3-member LLC with a solo 401K?

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papito23
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3-member LLC with a solo 401K?

Post by papito23 »

Anyone know if I can I have a solo 401k for myself within a 3-member (owner) LLC consisting of myself, spouse, and non-related partner? (That is, we have no employees). The LLC is taxed as a partnership for federal purposes.

My own research here and elsewhere has been somewhat inconclusive.

Called Fidelity, they said no.

Called Vanguard, they said yes. I signed up with them. They said I can extend the 401k option to include my partner if he wants, but I'm not obligated to do so, or to contribute in equal amounts, etc.

I am keeping all of the LLC paperwork/accounts separate from personal ones. I'm a little confused as to which bank account to draw contributions from, since there are both employER and employEE contributions, but the LLC is a pass through entity. I'm assuming it all needs to come from the LLC account. But since our LLC operating agreement is to split everything 33/33/33, I would need to have equal withdrawals for spouse and partner. And I would want to withdraw in April for the previous tax year, further complicating the bookwork.

Thanks any and all!

EDIT: We recently switched from a husband-wife proprietorship (thru 2014) to the 3-member LLC (1/1/2015). I explained to the Vanguard rep on 12/29 that I wanted to set up a solo 401k just for me for 2014 (established it on Dec. 31!), and then starting 2015 we were going to transition to a 3-member LLC. The rep appeared to understand this, and said that the partner could be added at a later time if desired (after some paperwork noting the change from sole-proprietorship to LLC).
Last edited by papito23 on Sat Jan 03, 2015 10:49 pm, edited 2 times in total.
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BolderBoy
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Re: 3-member LLC with a solo 401K?

Post by BolderBoy »

papito23 wrote:Anyone know if I can I have a solo 401k for myself within a 3-member (owner) LLC consisting of myself, spouse, and non-related partner?
A solo 401k, as in "individual 401k"? Unless the rules have changed, those are limited to the owner of the business and his/her spouse.

A regular 401k, sure you can have the 3 members.

Bet Vanguard didn't understand what you want to do.
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Re: 3-member LLC with a solo 401K?

Post by papito23 »

Thanks BoulderBoy. Please see edit above.
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Re: 3-member LLC with a solo 401K?

Post by tfb »

papito23 wrote:Anyone know if I can I have a solo 401k for myself within a 3-member (owner) LLC consisting of myself, spouse, and non-related partner?
The law allows. A plan can be more restrictive. If Fidelity's plan doesn't allow, but Vanguard's plan allows, they are both legal. The opportunity to participate must be offered to all three members. You can't exclude, not tell or refuse the partner. Elective deferral is up to each person (% of profit share or flat amount up to the $18k limit). Each person has to sign an election beforehand. Employer profit sharing contributions must be the same % for all three members. All contributions come from the LLC business account.
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Re: 3-member LLC with a solo 401K?

Post by Spirit Rider »

If this multi-member LLC is a disregarded entity, then it is by definition a partnership. Each partner in a partnership where the only employees are partners and their spouses may each have a separate Solo 401k. Each separate Solo 401k covers one partner and optionally their spouse (if they worked for the partnership.

What may confuse people is that it is not a partnership 401K which could not be a Solo 401k, but rather a small business 401k. They are individual Solo 401k plans based on Schedule K-1 (Form 1065) partnership income (considered self-employment income).
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Re: 3-member LLC with a solo 401K?

Post by papito23 »

Spirit Rider wrote:If this multi-member LLC is a disregarded entity, then it is by definition a partnership. Each partner in a partnership where the only employees are partners and their spouses may each have a separate Solo 401k. Each separate Solo 401k covers one partner and optionally their spouse (if they worked for the partnership.

What may confuse people is that it is not a partnership 401K which could not be a Solo 401k, but rather a small business 401k. They are individual Solo 401k plans based on Schedule K-1 (Form 1065) partnership income (considered self-employment income).
We have one overall plan, the "Individual 401k" and each person may set up their own account within this system. So right now, it's my wife that operates the plan and is the only one with accounts open in her name. I cannot open one, as I contribute to a regular 401(k) plan at work **(though I believe I can receive employer distributions in this one? anyone know?)
**

We used this form from Vanguard. From the first page:
"The Vanguard Individual 401(k) Plan is a retirement plan for owner-only businesses or owner-and-spouse businesses, including sole proprietors, C corporations, S corporations, partnerships, and [LLCs]. You can't establish the plan if you employ others, including children.

