Small Business Retirement Plans in Lexington, KY. Offering a retirement plan to your Lexington, KY employees is a great way to retain talent, boost performance, and get those much-desired tax breaks. While the benefits may be clear, the complexities of establishing and maintaining small business retirement plans are not. What type of plan is best for your business? What federal regulations do I have to follow? What do I do when I want to change plans, or if I'm closing my business? Correct Capital's team of Lexington, KY financial planners is dedicated to helping business owners and their employees reap the rewards of having a sound retirement plans and understanding the complexity of federal regulations. For anything from initial setup and employee education to fine-tuning an existing plan, speak to a financial advisor at Correct Capital today at 314-930-401K or contact us through our website.
What Types of Retirement Plans Are Available to Small Businesses in Lexington, KY?
The federal government and various financial custodians offer a wide array of plans and retirement accounts for small business owners and their employees in anticipation of retirement. The most prevalent ones are:
SEP-IRA
This form of individual retirement account is available to self-employed businesses, freelancers, and businesses with very few employees. It follows the similar rules as a traditional IRA, where the money put into the account grows tax-free. Employers can deduct contributions they make on behalf of their employees. Only employers make deposits, which are adjustable and can vary annually. Additionally, the contributions are deductible from taxes.
Benefits of a SEP-IRA
- High Contribution Limits: Employers have the ability to contribute up to 25% of each employee’s compensation, with the maximum set at $69,000 for 2024.
- Flexibility: Employers are not required to contribute every year, making it suitable for businesses with changing profits.
- Simple Administration: With this plan, there is minimal paperwork and no annual filing requirements with the IRS beyond regular tax filings.
Setting Up a SEP-IRA
- Select a Financial Institution: To hold SEP IRA assets, select a provider such as a bank, brokerage firm, or credit union. Another option is a virtual financial institution.
- Execute a Written Agreement: Communicate with eligible employees by establishing a contractual arrangement for the SEP IRA plan.
- Make Contributions: Contributions can be made by calculating a fixed percentage of each employee’s compensation. Alternatively, make payments based on a variable percentage determined by business earnings.
- Maintain Records: Keep comprehensive records of all contributions made to employee accounts, including dates of contribution and sums. Additionally, ensure records are neatly arranged and easily accessible for review purposes.
SIMPLE IRA
"SIMPLE" stands for "Savings Investment Match Plan for Employees," and these IRAs are for businesses with as many as 100 employees. Employees can make contributions to their own accounts through salary deferrals, and employers can also make contributions. This plan is low-cost as it's mainly funded by employees, and their contributions can be eligible for tax deduction.
Benefits of a SIMPLE IRA
- Ease of Setup and Administration: SIMPLE IRAs are easy to establish and maintain, with no need for yearly filings for employers. This makes them perfect for small businesses with restricted administrative resources.
- Employer Contributions: Employers are required to make contributions, by either matching employee contributions up to 3% of their salary or making a non-elective contribution of 2% of each eligible employee’s salary.
- Employee Contributions: Employees can contribute up to $16,000 in 2024, with an additional catch-up contribution of $3,500 for those aged 50 and older.
- Immediate Vesting: All contributions to the SIMPLE IRA are immediately 100% vested, meaning employees have full ownership of all funds in their accounts as soon as contributions are made.
Setting Up a SIMPLE IRA
- Select a Financial Institution: Choose a banking establishment, mutual fund, or brokerage firm to hold the SIMPLE IRA assets.
- Execute a Written Agreement: Use IRS Form 5304-SIMPLE or 5305-SIMPLE to create a written agreement outlining the terms of the plan.
- Employee Notification: Notify eligible employees about the plan, including details on how to participate and the benefits provided.
- Employee Enrollment: Assist employees in establishing their accounts and making their contributions.
- Employer Contributions: Decide whether to match up to employee contributions or make non-elective contributions, and ensure these are made timely.
