Can an LLC/SCorp make different employer contributions to 401k for each owner?

If we have more than one owners in an LLC¹ with no other employees I am unsure or confused about how much each owner can contribute. I was unable to find a definitive answer after searching for a few hours.

Can each owner contribute different amounts as the employer contribution to the 401K? Example² :

Owner 1 contributes $1000 (employee) and $0 (employer)
Owner 2 contributes $17500 (employee) and $10000 (employer)
Owner 3 contributes $17500 (employee) and $30000 (employer)

I ask as we are looking into setting up an Owner-Only 401(k) for our business, but one of our owners doesn't want to contribute any money.

¹ assume each owner gets $150K in wage compensation to cover 25% contribution limits

² the LLC is treated as an S-Corp for tax purposes, but I believe that is irrelevant

USA 401k

asked Oct 28 '13 at 23:32

Steve T.
13 points

Good question, the Owners only 401K explains that it has upper limits, but doesn't seem to be specific on if every owner has to contribute the same – Rhys W 11 years ago
When you say *Owner-Only* - does it mean you have other employees which you want to exclude? That would not be allowed, to the best of my understanding, under 401k rules. – Littleadv 11 years ago
@littleadv as long as the employees are not elligible under your 401k contract for the 401k you can still have employees and have an owner only 401k. I.e if contractually you say you must be over 18 and have worked for the company for 10 years to get a 401k then provided none of your employees have been there for 10 years you can still get the owner only 401k, BUT your contractual rules apply to you too, so if you havent been there 10 years you have just excluded yourself too. But the owner only 401k is something different to a 'normal' 401k to give choice to companies that are just 'owners' – Rhys W 11 years ago
http://www.raymondjames.com/personal_investing/solutions_small_business_401k_owners_only.htm – Rhys W 11 years ago
@RhysW there's no such thing as "worked for 10 years". There's very little you can do to exclude employees, and that's for a reason. – Littleadv 11 years ago
@littleadv i might have phrased it wrong, but the link covers all the points i was trying to make – Rhys W 11 years ago
@RhysW the link you provided talks about Solo 401k. There's no such thing "Owner's only" 401k. It says this, if you look closely: **"*While this type of plan is specifically for businesses with no employees*"** – Littleadv 11 years ago
@littleadv we have no other employees. Just three owners of an LLC taxed as an S-Corp. – Steve T. 11 years ago
@SteveT well, then it's just the owners are the only employees, but all the other rules still apply. Also, make sure you considered what happens when you hire new people. – Littleadv 11 years ago

1 Answer

I'd suggest you talking to an EA/CPA or a tax attorney specializing on retirement plan issues for a proper consultation.

You cannot have different employer contribution rules for different employees, that would disqualify your 401k plan entirely. One of the conditions for the 401(k) classification is non-discrimination (401(k)3). To avoid the claim of discrimination, you must have the allowed employee contribution either the same, or in the same proportion to the compensation.

See 26 USC § 401(a).5.B in particular:

(B) Contributions and benefits may bear uniform relationship to
compensation.— A plan shall not be considered discriminatory within
the meaning of paragraph (4) merely because the contributions or
benefits of, or on behalf of, the employees under the plan bear a
uniform relationship to the compensation (within the meaning of
section 414(s)) of such employees.

So for the employees that contribute the same to the plan - the employer's match should be the same. You cannot have employee X contributing $17500 but receiving $10000 match while employee Y contributes the same $17500 and receives $30000 match. That would disqualify your entire plan.

There's also an issue of favouring high earners that you need to keep in mind if you have other employees (sec 401(k)5 and 401(k)3.A.2).

However, if one of the owners doesn't want to contribute money, you're allowed not to match as well, since it is within the scope of the elective deferral (see sec. 401(k)).

You need to remember, that for owners you can only contribute to the plan from owners' compensation (see sec. 401(d)).

answered Oct 29 '13 at 04:06

Littleadv
5,090 points