Small Business Retirement Plans in Lancaster, CA

Small Business Retirement Plans in Lancaster, CA. Starting up a retirement plan for you and your Lancaster, CA employees offers a variety of benefits, including tax reductions and a great way to attract and retain talent. However, many business owners understandably have questions about small business retirement plans. What type of plan is best for your business? What are the different laws I'll have to follow? What do I do when I want to change plans, or if I'm retiring and my business will no longer be running? Correct Capital's team of Lancaster, CA financial planners is committed to helping business owners and their employees get the most out of having a sound retirement plans and understanding the complexity of their individual plans and benefits. Whether you're interested in modifying an existing plan or need to set up a 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 Lancaster, CA?

Retirement plans and accounts are offered to small business owners and their employees by the federal government and various financial custodians 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-deferred. Employers can deduct contributions they make on behalf of their employees. Only employers make contributions, which are flexible and can vary 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: For businesses with changing profits, this plan is suitable as employers are not obligated to contribute each year.
• 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: To hold SEP IRA assets, select an institution like a bank, brokerage firm, or credit union. You can also opt for a digital financial institution.
• Execute a Written Agreement: Establish a plan document and inform eligible employees of the SEP IRA plan.
• Make Contributions: Based on business performance, contributions can be made by a set percentage of each employee’s compensation or contribute based on a variable percentage.
• Maintain Records: Maintaining records involves keeping comprehensive records of all contributions made to employee accounts, including time stamps and sums. Additionally, ensure records are organized and easily accessible for inspection purposes.

SIMPLE IRA

"SIMPLE" stands for "Savings Investment Match Plan for Employees," and these IRAs are for businesses with a maximum of 100 employees. Employees can fund their own accounts through payroll deductions, and employers can also contribute. This plan is low-cost as it's mainly funded by employees, and their contributions can be deductible from taxes.

Benefits of a SIMPLE IRA

• Ease of Setup and Administration: SIMPLE IRAs are straightforward to establish and maintain, with no need for yearly filings for employers. This makes them ideal 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 instantly 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 investment brokerage 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 setting up 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 specifically 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 a yearly cap. While this plan is highly customizable and allows for significant contributions, there may be startup costs and annual fees 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 $two hundred seventy-five thousand dollars annually (in the current year) 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 accounts.
• 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 scheme document that details the terms of the plan, including contribution requirements and how benefits are calculated.
• Actuarial Calculations: Have an actuary calculate the necessary contributions to meet the promised benefits, ensuring compliance with 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 at least five years. Plans established that are quickly terminated are often signals and open to regulatory scrutiny.

401(k) Plans

401(k)s are available to corporations of any size, and are highly adaptable. Employees may postpone 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 before taxes. Alternatively, contributions can be made post-tax (Roth). Investments grow tax-deferred.
• Employer Matching: Many employers offer matching contributions, which can significantly boost an employee's retirement savings.
• Higher Contribution Limits: For the current year, employees can contribute up to $23,000, with an additional $seven thousand five hundred dollars 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 a range of investment options, management assistance, and employee learning resources.
• 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 secure them for employees.
• Develop a Recordkeeping System: Ensure detailed records of contributions, earnings, and distributions.
• Distribute Plan Information: Employers sponsoring a 401(k) must distribute plan information and modifications 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 sole proprietors, 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 a quarter 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 multiple investment options and reduced fees.
• Create a Plan Document: Create the terms of your plan, including contribution limits, investment options, and loan provisions.
• Open an Account: Open your Individual 401(k) account with the chosen provider. This typically involves completing an application and providing necessary documentation.
• Make Contributions: Determine 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 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 adaptable option for businesses with variable earnings.
• Tax Advantages: Contributions are tax-deductible for the business, reducing taxable income. Additionally, the funds grow tax-free until withdrawal, 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 25% of an employee’s compensation or $66,000 for 2024, making it a beneficial option for employee benefits.

Setting Up a Profit Sharing Plan

• Choose a Plan Provider: Select 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: Each year decide the amount to contribute based on company profits and the predetermined formula.
• File Necessary Forms: File IRS Form 5500 annually 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 give employees a stake in the company, aligning their goals with the business's success, and potentially preparing the business's next generation of leadership.

Benefits of an ESOP

• Employee Ownership: ESOPs grant employees with an partial ownership in the company, which can increase 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, offering potentially significant retirement savings.
• Succession Planning: ESOPs can be an effective tool for business succession, enabling owners to sell their shares to high-performing employees, who can slowly take the lead as previous owners ease into retirement.

Setting Up an ESOP

• Feasibility Study: Execute a feasibility study to determine if an ESOP is a viable option for your company.
• Hire ESOP Advisors: Bring on board financial, legal, and ESOP advisors to help with the setup process.
• Create a Plan Document: Compose a plan document that details the terms of the ESOP, including how shares will be distributed and vested.
• Establish a Trust: Create an ESOP trust to hold the company stock on behalf of employees.
• Communicate with Employees: Update employees about the ESOP, how it works, and the perks they can expect.
• Compliance and Reporting: Submit 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 take part in a single retirement plan and achieve economies of scale. MEPs are designed to provide small businesses with a affordable 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 cut 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 facilitate 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: Through an MEP, small businesses that might not have the resources to provide a retirement plan on their own can offer competitive retirement benefits, which can help to attract and retain talented employees and give a competitive advantage in hiring they otherwise may not have had.
• Fiduciary Relief: The MEP sponsor typically assumes most of the fiduciary responsibilities, lessening 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 an investment firm 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: Communicate 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 benefits and drawbacks 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 reputed financial advisor like those at Correct Capital will be able to help you determine which plan works best for you and your team.

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Benefits of Setting Up a Small Business Retirement Plan in Lancaster, CA

The particular, financial-based advantages to your Lancaster, CA 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. 60% of 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:

Do I Need a Financial Advisor in Lancaster, CA to Assist With My Small Business Retirement Plan?

Creating small business retirement plans is complicated. While the federal government does not currently obligate any employer to offer retirement savings options to workers, certain states require businesses with a minimum number of employees to have a retirement plan. Lancaster, CA retirement consultants that are experienced in helping business owners open retirement plans are usually needed to not only ensure the plan is right for you, but that you follow evolving tax and business laws.

As your Lancaster, 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 hold the assets
• Assist you in establishing 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 creating 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 it can serve as a part of their continued financial health

Correct Capital's Lancaster, CA financial planners are fiduciary advisors, meaning we are legally and ethically obligated 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 meeting with a member of our advisor team today.

Common Challenges and Solutions in Small Business Retirement Plans

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Challenge 1: High Setup and Administrative Costs

Many small businesses are reluctant to set up retirement plans due to the expected high costs.

Solution:

• SIMPLE IRA and SEP IRA: These plans have lower 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, plus an additional credit for automatic enrollment plans.

Challenge 2: Administrative Complexity

The administrative burden 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 payroll integration 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: 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.

Challenge 4: Compliance with Regulations

Managing 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. Correct Capital 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: Choose 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. Adjust the plan as necessary to align with changes in your business environment and workforce demographics.

With the help of dedicated Lancaster, CA 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 Lancaster, CA include:

• High-Net-Worth Wealth Management
• Retirement Planner
• Financial Planning
• Retirement Plan Consultants
• Fiduciary Financial Advisor

Small Business Retirement Plans in Lancaster, 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 in both small and large companies, and represents over $212 million in total plan assets* nationwide. To set up a retirement plan for your small business, or learn what other services we offer to business owners, speak to a financial advisor at Correct Capital today at 314-930-401K or contact us through our website.

*as of March 2024