Small Business Retirement Plans in Huntington Beach, CA. Establishing a retirement plan for you and your Huntington Beach, CA employees offers a variety of benefits, including tax reductions and a great way to attract and retain talent. While the benefits may be clear, the difficulties of establishing and maintaining small business retirement plans are not. What benefits do different kinds of plans provide? 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 Huntington Beach, CA financial planners is dedicated to helping business owners and their employees get the most out of having a sound retirement plans and navigate the specifics 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.
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What Types of Retirement Plans Are Available to Small Businesses in Huntington Beach, CA?
The federal government and various financial custodians offer a variety of retirement plans and retirement accounts for small business owners and their employees to better prepare for retirement. The most prevalent ones are:
SEP-IRA
This type of individual retirement account is available to self-employed businesses, freelancers, and businesses with very few employees. It follows the identical 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 contributions, which are modifiable and can vary from year to year. Additionally, the contributions are deductible from taxes.
Benefits of a SEP-IRA
- High Contribution Limits: For 2024, employers are allowed to contribute up to 25% of each employee’s compensation, with a cap of $69,000.
- Flexibility: Employers are not required to contribute annually, making it suitable for businesses with variable profits.
- Simple Administration: The plan requires minimal paperwork and has no annual filing requirements with the IRS except for regular tax filings.
Setting Up a SEP-IRA
- Select a Financial Institution: Choose a provider to hold SEP IRA assets, like a bank, brokerage firm, or credit union. Alternatively, opt for a virtual financial institution.
- Execute a Written Agreement: Notify eligible employees by establishing a contractual arrangement for the SEP IRA plan.
- Make Contributions: Based on business performance, contributions can be made by a set percentage of each employee’s compensation or deposit funds based on a percentage range.
- Maintain Records: Maintaining records involves keeping detailed records of all contributions made to employee accounts, including time stamps and sums. Additionally, ensure records are well-organized and easily accessible for review purposes.
SIMPLE IRA
"SIMPLE" stands for "Savings Investment Match Plan for Employees," and these IRAs are for businesses with up to 100 employees. Employees can fund their own accounts through payroll deductions, and employers can also make contributions. This plan is affordable 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 simple to establish and maintain, with no need for yearly filings for employers. This makes them ideal for small businesses with constrained administrative resources.
- Employer Contributions: Employers are required to make contributions, either by 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 extra 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 financial institution, investment 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 information 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 employee contributions or make non-elective contributions, and ensure these are made timely.
Personal Defined Benefit Plan
This plan is solely for owner-only businesses, or those with a maximum of 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 startup costs and yearly charges 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 401k plans.
- 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 a financial institution or retirement plan provider that specializes in defined benefit plans to establish the plan.
- Create a Plan Document: Draft a scheme document that details the terms of the plan, including benefit formulas and contribution requirements.
- Actuarial Calculations: Have an actuary calculate the necessary contributions to meet the promised benefits, per IRS requirements.
- Annual Administration: Manage the plan’s investments and ensure that required contributions are made annually. Annual actuarial reviews are necessary to adjust for any changes in funding requirements.
- Compliance and Reporting: Ensure compliance by filing IRS Form 5500 annually to report on the plan’s status.
- Permanence: A defined benefit plan needs to be in place for a minimum of five years. Plans established that are quickly terminated are often red flags and open to regulatory scrutiny.
401(k) Plans
401(k)s are available to companies of any size, and are highly adaptable. Employees may allocate 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: To reduce the employee’s taxable income, contributions are made pre-tax. Alternatively, contributions can be made post-tax (Roth). Investments grow without immediate tax.
- Employer Matching: Many employers offer match programs, which can significantly boost an employee's retirement savings.
- Higher Contribution Limits: For the current year, employees can contribute up to $$23k, with an additional $$7.5k 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 financial emergencies.
Setting Up a 401(k) Plan
- Choose a Plan Provider: Select a provider that offers multiple investment options, administrative services, and employee education.
