The IRS treats an LLC as either a sole proprietorship, partnership or corporation depending on its individual circumstances and elections when forming the company. For those filing under the corporation banner, all financial aspects including expenses and contributions go on its tax return, while LLCs treated as partnerships and sole proprietorships for tax purposes account for these funds on their individual tax returns. Depending on their elected structure, LLCs can then tailor the retirement plan that suits them best.
A traditional 401k plan is appropriate for all business types, and enables the LLC's owners to choose from a range of options. They may contribute fully to the plan for all enrollees, match their contributions or tailor a combination program, with proportional benefits for owners and employees. This plan can also be vested over time, which provides another avenue of control for the LLC. Participants would then have access to their money over a fixed number of years to encourage loyalty and retention.
Corporations and Larger Partnerships
For companies with significant revenue, a safe harbor 401k plan is particularly appropriate to make the most of what owners and key employees contribute toward their retirements. To take advantage of its tax-deferred and higher contribution provisions, the LLC must meet certain primary anti-discrimination thresholds, such as matching employee contributions up to 4 percent of salary, immediate vesting, withdrawal limits and full annual disclosure.
Certain defined-contribution programs, such as a straightforward individual retirement account (IRA) or SIMPLE 401k plan, can make the most sense for LLCs classified as sole proprietorships, especially if cost is an issue. Those options are also easier to administer and require less paperwork than one of the 401k plans, which have a range of features and provisos that make them more complex and require more vigilance to maintain.
Participants in an LLC retirement plan who wish to switch accounts can elect to take money or assets between a qualified retirement plan and roll them over to another plan, as long as this process occurs within 60 days. The IRS treats this as a nontaxable event, and the recipient receives a Form 1099-R to report the transaction. Standard IRA rules regarding minimum and hardship distributions, as well as age limits, still apply.