401(k) for an LLC: Setup, 2026 Limits, and Compliance

A 401(k) for an LLC can be set up as a solo plan if you’re the only worker, or as a full employer-sponsored plan once you have staff, and how your LLC is taxed determines whether your contributions are based on self-employment income or W-2 wages. For 2026, you can defer up to $24,500 as an employee, with combined employee and employer contributions capped at $72,000 before catch-ups.¹

Your Tax Classification Decides the Contribution Math

Before you pick a provider or sign a plan document, know how the IRS treats your LLC. That classification controls whether your compensation for plan purposes is self-employment income or a salary, which in turn changes how much you can put in.

A single-member LLC defaults to disregarded entity status, so the IRS treats you as a sole proprietor reporting on Schedule C.² A multi-member LLC defaults to partnership status and files Form 1065.³ Under either default, the owners are self-employed and plan compensation is net self-employment income.

Either type can instead elect corporate taxation by filing Form 8832 or, for S-corp treatment, Form 2553. After that election you’re a W-2 employee of your own LLC, and your plan contributions are calculated from wages rather than business profit. All four classifications can sponsor a 401(k); the classification doesn’t gate eligibility, it just changes the arithmetic.

Setting Up a Solo 401(k) When It’s Just You

If the only people working in the LLC are you and possibly your spouse, a solo 401(k), sometimes called a one-participant plan, is the simplest route. You wear both hats, employer and employee, and can contribute from each side.

Confirm your LLC has an Employer Identification Number. The plan operates as a trust and needs the EIN for any annual reporting.⁴

Then choose a provider. Brokerages and specialized retirement companies offer pre-approved solo 401(k) documents. Compare fees, investment lineup, and whether the provider supports Roth deferrals and participant loans. The IRS permits both, but not every provider offers them.

Adopt the plan document before your deadline. A plan can’t take effect earlier than the first day of the tax year in which you adopt it, and the 401(k) deferral feature specifically can’t reach back before the adoption date. You cannot retroactively defer salary you already received. To make employee deferrals for 2026, sign the plan document before December 31, 2026. Employer profit-sharing contributions have a longer runway and can be funded up to your tax filing deadline including extensions.⁵

A solo 401(k) works only while no employees are eligible for the plan. Federal law lets a plan require one year of service, defined as a 12-month period with at least 1,000 hours worked, and lets the plan impose a minimum age of 21.⁶ Those are the strictest eligibility conditions you can set. Hire someone who clears both, and you’ll need to transition to a plan that covers employees.

Setting Up a 401(k) When Your LLC Has Employees

Once your LLC has workers beyond you and your spouse, the plan must cover eligible employees, and you’re operating under ERISA, the federal Employee Retirement Income Security Act.

Most small employers engage a third-party administrator. A TPA handles plan design, drafts the formal plan document, runs compliance testing, and prepares government filings. One-time setup fees typically run $500 to $3,000, plus ongoing annual costs. Pricing varies widely, so get quotes.

The plan document is the legal backbone. It sets eligibility rules, vesting schedules for employer contributions, the types of contributions allowed (pre-tax deferrals, Roth deferrals, employer match, profit-sharing), and how the plan operates. Your TPA drafts it based on the choices you make.

Payroll has to keep up. Employee deferrals must be withheld from paychecks and deposited into the plan trust promptly. The Department of Labor requires deferrals to be segregated from the business’s general assets on the earliest date reasonably possible, and no later than the 15th business day of the following month.⁵ Before the plan’s effective date, each eligible employee must receive a Summary Plan Description explaining the terms.

Auto-Enrollment Rules for New Plans

If you’re creating a new 401(k) for plan years beginning after December 31, 2024, IRC Section 414A now requires most new plans to automatically enroll eligible employees at a default rate between 3% and 10% of compensation. That rate must step up by one percentage point per year until it reaches at least 10%, capped at 15%. Employees can opt out or set their own rate.⁷

Three exemptions matter for small LLCs:

Employers who normally have 10 or fewer employees are exempt.
Businesses in operation fewer than three years are exempt.
SIMPLE 401(k) plans are excluded from the mandate.

A brand-new LLC starting its first plan may qualify under both the small-employer and new-business exemptions, but the exemption disappears once the business outgrows the thresholds. Solo 401(k) plans are unaffected because there are no employees to enroll.⁷

Traditional or Safe Harbor

An LLC with employees has to pick a design, and the choice comes down to annual testing versus guaranteed employer contributions.

A traditional 401(k) is subject to ADP and ACP nondiscrimination testing each year, comparing how much highly compensated employees defer and receive in match against everyone else.⁸ Fail the test and you either refund excess deferrals to highly compensated employees or make additional contributions for the rest of the workforce. That adds cost and unpredictability, and it caps what owners can defer when rank-and-file participation is low.

A safe harbor 401(k) skips ADP and ACP testing in exchange for a mandatory employer contribution. You commit in advance to one of these formulas:

Basic match: 100% of deferrals up to 3% of pay, plus 50% of deferrals between 3% and 5%.
Enhanced match: 100% of deferrals up to 4% of pay.
Nonelective: 3% of pay to all eligible employees, whether or not they defer.

