ADP Testing of an LLC

[Guest dstran]

I have a client who recently spun off half of his company and re-organized the current company as an LLC. He is the sole owner of the LLC and does not receive any W2 compensation. Is he considered an employee and would he be considered and HCE for ADP testing?

[Archimage]

Does he actually do work for the company? If he is just a passive income owner then he would not be an employee. My guess is he does. His compensation would be his earned income from the business. I would recommend that you get a copy of his 1065 at the end of the year.

[Blinky the 3-eyed Fish]

Technically, the LLC would have to be taxed as a partnership (which nearly all are) for the owner's compensation to be his earned income. In this case though, in determining who is an HCE you don't have to worry about compensation because he is > 5% OWNER. He is an HCE.

Now if it turns out he ends up with 0 net earned income, there are questions as to how he should be treated for the testing. I think most would say, and I am one of them, that he would not be in the testing, rather than putting him there as a 0%.

[Archimage]

I meant to say get a copy of his K-1.

[Guest dstran]

Thanks for the responses. The LLC is taxed as a partnership and the owner does do work for the company. Due to ADP testing limits, he will not be able to defer very much. I was hoping maybe there were some solutions outside of the 401k plan but it doesn't appear like there is. Any ideas???? (he's not interested in a Safe Harbor plan)