Personal Defined Benefit Plan
This plan is solely for single-owner businesses, or those with up to 5 employees. With this plan, you target a desired level of retirement income, and contribution limits are adjusted each year based on that, with an annual maximum limit. While this plan is highly customizable and allows for significant contributions, there may be beginning expenditures and recurring costs associated with it.
Benefits of a Personal Defined Benefit Plan
- High Contribution Limits: Allows for significantly higher contributions compared to other retirement plans, potentially reaching $$275k annually (in 2024) depending on age, income, and the desired retirement benefit.
- Predictable Retirement Benefits: The plan promises a specific benefit at retirement, providing more predictability for retirement planning compared to defined contribution plans like 401(k)s.
- Tax Advantages: Contributions are tax-deductible, reducing current taxable income. The investments grow tax-deferred until distribution.
Setting Up a Personal Defined Benefit Plan
- Consult with a Plan Provider: Work with an investment firm or retirement plan provider that specializes in defined benefit plans to establish the plan.
- Create a Plan Document: Draft a plan document that details the terms of the plan, including benefit formulas and contribution requirements.
- Actuarial Calculations: Have a financial analyst calculate the necessary contributions to meet the promised benefits, ensuring compliance with IRS requirements.
- Annual Administration: To manage the plan’s investments, ensure that required contributions are made annually and conduct annual actuarial reviews to adjust for any changes in funding requirements.
- Compliance and Reporting: To report on the plan’s status and compliance, file IRS Form 5500 annually.
- Permanence: To ensure compliance, a defined benefit plan must be in place for at least five years. Plans that are quickly terminated can be red flags and subject to regulatory scrutiny.
401(k) Plans
401(k)s are available to private companies of any size, and are highly flexible. Employees may defer their salary as contributions, and employers can make contributions every year. Most 401(k) plans come with significant tax planning advantages for both businesses and employees. They can include:
- Traditional 401(k)s
- Safe Harbor 401(k)s
- Automatic enrollment 401(k)s
Benefits of a 401(k) Plan
- Tax Advantages: Contributions can be made before taxes, which reduces the employee’s taxable income. Alternatively, post-tax (Roth) contributions can be made. Investments grow tax-free until withdrawn.
- Employer Matching: Many employers offer contribution matching, which can significantly boost an employee's retirement savings.
- Higher Contribution Limits: For this year, employees can contribute up to $$23k, with an additional $7,500 catch-up contribution for those aged 50 and older.
- Loan Options: Participants can often take loans against their 401(k) balance, providing flexibility in case of urgent financial needs.
Setting Up a 401(k) Plan
- Choose a Plan Provider: Select a provider that offers various investment opportunities, administrative support, and staff training.
- Create a Plan Document: Detail the terms of the plan, including eligibility, contributions, and how funds are vested.
- Set Up a Trust: Ensure plan assets are held in trust to preserve them for participants.
- Develop a Recordkeeping System: Develop a meticulous record system of contributions, earnings, and distributions.
- Distribute Plan Information: Employers sponsoring a 401(k) must distribute plan information and updates in a timely manner.
Individual 401(k)
This plan, also known as a Individual 401(k), is designed to provide the same benefits as a traditional 401(k), but specifically for individuals who are self-employed, or whose only employee is their spouse. Each year, you can contribute up to the annual 401(k) limit, and the employer may make a additional contribution up to one-fourth of compensation or, if self-employed, an amount considering your earned income and deducting half of self-employment tax paid and contributions made by you during the year. Additionally, you have the option to open a Roth 401(k) account, or roll over pre-tax assets.
Setting Up an Individual 401(k)
- Choose a Plan Provider: Choose a financial institution or brokerage that offers Individual 401(k) plans. Seek out providers with a range of investment options and minimal fees.
- Create a Plan Document: Establish the terms of your plan, including contribution limits, investment options, and loan provisions.
- Open an Account: Establish your Individual 401(k) account with the chosen provider. This typically involves submitting an application and providing necessary documentation.
