One of my new plans is an LLC with a 50% owner who is not collecting a salary. Income from the LLC is $130,000 for this owner. He has made a deferral contribution of $7,692 to the safe harbor plan.

My question is this, is this allowable? Is the income from the LLC a wage? Can they receive a safe harbor contribution?

The inquiry is coming from their accountant.

I got the same question from one of our brokers today. Seems an accountant was telling their client they could contribute to a 401(k) because they did not have W-2 income.

First, said accountants should have their tickets lifted. They are displaying GROSS incompetence.

Second, Read The Free Document - see the definition of 'Earned Income'? This definition is in every document. It has been since ERISA. QED

Strong message to follow.

Rcline, you are missing a "not" in your post.

It is possible the LLC is taxed as a corporation and in such case the accountant is correct. It's highly unlikely though.

Just to be clear - I do not handle any other LLC - the situation I described is incorrect and the owners CANNOT make a contribution.

Am I making the correct assumption?

If the LLC is taxed as a partnership, their net earned income is considered compensation for plan purposes and the CAN make 401(k) deferrals and receive employer contributions.

If the LLC is taxed as a corporation (rare), they would have to take W-2 wages to make deferrals or receive contributions.

Thank you.

Of course I gave you the simplistic answer. If you are determining final figures, you really need an experienced person to determine the earned income to use for plan purposes.