Small Business Retirement Plans in Madison, WI. Establishing a retirement plan for you and your Madison, WI employees is a great way to retain talent, incentivize higher performance, and get those much-desired tax breaks. While the benefits may be obvious, the difficulties of opening 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 happens 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 Madison, WI financial planners has over 70 years of combined experience helping business owners and their employees reap the benefits of their retirement plans and navigate 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.
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What Types of Retirement Plans Are Available to Small Businesses in Madison, WI?
Retirement plans and accounts are offered to small business owners and their employees by the federal government and various financial custodians to better prepare for retirement. Among the most common are:
SEP-IRA
This form of individual retirement account is available to single-owner 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 adjustable and can vary from year to year. 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 annually, making it perfect for businesses with fluctuating profits.
- Simple Administration: With this plan, there is minimal paperwork and no annual filing requirements with the IRS except for regular tax filings.
Setting Up a SEP-IRA
- Select a Financial Institution: virtual financial institution.
- Execute a Written Agreement: To establish the SEP IRA plan, create a contractual arrangement and communicate with eligible employees.
- Make Contributions: Calculate and make contributions based on a fixed percentage of each employee’s compensation. Alternatively, deposit funds based on a variable percentage determined by business profits.
- Maintain Records: Keep complete records of all contributions made to employee accounts, including dates and figures. Additionally, ensure records are well-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 make contributions to their own accounts through salary deferrals, and employers can also make contributions. This plan is inexpensive 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 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 a supplementary 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 bank, investment 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 up to employee contributions or make non-elective contributions, and ensure these are made timely.
Personal Defined Benefit Plan
This plan is exclusively 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 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 $$275k 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 plans.
- Tax Advantages: Contributions are tax-deductible, reducing current taxable income. The investments grow tax-free 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 benefit formulas and contribution requirements.
- 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: To report on the plan’s status and compliance, file IRS Form 5500 annually.
- Permanence: A defined benefit plan should be maintained for at least five years. Quickly terminated plans often serve as signals and may attract regulatory scrutiny.
401(k) Plans
401(k)s are available to businesses of any size, and are highly flexible. Employees may defer 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: Contributions can be made tax-free initially, 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 match programs, which can significantly boost an employee's retirement savings.
- Higher Contribution Limits: For this 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: Pick a provider that offers various investment opportunities, management assistance, and staff training.
- Create a Plan Document: Prepare 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 protect them for employees.
- 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 updates in a timely manner.
Individual 401(k)
Also known as a i401(k), this plan is designed to offer the same benefits as a company 401(k), but 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 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 advantage of individual 401(k)s is that you can opt to open a Roth 401(k) account, or roll over pre-tax assets.
Setting Up an Individual 401(k)
- Choose a Plan Provider: Select a financial institution or brokerage that offers Individual 401(k) plans. Search for providers with multiple 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: Open your Individual 401(k) account with the chosen provider. This typically involves completing 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 $$250k, 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 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 adaptable option for businesses with changing 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 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 one-fourth of an employee’s compensation or $sixty-six thousand dollars for the current year, making it a beneficial option for employee benefits.
Setting Up a Profit Sharing Plan
- Choose a Plan Provider: Choose 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: 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 goals with the business's success, and potentially helping set up the business's upcoming generation of leadership.
Benefits of an ESOP
- Employee Ownership: ESOPs offer employees with an ownership stake in the company, which can improve motivation and dedication.
- 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 substantial retirement savings.
- Succession Planning: ESOPs can be an effective method for business succession, allowing owners to sell their shares to their best employees, who can steadily take the lead as previous owners move into retirement.
Setting Up an ESOP
- Feasibility Study: Conduct a feasibility study to determine if an ESOP is a suitable option for your company.
- Hire ESOP Advisors: Bring on board financial, legal, and ESOP advisors to aid in the setup process.
- Create a Plan Document: Prepare a plan document that specifies the terms of the ESOP, including how shares will be allocated and vested.
- Establish a Trust: Establish 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 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 favorable option for small businesses looking to save on expenses.
- Administrative Efficiency: MEPs facilitate the management of retirement plans by centralizing 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 set up a retirement plan on their own can deliver competitive retirement benefits, helping to attract and retain talented employees and provide 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 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 signing an adoption agreement and providing necessary employee information.
- Employee Enrollment: Explain 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 incentives, fees, required minimum distributions, contribution limits, and more. A respected 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 Madison, WI
The particular, financial-based benefits for your Madison, WI small business retirement plan will largely be based on the specific plan you set up. However, a small business retirement plan, whichever one you choose, has universal benefits. Three out of five workers responded to a survey stating it is a "very important" factor in how good they feel at their present employment, while employers also get tax breaks and can better attract and motivate employees. Below are some of the main benefits for both businesses and employees of establishing a small business retirement plan:
Employee Benefits
- Improved confidence in their retirement planning
- Reduced taxable income
- Contributions are simple with payroll deductions
- Contributions and investment gains are not taxed until distributed
- Over the years small savings grow into considerable savings
- Ability to perform a 401(k) rollover if they change employers
Business Benefits
- Attract, recruit, and retain talent
- Promote great work ethic
- Deduct your taxable income from your taxable profits
- Highly customized plans are available
- Tax credits upon initial set-up
Do I Need a Financial Advisor in Madison, WI to Help With My Small Business Retirement Plan?
Opening small business retirement plans is far different from setting up a personal savings plan at your local Madison, WI bank. While the federal government does not currently require any employer to offer retirement savings options to workers, some states require businesses of a certain size to have a retirement plan. Madison, WI retirement consultants that have spent years helping business owners establish retirement plans are usually needed to not only make sure you get the benefits you're looking for, but that you follow evolving tax and business laws.
As your Madison, WI retirement plan consultants for your small business, our advisers will:
- Help you elect the "right" plan for you, and which financial institution should hold the 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 developing 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 continued financial health
Correct Capital's Madison, WI advisors hold ourselves to the fiduciary standard, meaning we are legally and ethically obligated to do what's best for you and your employees. The only product we offer is trust. 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 unwilling to set up retirement plans due to the expected 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, 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 processing 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 increase 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
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. We 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. Update the plan as necessary to align with changes in your business environment and workforce demographics.
With the help of dedicated Madison, WI 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 Madison, WI include:
- 401(k) Audit
- High-Net-Worth Wealth Management
- Retirement Planner
- Financial Planning
- Retirement Plan Consultants
- Fiduciary Financial Advisor
Small Business Retirement Plans in Madison, WI | 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 shouldn't 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* throughout the country. To set up a retirement plan for your small business, or learn what we can do for 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