Can LLC be adopting employer of C Corp Plan?

[Guest SSCARO]

I have a client who has purchased a majority interest in an entity organized as a L.L.C. - the new entity has no plan at present. His company is a C-Corp, using a non-standardized 401K Prototype. He wants the new entity to become an adopting employer of his existing plan. Can he do this? If so, what are the practical problems?

[Dowist]

There would be no prohibition against the LLC adopting the plan (unless the plan was drafted to prohibit adoption by partnerships - see below - which is doubtful).

Presumably the LLC has elected to be taxed as a partnership for federal tax purposes. The members of the LLC would then be treated as "partners" with self-employment income. Practically, the primary issues would be 1. the partners/members compensation for plan purposes is "earned income," which is determined net of certain deductions such as contributions to the plan, and 2. the partners/members might be owner employees (more than 5% owners) and ineligible for loans. These are the two big issues - there may be others.