- Make Contributions: Set your contribution amounts for the year and make regular contributions. Ensure you stay within the IRS limits for total contributions.
- Compliance and Reporting: If your plan assets exceed $250,000, you must file IRS Form 5500 annually. Keep accurate records of all contributions and transactions.
Profit Sharing Plans
A Profit Sharing Plan is a type of retirement plan where employers can make optional contributions to employee retirement accounts, determined by the company's profits. These plans are intended to share the company’s success with its employees and motivate them to contribute to the company’s profitability.
Benefits of a Profit Sharing Plan
- Flexibility in Contributions: Employers can choose each year how much to contribute based on the company's profitability. This makes it an flexible option for businesses with fluctuating earnings.
- Tax Advantages: Contributions are tax-deductible for the business, reducing taxable income. Additionally, the funds grow tax-deferred, which can benefit employees' long-term savings.
- Employee Motivation and Retention: Linking contributions to company profits can increase employee morale and loyalty, as employees directly benefit from the company’s success.
- High Contribution Limits: Employers can contribute up to the lesser of 25% of an employee’s compensation or $66,000 for the current year, making it a generous option for employee benefits.
Setting Up a Profit Sharing Plan
- Choose a Plan Provider: Pick a investment firm or retirement plan provider to administer the plan.
- Create a Plan Document: Draft a plan document outlining the profit-sharing formula, eligibility requirements, and vesting schedule.
- Communicate with Employees: Educate employees about the plan, how it works, and the benefits they can expect.
- Determine Contributions: Annually decide the amount to contribute based on company profits and the predetermined formula.
- File Necessary Forms: File IRS Form 5500 every year to report the plan’s status and compliance.
Employee Stock Ownership Plan (ESOPs)
An Employee Stock Ownership Plan (ESOP) is a retirement plan that invests primarily in the employer's stock. ESOPs give employees ownership interest in the company, aligning their interests with the business's success, and potentially helping set up the business's next generation of leadership.
An Employee Stock Ownership Plan (ESOP) is a retirement plan that invests primarily in the employer's stock. ESOPs grant employees ownership interest in the company, aligning their interests with the business's success, and potentially preparing the business's next generation of leadership.
Benefits of an ESOP
- Employee Ownership: ESOPs provide employees with an equity share in the company, which can boost drive and commitment.
- Tax Benefits for the Company: Contributions to the ESOP are eligible for tax deduction, and the company can also receive tax benefits pertaining to the sale of stock to the ESOP.
- Retirement Savings for Employees: Employees profit from the growth in the value of the company’s stock, granting potentially substantial retirement savings.
- Succession Planning: ESOPs can be an effective strategy for business succession, enabling owners to sell their shares to high-performing employees, who can slowly take the lead as previous owners transition into retirement.
Setting Up an ESOP
- Feasibility Study: Carry out a feasibility study to determine if an ESOP is a feasible option for your company.
- Hire ESOP Advisors: Retain financial, legal, and ESOP advisors to help with the setup process.
- Create a Plan Document: Write a plan document that outlines the terms of the ESOP, including how shares will be apportioned and vested.
- Establish a Trust: Establish an ESOP trust to hold the company stock on behalf of employees.
- Communicate with Employees: Brief employees about the ESOP, how it works, and the advantages they can expect.
- Compliance and Reporting: Submit necessary documents with the IRS and the Department of Labor, including Form 5500, to ensure compliance.
Multiple Employer Plans (MEPs)
A Multiple Employer Plan (MEP) is a type of retirement plan that allows multiple, unrelated employers to take part in a single retirement plan and achieve economies of scale. MEPs are designed to provide small businesses with a economical and administratively efficient way to offer retirement benefits to their employees.
Benefits of an MEP
- Cost Savings: By pooling resources with other employers, businesses can reduce administrative costs and fees associated with maintaining a retirement plan. This cost-sharing makes MEPs an advantageous option for small businesses looking to save on expenses.
