Compensation in LLC

[Guest Tired TPA]

401K plan document defines compensation as 3401(a) compensation. Also states that "compensation for any self-employed individuals shall be equal to such individual's earned income". In an LLC, which gives the owners a W-2 reporting wages subject to self-employement taxes, and then also gives the owners a K-1 showing negative self employement income, is the owner's total self-employment income the net of W-2 and K-1 self employement income? (obviously the answer is yes). I know that an LLC should not really be giving owners W-2 wages - but it happens. Now, situation is that owners have been allowed to defer on W-2 wages and the ADP testing has been done using W-2 wages. Now, in September, we are getting the K-1s and have negative self employment income. Surely this happens all the time. What is the correct solution? Can you point me to an ERISA reg?

Thanks!

[Bird]

I don't know a reg for this but you're right, it's not supposed to be done but is all the time. Yes, net the comps - we would normally make the self-employment tax adjustment on positive profits; I guess you just leave the loss as it is; they probably overpaid on those SE taxes and it serves them right for doing it the wrong way. I hope it was a lot because they made your life miserable.

ADP test should not have been run on W-2 comp; that's nobody's fault and everybody's fault depending on who knew what when. Should be re-run properly now.