRC 401(a)(26) so it does not apply to defined contribution plans allows you to have these multiple plans in an affiliated service group situation.

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.