Small Business Retirement Plans in Montgomery, AL. Setting up a retirement plan for you and your Montgomery, AL employees offers a variety of benefits, including tax reductions and a great way to attract and retain your highest-performing workers. However, for most business owners, it can be difficult to know how to proceed once they decide to establish one. What benefits do different kinds of plans provide? What federal regulations do I have to follow? What do I do when I want to change plans, or if I'm closing my business? Correct Capital's team of Montgomery, AL financial planners is dedicated to helping business owners and their employees reap the rewards of their retirement plans and navigate the specifics of their individual plans and benefits. Whether you already have a plan and want insight as to how it's performing 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 Montgomery, AL?
The federal government provides a wide array of retirement plans and retirement accounts for small business owners and their employees to better prepare for retirement. These include:
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 without taxes. Employers can deduct contributions they make on behalf of their employees. Only employers make payments, which are flexible and can vary annually. Additionally, the contributions are eligible for tax deduction.
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 each year, making it ideal for businesses with variable profits.
- Simple Administration: Minimal paperwork and no annual filing requirements with the IRS beyond regular tax filings.
Setting Up a SEP-IRA
- Select a Financial Institution: virtual financial institution.
- Execute a Written Agreement: Establish a plan document and communicate with eligible employees of the SEP IRA plan.
- Make Contributions: To make contributions, calculate a set percentage of each employee’s compensation. Alternatively, deposit funds based on a range of percentages determined by business earnings.
- Maintain Records: Ensure you keep comprehensive records of all contributions made to employee accounts, including dates and amounts. 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 make contributions to their own accounts through payroll deductions, and employers can also contribute. This plan is inexpensive as it's mainly funded by employees, and their contributions can be eligible for tax deduction.
Benefits of a SIMPLE IRA
- Ease of Setup and Administration: SIMPLE IRAs are simple to establish and maintain, with no need for yearly filings for employers. This makes them perfect for small businesses with limited 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 promptly 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, 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 employee contributions or make non-elective contributions, and ensure these are made timely.
Personal Defined Benefit Plan
This plan is solely for owner-only businesses, or those with a maximum of 5 employees. With this plan, you target a desired level of retirement income, and contribution limits are adjusted each year based on that, with an annual maximum limit. While this plan is highly customizable and allows for significant contributions, there may be initial expenses 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 $275,000 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-deferred until distribution.
Setting Up a Personal Defined Benefit Plan
- Consult with a Plan Provider: Work with a financial institution or retirement plan provider that specializes in defined benefit plans to establish the plan.
- Create a Plan Document: Draft a scheme document that details the terms of the plan, including benefit formulas and contribution requirements.
- Actuarial Calculations: Have a financial analyst calculate the necessary contributions to meet the promised benefits, per IRS requirements.
- Annual Administration: Manage the plan’s investments and ensure that required contributions are made annually. Annual actuarial reviews are necessary to adjust for any changes in funding requirements.
- Compliance and Reporting: Ensure compliance by filing IRS Form 5500 annually to report on the plan’s status.
- Permanence: A defined benefit plan should be maintained for a minimum of five years. Quickly terminated plans often serve as signals and may attract regulatory scrutiny.
401(k) Plans
401(k)s are available to firms 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-free until withdrawn.
- Employer Matching: Many employers offer contribution matching, 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: Select a provider that offers various investment options, administrative services, and employee education.
- Create a Plan Document: Detail the terms of the plan, including eligibility, contributions, and vesting schedules.
- Set Up a Trust: Ensure plan assets are held in trust to preserve them for participants.
- Develop a Recordkeeping System: Develop a meticulous record system 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 non-elective 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. Search for providers with multiple investment options and minimal 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 submitting an application and providing necessary documentation.
- Make Contributions: Set 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 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 flexible option for businesses with fluctuating 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 increase employee morale and loyalty, as employees directly benefit from the company’s success.
- High Contribution Limits: Employers can contribute up to the lesser of a quarter of an employee’s compensation or $sixty-six thousand dollars for the current year, making it a generous option for employee benefits.
Setting Up a Profit Sharing Plan
- Choose a Plan Provider: Pick a investment firm or retirement plan provider to administer the plan.
