Small Business Retirement Plans in Mesquite, TX. Setting up a retirement plan for you and your Mesquite, TX employees is a great way to retain talent, incentivize higher performance, and get those much-needed tax breaks. 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 happens when a new plan seems like a better option, or if I'm closing my business? Correct Capital's team of Mesquite, TX financial planners is dedicated to helping business owners and their employees reap the benefits of their retirement plans and understanding the ins-and-outs of federal regulations. Whether you already have a plan and want insight as to how it's performing or are looking to create an entirely new one, call Correct Capital today at 314-930-401K or contact us through our website.
What Types of Retirement Plans Are Available to Small Businesses in Mesquite, TX?
The federal government provides a wide array of savings plans and savings vehicles 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 payments, which are modifiable and can vary from year to year. Additionally, the contributions are tax-deductible.
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: This plan does not require employers to contribute each year, which is ideal for businesses with changing profits.
- Simple Administration: The plan requires minimal paperwork and does not require annual filings with the IRS except for regular tax filings.
Setting Up a SEP-IRA
- Select a Financial Institution: To hold SEP IRA assets, select a company such as a bank, brokerage firm, or credit union. You can also opt for a digital financial institution.
- Execute a Written Agreement: Communicate with eligible employees by establishing a contractual arrangement for the SEP IRA plan.
- Make Contributions: Contributions can be made by calculating an established percentage of each employee’s compensation. Alternatively, deposit funds based on a variable percentage determined by business profits.
- Maintain Records: Keep comprehensive records of all contributions made to employee accounts, including dates 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 up to 100 employees. Employees can fund 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 easy to establish and maintain, with no annual filing requirements for employers. This makes them suitable for small businesses with limited 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 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 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 details 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 in a timely manner.
Personal Defined Benefit Plan
This plan is solely for sole proprietor 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 a maximum limit set each year. While this plan is highly customizable and allows for significant contributions, there may be beginning expenditures and recurring costs associated with it.
Benefits of a Personal Defined Benefit Plan
- High Contribution Limits: Allows for significantly higher contributions compared to other retirement plans, potentially reaching $275,000 annually (in 2024) depending on age, income, and the desired retirement benefit.
- Predictable Retirement Benefits: The plan promises a specific benefit at retirement, providing more predictability for retirement planning compared to defined contribution plans like 401(k)s.
- Tax Advantages: Contributions are tax-deductible, reducing current taxable income. The investments grow tax-deferred until distribution.
Setting Up a Personal Defined Benefit Plan
- Consult with a Plan Provider: Work with a bank or retirement plan provider that has experience with 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 a financial analyst 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 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 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: Contributions are made before taxes, reducing the employee’s taxable income. Alternatively, contributions can be made post-tax (Roth). Investments grow without immediate tax.
- 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 $23,000, 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 unexpected expenses.
Setting Up a 401(k) Plan
- Choose a Plan Provider: Choose a provider that offers various investment options, management assistance, 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 safeguard them for participants.
- 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 updates in a timely manner.
Individual 401(k)
Designed to offer the same benefits as a company 401(k), this plan is also known as a i401(k). It is ideal 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 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: Choose a financial institution or brokerage that offers Individual 401(k) plans. Look for providers with a range of investment options and reduced fees.
- Create a Plan Document: Draft 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 $$250k, you must file IRS Form 5500 annually. Maintain precise records 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 enhance 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 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 one-fourth of an employee’s compensation or $$66k for the current year, 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: Notify employees about the plan, how it works, and the benefits they can expect.
- Determine Contributions: Yearly 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 equity in the company, matching their interests with the business's success, and potentially preparing the business's future generation of leadership.
Benefits of an ESOP
- Employee Ownership: ESOPs provide employees with an ownership stake in the company, which can boost incentive and loyalty.
- Tax Benefits for the Company: Contributions to the ESOP are tax-deductible, and the company can also receive tax benefits pertaining to the sale of stock to the ESOP.
- Retirement Savings for Employees: Employees benefit from the growth in the value of the company’s stock, granting potentially considerable retirement savings.
- Succession Planning: ESOPs can be an effective tool for business succession, allowing 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 suitable option for your company.
- Hire ESOP Advisors: Consult financial, legal, and ESOP advisors to assist with the setup process.
- Create a Plan Document: Develop a plan document that outlines the terms of the ESOP, including how shares will be distributed and vested.
- Establish a Trust: Initiate an ESOP trust to hold the company stock on behalf of employees.
- Communicate with Employees: Brief employees about the ESOP, how it works, and the advantages they can expect.
- Compliance and Reporting: 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 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 lower 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 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: Businesses with limited resources to provide a retirement plan on their own can provide competitive retirement benefits through an MEP., helping to attract and retain talented employees and create a competitive advantage in hiring they otherwise may not have had.
- Fiduciary Relief: The MEP sponsor typically assumes most of the fiduciary responsibilities, decreasing 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 participate in 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 financial institution 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: 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 benefits, 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.
Benefits of Setting Up a Small Business Retirement Plan in Mesquite, TX
The specific, financial-based benefits for your Mesquite, TX small business retirement plan is dependent upon which plan you set up. However, there are many general benefits of setting up a small business retirement plan for both businesses and workers. 60% of employees responded to a survey stating it 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 having a small business retirement plan:
Employee Benefits
- Better confidence in their retirement planning
- Tax deductions
- Contributions are simple with payroll deductions
- They do not pay taxes on contributions or how the money grew until they withdraw them
- As interest accrues, small savings grow into significant sums of money
- Ability to perform a 401(k) rollover if it's beneficial down the road
Business Benefits
- Attract, recruit, and retain your best employees
- 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 Mesquite, TX to Assist 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 Mesquite, TX bank. While the federal government does not currently require any business to offer retirement savings options to employees, certain states require businesses of a certain size to offer access to a retirement plan. Mesquite, TX retirement consultants that are experienced in helping business owners set up retirement plans are usually needed to not only ensure you get the benefits you're looking for, but that you abide by frequently chancing tax and business laws.
As your Mesquite, TX 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 establishing your plan, including creating a document that complies with IRS code, establishing a trust for plan assets, helping employees understand how specific of the plan apply to their savings, and creating 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 Mesquite, TX advisors hold ourselves to the fiduciary standard, meaning we are obligated, by law and by ethics to do what's best for you and your employees. 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 hesitate 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, and an additional credit for automatic enrollment plans.
Challenge 2: Administrative Complexity
The complexity of maintaining a retirement plan can be daunting for small business owners.
Solution:
- Outsource Administration: Many plan providers offer administrative services that can handle the majority of the paperwork, compliance, and record-keeping tasks. Providers offer comprehensive administrative support, including integration with payroll and fiduciary services.
- Multiple Employer Plans (MEPs): Participating 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
Limited employee involvement 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.
Challenge 4: Compliance with 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: 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. Adjust the plan as necessary to align with changes in your business environment and workforce demographics.
With the support of dedicated Mesquite, TX 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 Mesquite, TX include:
- 401(k) Audit
- High-Net-Worth Wealth Management
- Retirement Planner
- Financial Planning
- Retirement Plan Consultants
- Fiduciary Financial Advisor
Small Business Retirement Plans in Mesquite, TX | Correct Capital
Owning a small business involves a mountain 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 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 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