From this and more, it is my understanding that it will "survive" as a sole proprietorship in 2014 and into 2015 as a multi-member LLC.
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Re: 3-member LLC with a solo 401K?

Post by Hayden »

My LLC has 2 members (not spouses). Fidelity told me that we could do a solo 401k. Don't know why they told you the opposite.

My company is an S Corp, perhaps that makes a difference.
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Re: 3-member LLC with a solo 401K?

Post by papito23 »

Hayden wrote:My LLC has 2 members (not spouses). Fidelity told me that we could do a solo 401k. Don't know why they told you the opposite.

My company is an S Corp, perhaps that makes a difference.
Hayden,

It's because:
*I may not have explained my situation clearly, even thought I though I had, and/or
*there is a wide-range in helpfulness and experience of customer service reps

Fidelity rep was extremely helpful and polite. First Vanguard rep was robotic and not very warm. Second was more helpful.

As my insurance carrier says, "If there is a discrepancy between verbal explanation of terms and the written terms of the plan, the written terms of the plan will control." Ditto, telecom reps who promise prices. Which is why in so many areas, one much research, research, and research again. It's a part-time job, and not an always fruitful one.
Last edited by papito23 on Tue Jan 06, 2015 10:42 pm, edited 1 time in total.
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Re: 3-member LLC with a solo 401K?

Post by Hayden »

papito23 wrote:
Hayden wrote:My LLC has 2 members (not spouses). Fidelity told me that we could do a solo 401k. Don't know why they told you the opposite.

My company is an S Corp, perhaps that makes a difference.
Hayden,

It's because:
*I may not have explained my situation clearly, even though I though I had, and/or
*there is a wide-range in helpfulness and experience of customer service reps

Fidelity rep was extremely helpful and polite. First Vanguard rep was robotic and not very warm. Second was more helpful.

As my insurance carrier says, "If there is a discrepancy between verbal explanation of terms and the written terms of the plan, the written terms of the plan will control." Ditto, telecom reps who promise prices. Which is why in so many areas, one much research, research, and research again. It's a part-time job, and not an always fruitful one.
Agreed. There have been several times I've gotten incorrect info from Vanguard reps. One has to be careful.

So what's the answer at Fidelity? Do you think what they told me was incorrect?

Edit: Fidelity is preferred to Vanguard because the Fidelity solo 401k accepts incoming rollovers, while the Vanguard plan does not.
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Re: 3-member LLC with a solo 401K?

Post by mah001 »

I'm unaware of a statutory or regulatory definition of terms like "individual k," solo-k," et. al.
These plans' "simplicity" is driven by the fact a given business has no nonhighly compensated employees who meet the statutory parameters for plan eligibility, e.g. age 21 with one year of service. Such a plan need not account for coverage and nondiscrimination requirements applicable to qualified plans. A three member LLC has 3 HCEs, no matter the income level. Since coverage and nondiscrimination are not at issue, a plan could be designed to exclude one or two members and/or to discriminate against same. There is no legal issue with plan discrimination against an HCE.

So read the plan's adoption agreement and if necessary the rest of the plan to see who is to be in and who isn't. Fidelity and Vanguard plans are likely to be very vanilla and to have all 3 members of the LLC as eligible. That is, each elects to defer or not. As for profit sharing, each eligible partner is likely to be due the same percentage of "compensation." Papito23, it sounds like the partnership is righfully the sponsor for 2015, in view of your description of things. It does not sound like the disregarded entity/every proprietor for himself plan design is usable here. Everything seems to be formally set up under the partnership umbrella. For 2014, you and spouse should have made any elective deferral election by 12/31/14. You can still do profit sharing; chances are the plan has spouse sharing in the contribution.

Hayden, there's no problem with an s-corp having a solo aka individual k, except for the unlikely event that's the effect of how the plan has been written.
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Re: 3-member LLC with a solo 401K?

Post by papito23 »

mah001 wrote: Papito23, it sounds like the partnership is righfully the sponsor for 2015, in view of your description of things. It does not sound like the disregarded entity/every proprietor for himself plan design is usable here. Everything seems to be formally set up under the partnership umbrella. For 2014, you and spouse should have made any elective deferral election by 12/31/14. You can still do profit sharing; chances are the plan has spouse sharing in the contribution.
I am planning on closing out / transitioning the 401(k) to the LLC in a few months. As least I was informed by the Vanguard rep (confidently) that I could do so.