- Create a Plan Document: 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: Each year decide the amount to contribute based on company profits and the predetermined formula.
- File Necessary Forms: File IRS Form 5500 each 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 employee benefit plan that invests mainly in the employer's stock. ESOPs provide employees with an ownership stake in the company, aligning their interests with the business's success, and potentially aiding in establishing the business's future leadership.
Benefits of an ESOP
- Employee Ownership: ESOPs grant employees with an ownership stake in the company, which can enhance incentive and commitment.
- Tax Benefits for the Company: Contributions to the ESOP are tax-deductible, and the company can also receive tax benefits related 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, providing potentially substantial retirement savings.
- Succession Planning: ESOPs can be an effective strategy for business succession, allowing owners to sell their shares to high-performing employees, who can steadily 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 feasible option for your company.
- Hire ESOP Advisors: Bring on board financial, legal, and ESOP advisors to facilitate 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: Set up an ESOP trust to hold the company stock on behalf of employees.
- Communicate with Employees: Inform 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 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 sharing 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 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: Businesses with limited resources to offer a retirement plan on their own can offer competitive retirement benefits through an MEP., 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 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 signing an adoption agreement and providing necessary employee information.
- Employee Enrollment: Inform the plan details to employees and facilitate their enrollment in the MEP.
- Ongoing Administration: The MEP sponsor handles the majority of the administrative tasks, including compliance with IRS and Department of Labor requirements, filing necessary forms, and managing plan assets.
There are advantages and disadvantages 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 reputed financial advisor like those at Correct Capital will be able to help you determine which plan works best for you and your team.
Why You Should Set Up a Small Business Retirement Plan in Montgomery, AL
The specific, financial-based benefits for your Montgomery, AL small business retirement plan is dependent upon which plan you set up. However, a small business retirement plan, whichever one you choose, benefit employers and employees in the same way. 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:
Employee Benefits
- More financial security in retirement
- Tax deductions
- Contributions can be easily made through payroll deductions
- They do not pay taxes on money they put in or investments gains until distributed
- As interest accrues, small contributions grow into considerable savings
- Ability to conduct a 401(k) rollover if it's beneficial down the road
Business Benefits
- Attract, recruit, and retain high performers
- Promote great work ethic
- Employer contributions are tax-deductible
- Flexible plan options to fit your plan to your needs
- Tax credits that can help reduce startup costs
Do I Need a Financial Advisor in Montgomery, AL to Assist With My Small Business Retirement Plan?
Setting up small business retirement plans is complicated. While the federal government does not currently obligate any employer to offer a retirement plan to employees, certain states require businesses with a minimum number of employees to have a retirement plan. Montgomery, AL retirement consultants that have spent years 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 follow frequently chancing tax and business laws.
As your Montgomery, AL retirement plan consultants for your small business, our team will:
- Help you decide 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 staying compliant 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 important aspect of their ongoing financial journey
Correct Capital's Montgomery, AL advisors hold ourselves to the fiduciary standard, meaning we are legally and ethically bound to do what's best for you and your employees. We work for you, and not our own firm. Request a meeting with a member of our advisor team today.
Common Challenges and Solutions in Small Business Retirement Plans
Challenge 1: High Setup and Administrative Costs
Many small businesses are reluctant to set up retirement plans due to the assumed high costs.
Solution:
- SIMPLE IRA and SEP IRA: These plans have 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 challenges of maintaining a retirement plan can be daunting for small business owners.
Solution:
- Outsource Administration: Many plan providers offer administrative services that can handle the majority of the administrative tasks, compliance, and record-keeping tasks. Providers offer comprehensive administrative support, including integration with payroll and fiduciary management.
- 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. Host 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
Handling 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 adapt 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. Modify the plan as necessary to align with changes in your business environment and workforce demographics.
With the assistance of dedicated Montgomery, AL 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 Montgomery, AL include:
- 401(k) Audit
- High-Net-Worth Wealth Management
- Retirement Planner
- Financial Planning
- Retirement Plan Consultants
- Fiduciary Financial Advisor
Small Business Retirement Plans in Montgomery, AL | Correct Capital
Owning a small business comes with countless moving parts and tasks to ensure things run smoothly — setting up and maintaining 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* 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