North Carolina Department of Justice
North Carolina Department of Justice
North Carolina Department of Justice
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October 3, 2005  

Mr. Benjamin Gilbert
Senior Vice President
University of North Carolina Health Care System
Legal Department
6001 East Wing
The University of North Carolina Hospitals
101 Manning Drive
Chapel Hill, NC 57514 

RE: Status Of Proposed Limited Liability Company (Rex Hospital, Inc. and Rex Hospital, Inc.) for the Purposes of the Teachers 

Dear Mr. Gilbert: 

You have written on behalf of The University of North Carolina Health Care System (UNCHCS) and Rex Hospital, Inc. (Rex Hospital) asking several questions relating to the proposed creation of a new limited liability company (LLC) to be formed by UNCHS and Rex Hospital. 

You have asked the following questions:
  

1. Would new employees of the LLC (including those currently employed by UNCHCS or Rex Hospital, but not including employees who have retired from UNCHCS and are currently receiving retirement benefits from the Teachers' and State Employees' Retirement System of North Carolina (Retirement System), be treated as employees of the State for Retirement System purposes?

Answer: No.
 

2. Can current State retirees who are employed by the LLC continue to receive their full retirement benefit from the Retirement System?

Answer: Yes.
 

3. Would the answer to questions 1 or 2 above change if the ownership percentage of UNCHCS in the LLC was less than 50%. If yes, what reduced ownership percentage by UNCHCS would the Retirement System require in order to determine that the LLC's employees would not be treated as employees of the State for Retirement System Purposes?  

Answer: No response necessary. 

A. FACTS  

1. UNCHCS, Rex Healthcare, Inc., Rex Hospital Information 

UNCHCS was established by statute, effective November 1, 1998, and is governed and administered as an affiliated enterprise of the University of North Carolina. UNCHCS employees are deemed employees of the State of North Carolina and participate in the Teachers' and State Employees' Retirement System of North Carolina (Retirement System). N.C. Gen. Stat. § 116-37. 

Rex Healthcare, Inc. (Rex Healthcare) is a non-profit corporation organized under the laws of the State of North Carolina. UNCHCS acquired 100% of the ownership interest in Rex Healthcare on April 13, 2000, and is currently the sole corporate member of Rex Healthcare. Rex Healthcare is a holding company and has no employees. 

Rex Hospital is a private, non-profit corporation organized under the laws of the State of North Carolina and is tax-exempt under Internal Revenue Code Section 501(c)(3). Rex Healthcare is the sole member of Rex Hospital. Rex Hospital maintains certain employee benefit plans for the benefit of its employees. 

In accordance with an Advisory Opinion from the North Carolina Attorney General's office, dated February 17, 2000 (Advisory Opinion), employees of Rex Healthcare, if any, (and presumably Rex Hospital, as an affiliated enterprise) are not considered employees of the State of North Carolina for any purpose, including the purpose of participating in the Retirement System. The Advisory Opinion issued was in response to a request from UNCHCS for guidance in connection with the acquisition of Rex Healthcare by UNCHCS. The Advisory Opinion expressly provides that [a]acquisition of corporate control over Rex Healthcare by [UNCHCS] will not, in our view, convert Rex [Healthcare] from a private, not-for-profit corporation organized under Chapter 55A of the General Statutes into a state government agency, institution or board. 

2. Reasons for the Establishment of the Proposed LLC 

The structure and operation of the new LLC are still in the planning stages and can be modified to help achieve the goals of the LLC depending on this advisory opinion. 

UNCHCS and Rex Hospital propose the establishment of the LLC to enhance workforce efficiency. The LLC will hire employees in certain specialized fields (such as home care) who can then be assigned to either UNCHCS and/or Rex Hospital. By being able to obtain employees through the LLC, UNCHCS and Rex Hospital intend to maximize the use and productivity of highly skilled employees hired by the LLC. As needs arise and change in either entity, the LLC will have the ability to realign the employees to assist with these shifting needs. Moreover, employees working on projects that overlap between the two entities will clearly exhibit the maximum efficiency of the new LLC. 

In addition, the LLC will provide UNCHCS and Rex Hospital the opportunity to centralize resources involved in the hiring, training and employing of highly qualified and experienced employees. 

3. Structure and Operation of the Proposed LLC 

The LLC will be organized under the laws of the State of North Carolina and its only members will be UNCCHS and Rex Hospital, and each will each own 50% of the LLC. You have informed me that the LLC will definitely be organized as a not-for-profit under Chapter 55A of the North Carolina General Statutes. UNCCHS and Rex Hospital will contribute equal capital contributions to fund the start-up costs for the LLC and will have equal economic ownership, both in capital and in profits, if any. It is proposed that both entities will have equal control over the management and operation of the LLC. 

UNCHCS and Rex Hospital envision that the LLC will hire both new employees (including some employees currently employed at Rex or UNCHCS) and employees who have retired from UNCHCS. As mentioned above, the new employees and retirees hired by the LLC will provide services to both UNCHCS and Rex Hospital on an as needed basis. Some LLC employees may provide services to both UNCHCS and Rex Hospital while others may provide services to only one. It is likely that work assignments will not be static, but instead, the LLC employees may alternate between the two entities. Moreover, on joint projects some employees will likely provide services to both entities at the same time. The LLC employees will be hired and paid by the LLC and will be treated as employees of the LLC for employment tax purposes. Although the day-to-day supervision of the LLC employees will be by their respective immediate supervisors at UNCHCS or Rex Hospital, as the case may be, their performance will ultimately be evaluated by the LLC, and the LLC will retain the right to hire and fire the employees. 