- Create a Plan Document: Draft the terms of the plan, including eligibility, contributions, and vesting schedules.
- Set Up a Trust: Ensure plan assets are held in trust to protect them for participants.
- Develop a Recordkeeping System: Keep accurate records of contributions, earnings, and distributions.
- Distribute Plan Information: Employers sponsoring a 401(k) must distribute plan information and changes in a timely manner.
Individual 401(k)
Designed to offer the same benefits as a traditional 401(k), this plan is also known as a Solo 401(k). It is ideal 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 non-elective contribution up to 25% 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. Another benefit of individual 401(k)s is the ability to open a Roth 401(k) account, or roll over pre-tax assets.
Setting Up an Individual 401(k)
- Choose a Plan Provider: Pick a financial institution or brokerage that offers Individual 401(k) plans. Look for providers with a range of investment options and minimal fees.
- Create a Plan Document: Prepare the terms of your plan, including contribution limits, investment options, and loan provisions.
- Open an Account: Set up your Individual 401(k) account with the chosen provider. This typically involves submitting an application and providing necessary documentation.
- Make Contributions: Decide on 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 $two hundred fifty thousand dollars, you must file IRS Form 5500 annually. Ensure detailed records of all contributions and transactions.
Profit Sharing Plans
A Profit Sharing Plan is a type of retirement plan where employers can make voluntary 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 incentivize them to contribute to the company’s profitability.
Benefits of a Profit Sharing Plan
- Flexibility in Contributions: Employers can decide each year how much to contribute based on the company's profitability. This makes it an versatile option for businesses with fluctuating earnings.
- Tax Advantages: Contributions are tax-deductible for the business, reducing taxable income. Additionally, the funds grow without immediate tax, which can benefit employees' long-term savings.
- Employee Motivation and Retention: Linking contributions to company profits can boost employee morale and loyalty, as employees directly benefit from the company’s success.
- High Contribution Limits: Employers can contribute up to the lesser of a quarter of an employee’s compensation or $66,000 for the current year, making it a beneficial 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: Prepare a plan document outlining the profit-sharing formula, eligibility requirements, and vesting schedule.
- Communicate with Employees: Notify employees about the plan, how it works, and the benefits they can expect.
- Determine Contributions: Each year 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 pension scheme that primarily invests in the employer's stock. ESOPs grant employees equity in the company, aligning their interests with the business's success, and potentially helping establish the business's next generation of leadership.
Benefits of an ESOP
- Employee Ownership: ESOPs offer employees with an ownership stake in the company, which can boost drive and loyalty.
- Tax Benefits for the Company: Contributions to the ESOP are eligible for tax deduction, and the company can also receive tax benefits associated with the sale of stock to the ESOP.
- Retirement Savings for Employees: Employees gain from the growth in the value of the company’s stock, providing potentially considerable retirement savings.
- Succession Planning: ESOPs can be an effective tool for business succession, enabling owners to sell their shares to their best employees, who can slowly take the lead as previous owners move into retirement.
Setting Up an ESOP
- Feasibility Study: Carry out a feasibility study to determine if an ESOP is a viable option for your company.
- Hire ESOP Advisors: Engage financial, legal, and ESOP advisors to aid in the setup process.
- Create a Plan Document: Draft a plan document that outlines the terms of the ESOP, including how shares will be assigned and vested.
- Establish a Trust: Form an ESOP trust to hold the company stock on behalf of employees.
- Communicate with Employees: Educate employees about the ESOP, how it works, and the perks they can expect.
- Compliance and Reporting: Send in necessary documents with the IRS and the Department of Labor, including Form 5500, to keep your plan compliant.
Multiple Employer Plans (MEPs)
A Multiple Employer Plan (MEP) is a type of retirement plan that allows multiple, unrelated employers to join a single retirement plan and achieve economies of scale. MEPs are designed to provide small businesses with a cost-effective and administratively efficient way to offer retirement benefits to their employees.