- Administrative Efficiency: MEPs ease the management of retirement plans by combining administrative tasks. This includes plan setup, compliance, reporting, and participant communication, which are handled by the MEP sponsor or administrator.
- Improved Access to Benefits: Small companies lacking resources to provide a retirement plan on their own can provide competitive retirement benefits through an MEP., helping to attract and retain talented employees and create the business access to a competitive advantage they wouldn't be able to have on their own.
- Fiduciary Relief: The MEP sponsor typically assumes most of the fiduciary responsibilities, reducing the liability and administrative burden on individual employers.
Setting Up an MEP
- Join an Existing MEP or Form a New One: Small businesses can either become part of an existing MEP or collaborate with other businesses to form a new one. This step involves selecting a MEP sponsor who will manage the plan.
- Select a Plan Provider: The MEP sponsor will work with a bank or retirement plan provider to administer the plan.
- Adopt the Plan: Each participating employer must formally adopt the MEP by signing an adoption agreement and providing necessary employee information.
- Employee Enrollment: Inform the plan details to employees and facilitate their enrollment in the MEP.
- Ongoing Administration: The MEP sponsor handles the majority of the administrative tasks, including compliance with IRS and Department of Labor requirements, submitting required documents, and managing plan assets.
There are pros and cons to each plan, and which may be "best" for you will depend on your business and your and your employees' needs. Different plans and accounts have different tax advantages, fees, required minimum distributions, contribution limits, and more. A trusted financial advisor like those at Correct Capital will be able to help you determine which plan works best for you and your team.
Benefits of Setting Up a Small Business Retirement Plan in Lexington, KY
The specific, financial-based benefits for your Lexington, KY small business retirement plan will largely be based on the specific plan you choose. However, a small business retirement plan, whichever one you choose, benefit employers and employees in the same way. Over half of employees say that a retirement plan is a "very important" factor in how good they feel at their present employment, while employers reap the benefits both during tax season and in office productivity. Below are some of the main benefits for both businesses and employees of setting up a small business retirement plan:
Employee Benefits
- Improved confidence in their retirement planning
- Tax deductions
- Contributions are simple with salary deferral
- They do not pay taxes on contributions or investments gains until they take them out
- Over the years small contributions grow into considerable savings
- Ability to perform a 401(k) rollover if it's beneficial down the road
Business Benefits
- Attract, recruit, and retain your best employees
- Promote great work ethic
- Employer contributions are tax-deductible
- Flexible plan options to fit your plan to your needs
- Tax credits that can help reduce startup costs
Do I Need a Financial Advisor in Lexington, KY to Help With My Small Business Retirement Plan?
Setting up small business retirement plans is complicated. While the federal government does not currently obligate any employer to offer a retirement plan to employees, some states require employers with a certain number of employees to offer access to a retirement plan. Lexington, KY retirement consultants that have spent years helping business owners open retirement plans are usually needed to not only make sure the plan is right for you, but that you abide by frequently chancing tax and business laws.
As your Lexington, KY retirement plan consultants for your small business, our financial planners will:
- Help you decide the best plan for you, and the right custodian to hold plan assets
- Assist you in setting up your plan, including adopting a written plan, establishing a trust for plan assets, helping employees understand the plan's terms, and developing a record keeping system
- Help you operate your plan by adapting as we need to to applicable laws, managing the plan's assets, and distributing benefits
- Help educate your employees on your plan, its benefits, and how they can use it as a part of their continued financial journey
Correct Capital's Lexington, KY advisors hold ourselves to the fiduciary standard, meaning we are obligated, by law and by regulatory oversight to only offer advice based on what we believe is in your best interest. The only thing we sell is trust. Request a meeting with a member of our advisor team today.
Common Challenges and Solutions in Small Business Retirement Plans
Challenge 1: High Setup and Administrative Costs
Many small businesses are reluctant to set up retirement plans due to the perceived high costs.
