Small Business Retirement Plans in Lexington, KY

Small Business Retirement Plans in Lexington, KY. Starting up a retirement plan for you and your Lexington, KY 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 benefits do different kinds of plans provide? What federal regulations do I have to follow? What do I do when a new plan seems like a better option, or if I'm retiring and my business will no longer be running? Correct Capital's team of Lexington, KY financial planners has over 70 years of combined experience helping business owners and their employees get the most out of their retirement plans and understanding the complexity of financial law. Whether you already have a plan and want insight as to how it's performing or need to set up a plan, call Correct Capital today at 314-930-401K or contact us through our website.

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Correct Capital Wealth Management's office is physically located in St. Louis, MO, but we serve clients throughout the United States in both personal financial planning and corporate retirement plans.

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What Types of Retirement Plans Are Available to Small Businesses in Lexington, KY?

Small business owners and their employees are offered retirement plans through the federal government and various financial custodians to better prepare for retirement. Among the most common are:

SEP-IRA

This kind of individual retirement account is available to owner-only 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 flexible and can vary annually. Additionally, the contributions are eligible for tax deduction.

Benefits of a SEP-IRA

• High Contribution Limits: Employers can contribute up to 25% of each employee’s compensation, with a maximum of $69,000 for 2024.
• Flexibility: For businesses with changing profits, this plan is ideal as employers are not obligated to contribute each year.
• Simple Administration: With this plan, there is minimal paperwork and no requirement for annual filings with the IRS except for regular tax filings.

Setting Up a SEP-IRA

• Select a Financial Institution: Selecting a financial institution involves choosing an institution for instance a bank, brokerage firm, or credit union. Another option is a virtual financial institution.
• Execute a Written Agreement: To establish the SEP IRA plan, create a written agreement and communicate with eligible employees.
• Make Contributions: To make contributions, calculate a fixed percentage of each employee’s compensation. Alternatively, deposit funds based on a percentage range determined by business earnings.
• Maintain Records: Maintaining records involves keeping thorough records of all contributions made to employee accounts, including dates and amounts. 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 a maximum of 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 annual filing requirements for employers. This makes them perfect for small businesses with restricted 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, 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 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 up to employee contributions or make non-elective contributions, and ensure these are made timely.

Personal Defined Benefit Plan

This plan is specifically for owner-only 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 beginning expenditures 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 $two hundred seventy-five thousand dollars 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 bank or retirement plan provider that specializes in defined benefit plans to establish the plan.
• Create a Plan Document: Draft a written plan 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, per IRS requirements.
• Annual Administration: Managing the plan’s investments includes ensuring that required contributions are made annually. Annual actuarial reviews are necessary 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: A defined benefit plan should be maintained for a minimum of five years. Quickly terminated plans often serve as red flags and may attract regulatory scrutiny.

401(k) Plans

401(k)s are available to companies of any size, and are highly tailorable. Employees may postpone their salary as contributions, and employers can make annual contributions. 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 tax-deferred.
• Employer Matching: Many employers offer contribution matching, which can significantly boost an employee's retirement savings.
• Higher Contribution Limits: For the current year, employees can contribute up to $twenty-three thousand dollars, 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 urgent financial needs.

Setting Up a 401(k) Plan

• Choose a Plan Provider: Choose a provider that offers various investment choices, administrative support, and employee learning resources.
• Create a Plan Document: Outline the terms of the plan, including eligibility, contributions, and vesting schedules.
• Set Up a Trust: Ensure plan assets are held in trust to safeguard them for participants.
• Develop a Recordkeeping System: Maintain precise 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 i401(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 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: 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: Establish your Individual 401(k) account with the chosen provider. This typically involves filling out 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 $two hundred fifty thousand dollars, you must file IRS Form 5500 annually. Develop a meticulous record system of all contributions and transactions.

Profit Sharing Plans

A Profit Sharing Plan is a type of retirement plan where employers can make discretionary 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 versatile option for businesses with changing 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 enhance 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 $$66k for 2024, making it a advantageous option for employee benefits.

Setting Up a Profit Sharing Plan

• Choose a Plan Provider: Choose a bank or retirement plan provider to administer the plan.
• Create a Plan Document: Write 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 give employees equity in the company, aligning their interests with the business's success, and potentially establishing the business's next generation of leadership.

Benefits of an ESOP

• Employee Ownership: ESOPs offer employees with an partial ownership in the company, which can heighten incentive and loyalty.
• Tax Benefits for the Company: Contributions to the ESOP are deductible from taxes, and the company can also obtain 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, offering potentially significant retirement savings.
• Succession Planning: ESOPs can be an effective method for business succession, enabling owners to sell their shares to their best employees, who can steadily take the lead as previous owners ease into retirement.

Setting Up an ESOP

• Feasibility Study: Carry out a feasibility study to determine if an ESOP is a suitable option for your company.
• Hire ESOP Advisors: Consult financial, legal, and ESOP advisors to aid in the setup process.
• Create a Plan Document: Prepare a plan document that defines the terms of the ESOP, including how shares will be distributed and vested.
• Establish a Trust: Establish an ESOP trust to hold the company stock on behalf of employees.
• Communicate with Employees: Advise employees about the ESOP, how it works, and the perks they can expect.
• Compliance and Reporting: File 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 join 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 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 simplify the management of retirement plans by consolidating administrative tasks. This includes plan setup, compliance, reporting, and participant communication, which are handled by the MEP sponsor or administrator.
• Improved Access to Benefits: An MEP allows small businesses that might not have the resources to provide a retirement plan on their own can provide competitive retirement benefits, which helps 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, diminishing 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 join 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 executing 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 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.

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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, has universal benefits. Three out of five workers 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. Below are some of the main benefits for both businesses and employees of establishing a small business retirement plan:

Why Should I Consult With a Financial Advisor in Lexington, KY to Help With My Small Business Retirement Plan?

Setting up small business retirement plans is not the same thing as setting up a personal savings plan at your local Lexington, KY bank. While the federal government does not currently obligate any company to offer a retirement plan to workers, certain states require employers of a certain size to offer access to a retirement plan. Lexington, KY retirement consultants that are experienced in helping business owners create 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 evolving tax and business laws.

As your Lexington, KY retirement plan consultants for your small business, our financial planners will:

• Help you elect the "right" plan for you, and the right custodian to hold plan assets
• Assist you in setting up your plan, including adopting a written plan, arranging a trust for plan assets, helping employees understand the plan's terms, 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 component to their continued financial health

Correct Capital's Lexington, KY advisors hold ourselves to the fiduciary standard, meaning we are obligated, by law and by regulatory oversight to do what's best for you and your employees. We work for you, and not our own firm. Schedule a consultation 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 unwilling 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 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 documentation, compliance, and record-keeping tasks. Providers offer comprehensive administrative support, including integration with payroll and fiduciary services.
• Multiple Employer Plans (MEPs): Being part of 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 increase 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. 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 adjust to 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. 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:

• 401(k) Audit
• High-Net-Worth Wealth Management
• Retirement Planner
• Financial Planning
• Retirement Plan Consultants
• Fiduciary Financial Advisor
• Self-Employed Retirement Plans

Small Business Retirement Plans in Lexington, KY | Correct Capital

Operating a small business involves a plethora of moving parts and 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* across the United States. To set up a retirement plan for your small business, or learn what other services we offer to business owners, call Correct Capital today at 314-930-401K or contact us through our website.

*as of March 2024