Benefits of an MEP
- Cost Savings: By sharing resources with other employers, businesses can reduce administrative costs and fees associated with maintaining a retirement plan. This cost-sharing makes MEPs an appealing 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 offer a retirement plan on their own can deliver competitive retirement benefits through an MEP., which can help to attract and retain talented employees and provide a competitive advantage in hiring they otherwise may not have had.
- 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 completing 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, filing necessary forms, 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 benefits, fees, required minimum distributions, contribution limits, and more. A renowned 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 Huntington Beach, CA
The particular, financial-based benefits for your Huntington Beach, CA small business retirement plan will largely be based on the specific plan you choose. However, there are many general benefits of setting up a small business retirement plan for both businesses and workers. Three out of five employees say that a retirement plan is a "very important" factor in job satisfaction, while employers reap the benefits both during tax season and in office productivity. Companies and employees will both enjoy:
Employee Benefits
- More financial security in retirement
- Tax deductions
- Contributions are simple with salary deferral
- They do not pay taxes on money they put in or how the money grew until distributed
- As interest accrues, small savings grow into considerable sums of money
- Ability to conduct a 401(k) rollover if it's beneficial down the road
Business Benefits
- Attract, recruit, and retain high performers
- Incentivize based on performance-based employer contributions
- Employer contributions are tax-deductible
- Highly customized plans are available
- Tax credits that can help reduce startup costs
Why Should I Consult With a Financial Advisor in Huntington Beach, CA to Help With My Small Business Retirement Plan?
Setting up small business retirement plans is not the same thing as setting up a personal account at your local Huntington Beach, CA bank. While the federal government does not currently obligate any company to offer retirement savings options to workers, certain states require employers with a minimum number of employees to offer access to a retirement plan. Huntington Beach, CA retirement consultants that have spent years helping business owners establish retirement plans are usually needed to not only ensure you and your employees get the most out of your plan, but that you abide by ever-changing tax and business laws.
As your Huntington Beach, CA retirement plan consultants for your small business, our advisers will:
- Help you choose which plan works best for you and your employees, and which financial institution should house the assets
- Assist you in setting up your plan, including adopting a written plan, establishing a trust for plan assets, helping employees understand how specific of the plan apply to their retirement, and implementing a record keeping system
- Help you operate your plan by keeping up-to-date with relevant laws, managing the plan's assets, and distributing benefits
- Help educate your employees on your plan, its benefits, and how it can serve as a part of their ongoing financial health
Correct Capital's Huntington Beach, CA advisors hold ourselves to the fiduciary standard, meaning we are legally and ethically bound to only offer advice based on what we believe is in your best interest. As an independent firm, we have the freedom and flexibility to tailor our offerings to best suit the goals of our clients. Request a consultation 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 assumed high costs.
Solution:
- SIMPLE IRA and SEP IRA: These plans have reduced 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 challenges 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 documentation, compliance, and record-keeping tasks. Providers offer comprehensive administrative support, including integration with payroll and fiduciary services.
- Multiple Employer Plans (MEPs): Enrolling in 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: Introducing 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. Offer 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 change with 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 assistance of dedicated Huntington Beach, CA financial advisors and retirement plan specialists, your business can manage these challenges to create a small business retirement plan that works for both you and your employees.
Other services we offer in Huntington Beach, CA include:
- 401(k) Audit
- High-Net-Worth Wealth Management
- Retirement Planner
- Financial Planning
- Retirement Plan Consultants
- Fiduciary Financial Advisor
Small Business Retirement Plans in Huntington Beach, CA | Correct Capital
Operating a small business involves countless daily, monthly, and annual tasks to ensure things run smoothly — navigating the complexities of a small business retirement plan doesn't have to be one of them. Correct Capital currently manages over 37 plans for a variety of types of businesses, and represents over $212 million in total plan assets* nationwide. 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