Treasury Clarifies That Partners Working for a Disregarded Entity Owned by a Partnership are Self-Employed: Proposed Regulations Would, as a General Matter, Prevent Partners from Participating in Employee Benefit Plans Established for Employees of a Disregarded Entity Owned by the Partnership

Sullivan & Cromwell LLP - May 3, 2016

Today, the Treasury Department issued proposed and temporary regulations clarifying that partners providing services to a disregarded entity owned by the partnership are not treated as employees of the disregarded entity, but rather, are treated as self-employed.  Consequentially, those partners are generally not eligible to participate in benefit plans that are limited to employees and are sponsored by a disregarded entity owned by the partnership.
The Treasury Department requests comments as to (i) whether it may be appropriate to treat partners as employees in tiered partnership structures or in certain other circumstances, including when employees receive relatively small partnership interests as compensation, and (ii) the potential impact on employee benefit plans and self-employment taxes if partners were permitted to be treated as employees.