Safe harbor employer contributions must be immediately 100% vested. You must also give employees an annual notice at least 30 days and no more than 90 days before each plan year begins, and no later than the eligibility date for someone entering the plan mid-year.⁹ For many small LLCs, the guaranteed employer cost is worth the testing relief and the ability of owners to max their deferrals regardless of employee participation.

2026 Contribution Limits

All 401(k) plans share the same IRS dollar limits. The employer piece is where classification changes the math.

Employee Deferrals

You can defer up to $24,500 of compensation in 2026. If you’re 50 or older, an $8,000 catch-up brings the ceiling to $32,500.¹ If you turn 60, 61, 62, or 63 during 2026, the catch-up rises to $11,250 instead of $8,000, putting the deferral ceiling at $35,750.¹⁰ The $24,500 covers pre-tax and Roth deferrals combined; if the plan allows Roth, you can split the total however you want, but you can’t exceed it.

Employer Profit-Sharing

If your LLC is taxed as an S-corp or C-corp, the employer contribution is 25% of your W-2 wages. On a $150,000 salary, that’s up to $37,500 from the employer side.¹¹

If your LLC is taxed as a sole proprietorship or partnership, the calculation runs off net self-employment income (business profit minus the deductible half of self-employment tax). Because the contribution itself reduces the income it’s calculated against, the effective ceiling works out to roughly 20% of adjusted net earnings, not 25%. IRS Publication 560 provides worksheets for the circular calculation.¹²

Combined Ceiling

Employee deferrals plus employer contributions can’t exceed $72,000 for 2026 before catch-ups.¹ Add the standard age-50 catch-up and you reach $80,000. With the enhanced catch-up available at ages 60 through 63, the ceiling is $83,250.

Tax Credits That Offset Startup Costs

Small LLCs get federal tax breaks for launching a retirement plan, and two credits work together.

The startup costs credit is available to employers with 100 or fewer employees who earned at least $5,000 in the prior year, provided at least one participant is a non-highly compensated employee. For LLCs with 50 or fewer employees, the credit covers 100% of eligible startup costs, including setup, TPA fees, and employee education. For 51 to 100 employees, it covers 50%. Either way, the maximum is $5,000 a year for three years.¹³

SECURE 2.0 added a separate credit for employer contributions to employee accounts. LLCs with 50 or fewer employees can claim up to $1,000 per employee earning $100,000 or less. The credit is 100% for the plan’s first two years, 75% in year three, 50% in year four, and 25% in year five. Employers with 51 to 100 employees get a reduced version.

Owner-only plans with no non-highly compensated employees don’t qualify. Both credits exist to encourage covering rank-and-file workers.

Annual Compliance

Once the plan is running, the work is keeping it compliant. That’s where penalties usually come from.

Form 5500

The Form 5500 series is the annual return filed with the DOL and IRS.¹⁴¹⁵¹⁶

Plans with fewer than 100 participants can file the shorter Form 5500-SF if their assets have readily determinable fair value and the plan holds no employer securities.¹⁷ At 100 or more participants, the full Form 5500 applies and an independent audit by a qualified public accountant is required.

Missing a filing is expensive. The IRS can assess $250 per day up to $150,000 per late return, and the DOL imposes its own separate daily penalty on top of that.¹⁸

Nondiscrimination Testing and Fidelity Bond

Traditional plans with non-owner employees run ADP and ACP tests annually. Failure means corrective refunds to highly compensated employees or additional contributions for others.⁸ Safe harbor plans that meet their contribution and notice rules are exempt.

Plans with more than one participant also need an ERISA fidelity bond covering at least 10% of plan assets, with a $1,000 minimum and $500,000 maximum, protecting participants against fraud or dishonesty by anyone handling plan funds.¹⁹

Fiduciary Duties

Sponsoring a 401(k) makes you a fiduciary under ERISA. If you control plan assets, manage investments, or make administrative decisions, you owe participants specific duties: run the plan solely in their interests, invest prudently with appropriate diversification, follow the plan document, and avoid conflicts of interest. Breach can bring personal liability for plan losses and removal by a court.²⁰ For a solo 401(k), these duties still technically apply, though you’re the only beneficiary of your own decisions.

1
Internal Revenue Service. IRS Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
2
Internal Revenue Service. Single Member Limited Liability Companies
3
Internal Revenue Service. LLC Filing as a Corporation or Partnership
4
Internal Revenue Service. Understanding Your EIN
5
Internal Revenue Service. 401(k) Resource Guide – Plan Sponsors – Starting Up Your Plan
6
Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards
7
Office of the Law Revision Counsel. 26 USC 414A – Requirements Related to Automatic Enrollment
8
Internal Revenue Service. 401(k) Plan Fix-It Guide – The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests
9
Internal Revenue Service. Notice Requirement for a Safe Harbor 401(k) or 401(m) Plan
10
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
11
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12
Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
13
Internal Revenue Service. Retirement Plans Startup Costs Tax Credit
14
Internal Revenue Service. Form 5500 Corner
15
Internal Revenue Service. Assets in One-Participant Plans More Than $250,000
16
Internal Revenue Service. Instructions for Form 5500-EZ
17
Department of Labor. Instructions for Form 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan
18
Internal Revenue Service. Penalty Relief Program for Form 5500-EZ Late Filers
19
Internal Revenue Service. Defined Contribution Plans With Less Than $250,000 in Assets
20
U.S. Department of Labor. Fiduciary Responsibilities