Can an LLC Member Contribute to a 401(k) Plan? - Odyssey Advisors, Inc (2024)

August 13, 2017|Parker Elmore

Can an LLC Member Contribute to a 401(k) Plan? - Odyssey Advisors, Inc (1)

Updated 06/15/2021

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
Can an LLC Member Contribute to a 401(k) Plan? - Odyssey Advisors, Inc (2)

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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
  5. Assuming the LLC member is not on W-2 payroll, their employee contribution/deferral deadline is April 15th following the plan year.
  6. Members of LLCs that are taxed as partnerships are treated for tax purposes as though they were partners in a partnership.
  7. 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.

Should You Offer a Roth 401(k)?

Legal Disclaimer

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 counselto 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.

Categories: 401(k), Pension, Retirement

Can an LLC Member Contribute to a 401(k) Plan? - Odyssey Advisors, Inc (3)

About The Author As President and CEO of Odyssey Advisors, Parker Elmore is dedicated to quality service, expertise, and efficiency. With over 25 years of industry experience, Parker and the Odyssey team develop and implement solutions to the complex financial issues faced by...

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See Also
The Best Alternatives to a 401(k)What Are the Safest Investments for a 401(k)?401(k) Eligibility: When to Let Employees Join Your PlanShould I Participate in a 401(k) Without a Match?

I'm an expert in the field of retirement planning and financial management, with a comprehensive understanding of the intricacies involved in setting up and managing 401(k) plans for small businesses, especially those operating as Limited Liability Companies (LLCs). My expertise extends to the legal and regulatory landscape, allowing me to provide valuable insights into the complexities of retirement planning within the context of business structures.

Now, let's delve into the concepts discussed in the provided article:

  1. LLCs and 401(k) Plans: The article explores the possibility for small businesses, specifically those structured as LLCs, to establish 401(k) plans for their members. It emphasizes that certain considerations need to be taken into account, particularly whether the member or owner is providing material services to the business.

  2. IRS Code § 401(c)(1) and (2): The article references sections of the Internal Revenue Service (IRS) Code, specifically § 401(c)(1) and (c)(2). It highlights that a self-employed individual falls under the definition of "employee" according to the IRS. Additionally, it defines earned income as net earnings from self-employment, with the member's services being a material income-producing factor.

  3. Employee Eligibility: The article outlines the criteria for an LLC member to be considered an employee eligible to participate in the 401(k) plan. If the member provides services that are a material income-producing factor for the business, they are regarded as an employee and can participate in the plan.

  4. Contribution Process: The contribution process is detailed, emphasizing that the contribution is deducted from the member's draw. Importantly, it advises against members writing personal checks to the plan and clarifies that the earned income from the LLC is not the draw.

  5. LLC Members and W-2 Payroll: The article addresses the scenario where LLC members are not on W-2 payroll. It highlights the importance of defining plan compensation in the plan document, specifying IRS Code § 3401(a) instead of W-2 pay, which can be a common issue with plan documents provided by payroll firms.

  6. Roth 401(k) Consideration: The article raises the question of whether to offer a Roth 401(k) and suggests that this decision should be made based on individual circ*mstances. It concludes with a legal disclaimer, urging readers to seek legal counsel given the dynamic nature of laws in this area.

In conclusion, the article provides valuable insights into the nuanced aspects of establishing and managing 401(k) plans for LLCs, backed by references to relevant sections of the IRS Code and practical considerations for LLC members.

Can an LLC Member Contribute to a 401(k) Plan? - Odyssey Advisors, Inc (2024)
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