I may or may not know what I'm doing. We'll see.
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Re: 3-member LLC with a solo 401K?

Post by mah001 »

So you will amending and restating the same prototype plan document to show the new sponsor is XYZ LLC, as of 1/1/15. There is no need to 'close' or 'terminate' the XY Partnership plan. You should have a copy of the entire plan available to you at least online. Plans run around 100 pages in length these days. Any options you may have selected will probably be in an 'adoption agreement,' which is a part of the plan document. Read these materials to see if the 3rd partner can be excluded. Not following your own plan is the #1 cause of problems. Check the plan's eligibility provisions, which are generally found around Section III of a given plan. Read your partnership agreement to assure there's no conflict there.
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Re: 3-member LLC with a solo 401K?

Post by dissonance »

I use Fidelity so I can speak to my interpretation. I also have a LLC electing SCORP status with 2 other partners (50/25/25 stakes)

You can do this so long as you meet the adoption agreements definition of ownership:

IRS 401(a):

(3) Owner-employee
The term “owner-employee” means an employee who—
(A) owns the entire interest in an unincorporated trade or business, or
(B) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.

You must make profit sharing contributions equally across the board. I don't believe Fidelity's plan allows for age weighted or new comparability methods--only SS integrated (Taxable Wage Base Calculation) and non-integrated methods.

"The "ratio that each Eligible Participant's Compensation for the Plan Year bears on the total Compensation of all Eligible Participants for that year" covers the equal percentage of compensation."

But yes, so long as there are no common-law employees (owner-employees are permitted along with spouse).

Leisure reading:

https://www.fidelity.com/static/dcle/ir ... 01kfrp.pdf

http://www.law.cornell.edu/uscode/text/26/401
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Re: 3-member LLC with a solo 401K?

Post by papito23 »

yzhang12 wrote:I use Fidelity so I can speak to my interpretation. I also have a LLC electing SCORP status with 2 other partners (50/25/25 stakes)

You can do this so long as you meet the adoption agreements definition of ownership:

IRS 401(a):

(3) Owner-employee
The term “owner-employee” means an employee who—
(A) owns the entire interest in an unincorporated trade or business, or
(B) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.

You must make profit sharing contributions equally across the board. I don't believe Fidelity's plan allows for age weighted or new comparability methods--only SS integrated (Taxable Wage Base Calculation) and non-integrated methods.

"The "ratio that each Eligible Participant's Compensation for the Plan Year bears on the total Compensation of all Eligible Participants for that year" covers the equal percentage of compensation."

But yes, so long as there are no common-law employees (owner-employees are permitted along with spouse).

Leisure reading:

https://www.fidelity.com/static/dcle/ir ... 01kfrp.pdf

http://www.law.cornell.edu/uscode/text/26/401
What if my partner elects not to have a 401(k) when I offer it to him? Can I still take employER contributions?

Since I don't have time to go to law school, I will probably just call Vanguard reps until I get a convincing answer from 2 separate people, in addition to my own understanding having read it. ~Thanks all~
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Re: 3-member LLC with a solo 401K?

Post by Spirit Rider »

papito23 wrote:What if my partner elects not to have a 401(k) when I offer it to him? Can I still take employER contributions?

Since I don't have time to go to law school, I will probably just call Vanguard reps until I get a convincing answer from 2 separate people, in addition to my own understanding having read it. ~Thanks all~
Certainly check with Vanguard on this.

Remember, a solo 401k is still fundamentally a 401k, with some exceptions. An eligible employee (or in this case owner employees) does not elect to have a 401k, rather they elect how much if any employee salary deferral to have. I believe they have no option whether or not to receive non-elective employer 401k contributions. What you can not do is give employer profit sharing to two partners and not equally to the third. Also, since solo 401k plans require no discrimination testing, you should be able max your salary deferral regardless of what the third partner does.

Also, the third partner should certainly have some say in whether partnership profits are distributed as retirement profit sharing contributions. Now it is a partnership so depending on ownership percentages the other two could certainly overrule the third partner's wishes, but that may not be in the harmonious interest of the partnership.
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Re: 3-member LLC with a solo 401K?

