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Limited Liability Companies and Income for Plan Purposes

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“My client, who is a partner in a Limited Liability Company (LLC), would like to contribute to a retirement plan and wants to know what compensation she should use for contribution purposes?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in New York is representative of a common scenario involving a partner in an LLC.

Highlights of the Discussion

Because this question deals with specific tax information, business owners should always seek the guidance of a tax professional for advice on their individual situations.  What follows is general information.

For federal tax purposes, the IRS, typically, treats an LLC as a partnership, which must file IRS Form 1065, U.S. Return of Partnership Income for the business.[1] There are exceptions to this rule, so a client should be encouraged to determine the exact nature of the business’s tax structure with a tax advisor. For example, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832, Entity Classification Election and elects to be treated as a corporation.

Any retirement plan established would need to cover the LLC as a whole. For plan purposes, assuming the LLC is a partnership, each partner of the LLC should receive a Schedule K-1 (Form 1065) for his or her share of income or losses associated with the business. Therefore, a partner in an LLC would use his or her earnings from self employment reported on the Schedule K-1 (Form 1065) to determine contributions for plan purposes.

Conclusion

When faced with a client who has a tax-related question, it is always prudent to direct the client to his or her own tax advisor for definitive answers. Generally, owners of an LLC are partners for tax purposes, but exceptions may apply. Partners use earnings from self employment reported on the Schedule K-1 (Form 1065) for plan purposes.

[1] LLC Filing as a Corporation or Partnership

 

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Plan Establishment Deadlines

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“Is it too late to establish a qualified retirement plan for 2020?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Arizona is representative of a common inquiry related to setting up qualified retirement plans.

Highlights of the Discussion

As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, businesses have more time to set up plans for a particular tax year.

Prior to the SECURE Act, a business that wanted a qualified retirement plan (e.g., 401(k), profit sharing, money purchase pension, defined benefit pension plan, etc.) for a particular tax year had to establish it by the last day of the business’s tax year. For example, a calendar year business had to sign documents to set up the plan by December 31 of the tax year in order to be able to contribute to and take a deduction for contributions.

For 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan. Notice the plan establishment deadline is tied to the type of business entity (e.g., sole proprietor, partnership, corporation, etc.) and its associated tax filing deadline as illustrated below. [Note: Simplified employee pension (SEP) plans have historically followed this schedule; and special set-up rules apply for safe harbor 401(k) plans.]

Tax Status Filing Deadline Extended Deadline
S-Corporation (or LLC taxed as S-Corp) March 15 September 15
Partnership (or LLC taxed as a part) March 15 September 15
C-Corporation (or LLC taxed as C-Corp) April 15 October 15
Sole Proprietorship (or LLC taxed as sole prop) April 15 October 15

EXAMPLE:  Doin’ Great, Inc., has an extended tax filing deadline of October 15, 2021, for its 2020 tax year. The owners of Doin’ Great decide in early 2021 they would like to set up a 401(k)/profit sharing plan for the business for 2020. They have until October 15, 2021, to execute plan documents to set up the plan, effective for 2020. While Doin’ Great would be able to make a profit sharing contribution on behalf of participants for 2020, participants can only make pre-tax employee salary deferrals and designated Roth contributions prospectively—meaning after they execute valid salary deferral elections for compensation yet to be received in 2021.

Conclusion

Thanks to the SECURE ACT, for 2020 and later tax years, a business has more time—until its tax filing deadline, plus extensions for a particular tax year—to set up a plan.

 

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Covid-Related Paid Sick Leave and Salary Deferrals

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“My client sponsors a 401(k) plan for her employees.  She has had a number of employees taking sick leave due to Covid-related reasons. Is Covid-related sick pay considered compensation for making employee salary deferrals?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Washington is representative of a common inquiry related qualified leave wages.

Highlights of the Discussion

The Families First Coronavirus Response Act (FFCRA) requires certain covered employers to provide eligible employees with paid sick leave (for two weeks) and expanded family and medical leave pay (for an additional 10 weeks) if taken for specified reasons related to COVID-19. The Department of Labor published a helpful FFCRA summary for employers that define which employers are affected, who eligible employees are and how to calculate the qualified leave wages.

The IRS further clarified in question and answer (Q&A) #54 of a Special Issues News Release that plan sponsors should include qualified leave wages paid to employees due to the COVID-19 pandemic as plan compensation, unless that plan’s provisions specifically exclude this compensation from the definition. See excerpt below from Q&A #54.

“The FFCRA does not distinguish qualified leave wages from other wages an employee may receive from the employee’s standpoint as a taxpayer; thus, the same rules that generally apply to an employee’s regular wages … would apply from the employee’s standpoint.  To the extent that an employee has a salary reduction agreement in place with the Eligible Employer, the FFCRA does not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.”

Conclusion

Unless a 401(k) plan’s provisions specifically exclude Covid-19-related qualified leave wages, plan sponsors should include such amounts in the definition of compensation for plan purposes.

 

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