Employee Retirement Plans

By Bethany Ramos

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. Many business owners may think of the ever-popular 401K retirement plan off-the-bat for their LLC, although there are several other sound options available.

LLC 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.

Retirement plan options for an LLC include:

1. 401K
2. SEP IRA
3. Simple IRA

A business owner can better whittle down their choices by asking themselves the following questions:

• Should my employees be allowed to contribute to their retirement plans?
• How much can I afford to match toward my employees’ contributions, if any?
• What is the maximum amount that my employees will want to contribute per year?

How cost impacts an LLC retirement plan

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 401K plan is more complex and, depending on the investment options and special features offered, can be more costly.

In a traditional 401K retirement plan, employees contribute, while employer contributions remain optional. In an SEP IRA, an employer contributes; in a simple IRA, both an employer and employees contribute to the account.

Maximum employee contributions must also be considered, especially if an employer is matching contributions. 401K maximum contributions for employees are set at less than $17,500 for 2013 or 100% of employee compensation; SEP IRA maximum contributions aren't limited since contributions normally come from employers only; simple IRA employee contributions are limited at less than $12,000 in 2013 or 100% of employee compensation.

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 401K may be appropriate.

According to Scott M. Feit of The CPA Journal, the safe harbor 401K 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 $51,000 for 2013. It's important to do a detailed 401K analysis before deciding on a safe harbor 401K or traditional 401K. If the nondiscrimination tests for a traditional 401K can be met, it may not be necessary to make the employer contribution commitment required for a safe harbor 401K.

Another option to maximize partners' benefits is a non-qualified 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 non-qualified plans include:

• Excess benefit plans
• Supplemental executive retirement plans (top hat plans)
• Deferred bonuses

Tax considerations for LLC retirement funds

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. An LLC can confer with their third-party or in-house accountant to determine how to best deduct contributions to employee retirement plans. Tax deduction amounts will depend on the type of retirement plan implemented and if employer contributions are immediately vested or vested according to a schedule.