Deferrals in an LLC

[Guest Crystal]

For a 401(k) Plan, are the deferrals for a shareholder of an LLC limited to the payments they receive during the year or on their net income? Where is this spelled out?

[EGB]

A member in an LLC (assuming the LLC is set up to be taxed like a partnership) is treated

like a partner in a partnership. A partner is treated as a self-employed individual and elections are based on "earned income" (which should be defined in your plan document). The issue of what constitutes earned income is a complicated one and depends on various factors such as whether the member is treated as a limited or general partner. The Tax Management Portfolio on LLCs has a decent discussion of this issue (which includes the applicable citations).