K-1 income

[pbarrett]

We have a LLC wanting to set up a 401(k) plan. Employees have W2 income, owners K1. I know k1 income cannot be considered in a partnership, but what about an LLC? What type of plan would be best for a profitable llc? Any thoughts would be appreciated.

Thanks.

[Blinky the 3-eyed Fish]

I know k1 income cannot be considered in a partnership, but what about an LLC?

What do you mean by this?

As for your question, the entity type is a minor consideration, but rather you should figure out what they are trying to achieve.

[E as in ERISA]

"LLC" does not have significance for tax purposes. They would have to "check the box" to be taxed as a corporation, partnership, etc. You need to know what their tax status is.

[Guest abrandw]

In the case of an LLC that is taxed as a partnership (most are), the members or owners of the LLC can participate in a qualified plan to the extent that they have earned income within the meaning of Code Section 401©(2) which is defined as net earnings from self-employment with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor. In other words, a passive investor in an LLC could not participate in the plan, but an owner who is providing personal services can.

There are various adjustments to earned income that must be made for qualified plan purposes. Look at the Code section.

[pbarrett]

They are trying to achieve a reduction in taxes by funding a retirement plan.

The CPA wants to set up a 401(k)/New comp combo. He stated the owners' income is $150,000 (K-1). At first I thought the entity was a Sub-S and I said the $150,000 profit was not treated as plan comp- it was more of a "pass thru" income. He stated they were not a Sub S, but rather an LLC.

The real question is: Can the K-l income be used as plan comp for computing contributions etc.

[Lame Duck]

Code Section 1402(a) defines net earnings from self-employment as "the gross income derived by an individual from any trade of business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in Section 702(a)(8) from any trade or business carried on by a partnership of which he is a member ...." This income is reported on a partner's K-1. What you are thinking about are distributions from a Sub-S corporation also reported on a K-1 which represent dividends rather than compensation eligible for plan benefits.