Post by dissonance »

He can decline it. Just get it in writing or something. You just can't legally deny a partner the opportunity to participate.
papito23 wrote:
yzhang12 wrote:I use Fidelity so I can speak to my interpretation. I also have a LLC electing SCORP status with 2 other partners (50/25/25 stakes)

You can do this so long as you meet the adoption agreements definition of ownership:

IRS 401(a):

(3) Owner-employee
The term “owner-employee” means an employee who—
(A) owns the entire interest in an unincorporated trade or business, or
(B) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.

You must make profit sharing contributions equally across the board. I don't believe Fidelity's plan allows for age weighted or new comparability methods--only SS integrated (Taxable Wage Base Calculation) and non-integrated methods.

"The "ratio that each Eligible Participant's Compensation for the Plan Year bears on the total Compensation of all Eligible Participants for that year" covers the equal percentage of compensation."

But yes, so long as there are no common-law employees (owner-employees are permitted along with spouse).

Leisure reading:

https://www.fidelity.com/static/dcle/ir ... 01kfrp.pdf

http://www.law.cornell.edu/uscode/text/26/401
What if my partner elects not to have a 401(k) when I offer it to him? Can I still take employER contributions?

Since I don't have time to go to law school, I will probably just call Vanguard reps until I get a convincing answer from 2 separate people, in addition to my own understanding having read it. ~Thanks all~
mah001
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Re: 3-member LLC with a solo 401K?

Post by mah001 »

Papito23, read your current (2014) plan, since it's the same document you're using in 2015. A plan must be a DEFINITE document that will tell you if partner number 3 is in on profit sharing. It's unlikely either Fidelity or Vanguard plans allow for shutting out partner 3, unless he/she has not met plan's eligibility specs.

You can obtain a plan document that would permanently shut out partner number three. and you need not have his permission to do so. Given the current fact situation, with all 3 being HCEs, the plan could be written so that it doesn't cover partner 3. On the other hand, some plans allow the employee himself to opt out of a plan. The thing you might want to avoid is partner 3 changing his mind about opting out of profit sharing. The IRS likes to assert this can lead to a "deemed CODA.". This can be a messy bother, even if a 401(k) is already an actual CODA....If partner 3 received $25k of profit sharing next year after opting out this year, for example, IRS can assert that $25k is not only considered to be an elective employee deferral but an excess amount at that. ( more than the $23,000 limit).
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Re: 3-member LLC with a solo 401K?

Post by friareye »

I found this thread via search as it is something I am researching... and I wonder how this all ended up?

I currently am an owner in a 3-member LLC in a medical practice--we have 25 employees and have an IRA for retirement.
We are in the process of buying the building (1 of the 3 is already an owner, myself and the other partner would buyout the current retired docs).
The building entity is an LLC, but they never set up any retirement plan.
With all 3 of us being equal (33 and 1/3) partners, could we set up a solo 401k?
In doing so, can we then max the 401k benefits via the building LLC entity, while maxing out the IRA benefits of the practice LLC entity?
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Re: 3-member LLC with a solo 401K?

Post by Spirit Rider »

First, real estate income is almost always passive income. It is unlikely with full time employment the three of you can meet the IRS requirement of being engaged in the "business of real estate". This is the only way it would qualify as earned income eligible for the LLC to adopt an employer retirement plan.

Second, even in the unlikely event you were able to do so. The two LLCs would most likely be considered a brother-sister controlled group. For employer retirement plan purposes, the two LLCs would be considered a single employer. You would be required by the tax code and IRS regulations to provide the same employer retirement plan benefits to both LLCs.

What do you mean by you have an "IRA for retirement" for the current LLC? Is it a true employer retirement plan (SEP IRA or SIMPLE IRA) or a payroll deduction traditional/Roth IRA?
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Re: 3-member LLC with a solo 401K?

Post by friareye »

Thank you for the reply. We are currently in a old grandfather SARSEP IRA ($19,000 max contribution for 2019), but we are dancing on the qualified employees number (25). We just had an employee move away and resign, so we can stay in the SARSEP IRA for at least 1 more year, but needing to start a SIMPLE IRA or 401k is likely on the horizon.

In a perfect world, due to the lack of expense of having a SIMPLE IRA, we would have the SIMPLE IRA for the medical practice for our employees, and was hoping to do a solo 401k for building LLC (all owners, no employees). But it sounds like that perfect world might not exist.
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