Finding the best retirement plan for an LLC

Choosing a plan to maximize contributions

Written by Kevin Hagen

The best retirement plan for an LLC depends on what’s most important for the partners and the company's employees. Generally, an LLC can set up any type of retirement plan. Retirement plans differ in their flexibility and complexity, and therefore in their cost. And, to take advantage of tax benefits, a retirement plan needs to be qualified – it must meet IRS and ERISA rules, one of them being nondiscrimination in favor of owners or highly-compensated employees.

Another factor to consider is the maximum limit on contributions under different types of plans.

Cost

If cost is the primary criteria, an LLC could opt for a defined contribution plan such as a SEP or simple IRA. These plans are easy to set up and operate, and have the lowest administrative cost. A 401(k) plan is more complex and, depending on the investment options and special features offered, can be more costly.

Maximizing partner’s contributions with the best retirement plan for an LLC

If the LLC wants to maximize the contributions that its partners or highly compensated employees can make to their retirement accounts, a safe harbor 401(k) may be appropriate. According to Scott M. Feit of The CPA Journal, the safe harbor 401(k) must meet four conditions to meet the anti-discrimination test:

1. The employer must either match employee contributions up to 4% of compensation, or make a non-elective contribution of 3% of compensation for all eligible employees
2. Contributions must be 100% vested immediately
3. An annual notice must be given to all participants
4. There must be restrictions on withdrawals

By meeting these conditions, total contributions to an owner's account (salary deferral plus employer match) can be up to the maximum of $49,000 for 2009. It’s important to do a detailed 401(k) analysis before deciding on a safe harbor 401(k) or traditional 401(k). If the nondiscrimination tests for a traditional 401(k) can be met, it may not be necessary to make the employer contribution commitment required for a safe harbor 401(k).

Another option to maximize partners' benefits is a nonqualified plan. These plans can be discriminatory in their application and can be used to provide deferred compensation to key personnel. These plans do not receive favorable tax treatment, however – deferred payments or contributions to a fund set up by the LLC would not be tax-deductible until they are actually paid to the beneficiary.

Examples of nonqualified plans include excess benefit plans, supplemental executive retirement plans (top hat plans) and deferred bonuses.

Tax considerations

For income tax purposes, an LLC is treated as either a corporation or a partnership. This may be a factor in deciding on the best retirement account and also in determining how to file. If the LLC files as a corporation, the tax deduction for contributions and expenses goes to the corporation. If the LLC files as a partnership – a pass-through entity – the deductions go to the partners. The partners' individual tax circumstances could dictate which tax treatment, and which retirement plan, would be best.

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