While still in the planning stages, it is envisioned that UNCHCS and Rex Hospital will each pay the LLC for the services of its employees based on the value of the services each entity receives. The value of services will be based on a written agreement between the LLC, UNCHCS, and Rex Hospital that sets forth established pay rates for various categories of employees. The purpose of the LLC will not be to generate profits, but to operate, in effect, as an employment agency or contract staffing firm providing services to UNCHCS and Rex Hospital. The vast majority of current employees of UNCHCS or Rex Hospital will remain as employees of UNCHCS or Rex Hospital, respectively. It is not anticipated that many employees of UNCHCS or Rex Hospital will be hired by the LLC probably in the range of 100 to 200 employees, although the actual number could be outside of that range. 

Eligible LLC employees will participate in benefit plans maintained by Rex Hospital. These plans permit the LLC, as an affiliated employer, to adopt the plans for the benefit of LLC employees with the consent of the applicable sponsor. 

B. QUESTIONS PRESENTED  

1. Would new employees of the LLC (including those currently employed by UNCHCS or Rex Hospital, but not including employees who have retired from UNCHCS and are currently receiving retirement benefits from the Teachers' and State Employees' Retirement System of North Carolina (Retirement System) be treated as employees of the State for Retirement System purposes? 

By our February 17, 2000 Advisory Opinion (Authority of University of North Carolina Health Care System to Acquire Control of Rex Healthcare, Inc.), 2000 N.C. AG LEXIS 23, we concluded that consummation of the acquisition of corporate control of Rex Healthcare by UNCHCS did not convert Rex Healthcare from a private, not-for-profit corporation into a state government agency, institution or board. (The sole member of Rex Healthcare is UNCHCS and Rex Healthcare is the holding company for Rex Hospital, Inc. A copy of the February 17, 2000 advisory opinion is attached for ease of reference.) We believe that the reasoning of the advisory opinion is equally applicable to the status of Rex Hospital. Rex Healthcare is the sole member of Rex Hospital and such a relationship does not convert Rex Hospital into a state government agency, institution or board. In sum, neither Rex Healthcare nor Rex Hospital is a state government agency, institution or board. Therefore, employees of Rex Hospital are not State employees and are not required to be members of the Retirement System. See N.C. Gen. Stat. § 135-1(10); N.C. Gen. Stat. § 116C-37. 

We understand that in Private Ruling 2003-39055, 2003 PRL Lexis 853, the Internal Revenue Service concluded that Rex Hospital, Inc.'s employee benefit plans are, by virtue of UNCHCS's control of Rex Healthcare and, in turn Rex Hospital, are governmental plans within the meaning of 26 U.S.C. § 414(d) of the Internal Revenue Code. The benefit plans described in the revenue ruling included: a defined benefit plan, a 26 U.S.C. § 403(b) tax-deferred annuity plan, a welfare plan which provides life, short-term disability and long-term disability benefits, wrap-around welfare benefits including a group health plan, a dental plan, an employee assistance plan, a tuition reimbursement plan, an adoption assistance plan, a wellness program. an employee discount program, and a 26 U.S.C. §125 cafeteria plan that provides premium payments for health care and dependent care expense reimbursement accounts. The conclusion by the Internal Revenue Services does not alter our opinion that Rex Healthcare and Rex Hospital are not State entities. 

We believe that the logic and conclusion of the Advisory Opinion also applies to the creation and ownership of the proposed LLC. Upon its creation, UNCHCS would have corporate control of the LLC by virtue of its equity ownership of 50% of the LLC and its control of Rex Healthcare (and Rex Hospital). Such ownership and control does not ipso facto make the LLC a State agency, institution or board. 

Employees of UNCHCS are clearly State employees and as such are required to contribute to and participate in the Retirement Plan. Given our conclusion that the LLC is not a State Agency, institution or board, we conclude that employees hired by the LLC are not State employees and are not required to contribute to and participate in the Retirement Plan.
 

2. Can current State retirees who are employed by the LLC continue to receive their full retirement benefit from the Retirement System?  

Currently, N.C. Gen. Stat. § 135-3(8)(c), effective June 30, 2005, permits a retiree to be reemployed by a State employer after early retirement or service retirement subject to a limitation on post-retirement earnings. However, N.C. Gen. Stat. § 135-1(20) requires that in order for a member to retire, the member cannot provide any services to a State employer during the month in which his or her retirement is to be effective. A retiree's earnings are limited to (1) the greater of $20,000.00 or fifty percent (50%) of the retiree's reported compensation, as indexed, during the 12-month period immediately following the effective of retirement and (2) the greater of $20,000.00 or fifty percent (50%) of the retiree=s reported compensation, as indexed, during any calendar year. Senate Bill 622 (2005 Session Law 276) was signed by the Governor on August 13, 2005. Section 29.28(e), effective November 1, 2005, amends G.S. Gen. Stat. § 135-1(20), to extend the time for a complete separation from service to the State employer from one month to six months. The earnings limitation remains the same. 

However, since we have concluded that the proposed LLC would not be a State agency, institution or board, retired State employees who are hired and paid by the LLC can continue to receive their full retirement benefits while employed by the LLC and would not be subject to the provisions of Senate Bill 622, section 29.28.(e).

 3. Would the answer to questions 1 or 2 above change if the ownership percentage of UNCHCS in the LLC was less than 50%. If yes, what reduced ownership percentage by UNCHCS would the Retirement System require in order to determine that the LLC's employees would not be treated as employees of the State for Retirement System Purposes?

Given our responses to questions 1 and 2 above, there is no need to respond to this question.

Should you have any questions, please contact us.

 

Sincerely, 

Grayson G. Kelley
Chief Deputy Attorney General 
 

Ann Reed
Senior Deputy Attorney General 
 

Lars F. Nance
Special Deputy Attorney General