Solution:
- SIMPLE IRA and SEP IRA: These plans have decreased setup and administrative costs compared to traditional 401(k) plans.
- Tax Credits: The SECURE Act 2.0 offers tax credits for small businesses to offset the costs of setting up retirement plans. Businesses can receive a credit of up to $5,000 annually for three years to cover startup costs, with an additional credit for automatic enrollment plans.
Challenge 2: Administrative Complexity
The complexity of maintaining a retirement plan can be daunting for small business owners.
Solution:
- Outsource Administration: Many plan providers offer administrative services that can handle the majority of the paperwork, compliance, and record-keeping tasks. Providers offer comprehensive administrative support, including integration with payroll and fiduciary responsibilities.
- Multiple Employer Plans (MEPs): Joining an MEP can significantly reduce the administrative burden as the MEP sponsor handles most of the administrative duties, including compliance and reporting.
Challenge 3: Employee Participation and Engagement
Low employee participation can limit the effectiveness of a retirement plan.
Solution:
- Automatic Enrollment: Implementing automatic enrollment can significantly increase participation rates. Employees are automatically enrolled at a default contribution rate but can opt out if they choose. This approach has been shown to raise participation and savings rates.
- Employee Education: Providing regular education and communication about the benefits of the retirement plan can help increase employee engagement. Provide workshops, seminars, and one-on-one meetings to ensure employees understand how the plan works and the importance of saving for retirement. Correct Capital offers employee education, including one-on-one meetings and quarterly webinars, if you choose us as your retirement plan advisors.
Problem 4: Adhering to Regulations
Navigating the complex regulatory landscape can be challenging, especially for business owners who need to keep their attention on their core business.
Solution:
- Professional Guidance: Hiring a financial advisor or consultant who specializes in retirement plans can help ensure compliance with ERISA, IRS, and Department of Labor regulations. Our team can assist with plan setup, annual filings, and ongoing management.
- Use of Technology: Many retirement plan providers offer online platforms that help manage compliance by automating reporting, tracking contributions, and ensuring that all regulatory requirements are met.
Challenge 5: Flexibility and Adaptability
Business owners need plans that can adapt to changing business conditions.
Solution:
- Flexible Plans: Opt for retirement plans that offer flexibility in contributions. SEP IRAs, for example, allow employers to decide each year how much to contribute based on the company’s profitability, making it a suitable option for businesses with variable income.
- Regular Plan Reviews: Conduct regular reviews of your retirement plan to ensure it continues to meet the needs of your business and employees. Modify the plan as necessary to align with changes in your business environment and workforce demographics.
With the help of dedicated Lexington, KY financial advisors and retirement plan specialists, your business can navigate these challenges to create a small business retirement plan that works for both you and your employees.
Other services we offer in Lexington, KY include:
- Family Wealth Planning
- Financial Planning for Business Owners
- Comprehensive Financial Planning
- Retirement Income Planning
- Investment Planning
- Retirement Financial Planning
- Independent Financial Advisor
- Roth Conversion
- Investment Management
- 401(k) Audit
Other services we offer in Lexington, KY include:
- Family Wealth Planning
- Financial Planning for Business Owners
- Comprehensive Financial Planning
- Retirement Income Planning
- Investment Planning
- Retirement Financial Planning
- Independent Financial Advisor
- Roth Conversion
- Investment Management
- 401(k) Audit
Small Business Retirement Plans in Lexington, KY | Correct Capital
Owning a small business involves a mountain of daily, monthly, and annual tasks to ensure things run smoothly — setting up and maintaining a small business retirement plan doesn't have to be one of them. Correct Capital currently manages over 37 plans in both small and large companies, and represents over $212 million in total plan assets* throughout the country. To set up a retirement plan for your small business, or learn what we can do for business owners, call Correct Capital today at 314-930-401K or contact us online.
*as of March 2024
