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Can an LLC Member Contribute to a 401(k) Plan?
Bottom Line Up Front
- As a small business that operates as an LLC, you can set up a 401(k) plan for yourself with some exceptions
- Below is a list of some things to consider, but the biggest is whether or not you are providing material services to the business
Short answer – yes! 401(k) deferrals and contributions are allowed as a general rule, but there are exceptions. The biggest issue to consider is whether or not the member or owner is providing material services that are income-producing for the LLC. Here is a basic list of things to consider:
- Under IRS Code § 401(c)(1), the IRS states that “employee” includes “self-employed individual,” and that a self-employed individual is someone with earned income.
- IRS Code § 401(c)(2) defines earned income as net earnings from self-employment (i.e., subject to tax as self-employment income) from a business where the member’s services are a material income-producing factor.
- A member who is involved in the business has earned income.
- A member who is not involved in the business does not have earned income, regardless of the payment of self-employment tax.
- In general, a member of an LLC who provides services that are a material income-producing factor for the business shall be considered an employee.
- As an employee, the member is eligible to participate in the plan.
- The contribution shall be deducted from the member’s draw.
- The member should NEVER write a personal check to the Plan.
- Remember that the member’s earned income from the LLC is NOT the draw. The maximum deferral amount and/or employer contribution will be based on actual earned income which is not known until year-end
- Assuming the LLC member is not on W-2 payroll, their employee contribution/deferral deadline is April 15th following the plan year.
- Members of LLCs that are taxed as partnerships are treated for tax purposes as though they were partners in a partnership.
- Your plan document should define plan compensation as IRS Code § 3401(a) vs W-2 as an LLC Member will not be on payroll and will not have W-2 pay. This is a common problem for those with plan documents provided by payroll firms.
Nothing in this post should be interpreted to be legal advice for the reader. Given that laws in this area change frequently, the reader is encouraged to seek review by your legal counsel to apply the law to the particular facts of your situation.
If you have questions about how to best design your retirement plan to align your personal goals with your business goals, please reach out to one of our Odyssey Advisor Consultants here.
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