Small Business Retirement Plans in Rancho Cucamonga, CA. Offering a retirement plan to your Rancho Cucamonga, CA employees is a great way to retain talent, incentivize higher performance, and get those much-needed tax breaks. While the benefits may be obvious, the complexities of establishing 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 I want to change plans, or if I'm closing my business? Correct Capital's team of Rancho Cucamonga, CA financial planners is committed to helping business owners and their employees reap the rewards of having a sound retirement plans and understanding the ins-and-outs of their individual plans and benefits. Whether you're interested in modifying an existing plan or are looking to create an entirely new one, speak to a financial advisor at Correct Capital today at 314-930-401K or contact us online.
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What Types of Retirement Plans Are Available to Small Businesses in Rancho Cucamonga, CA?
The federal government provides a wide array of retirement plans and savings vehicles for small business owners and their employees in preparation for retirement. Among the most common are:
SEP-IRA
This variant of individual retirement account is available to self-employed businesses, freelancers, and businesses with very few employees. It follows the same 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 deposits, which are flexible and can vary annually. 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: The plan does not require employers to contribute annually, which is perfect for businesses with changing profits.
- Simple Administration: 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: Choose an institution to hold SEP IRA assets, like a bank, brokerage firm, or credit union. Alternatively, opt for an online financial institution.
- Execute a Written Agreement: Establish a written agreement and inform eligible employees of the SEP IRA plan.
- Make Contributions: To make contributions, calculate a predetermined percentage of each employee’s compensation. Alternatively, contribute based on a percentage range determined by business performance.
- Maintain Records: To maintain records, keep detailed records of all contributions made to employee accounts, including time stamps and amounts. Additionally, ensure records are neatly arranged 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 deductions from their salaries, and employers can also contribute. This plan is inexpensive as it's mainly funded by employees, and their contributions can be tax deductible.
Benefits of a SIMPLE IRA
- Ease of Setup and Administration: SIMPLE IRAs are easy to establish and maintain, with no need for yearly filings for employers. This makes them perfect for small businesses with constrained administrative resources.
- Employer Contributions: Employers are required to make contributions, by either matching employee contributions up to 3% of their salary or making a non-elective contribution of 2% of each eligible employee’s salary.
- Employee Contributions: Employees can contribute up to $16,000 in 2024, with an additional catch-up contribution of $3,500 for those aged 50 and older.
- Immediate Vesting: All contributions to the SIMPLE IRA are instantly 100% vested, meaning employees have full ownership of all funds in their accounts as soon as contributions are made.
Setting Up a SIMPLE IRA
- Select a Financial Institution: Choose a 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 establishing 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 promptly.
Personal Defined Benefit Plan
This plan is exclusively for owner-only businesses, or those with as many as 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 $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 an investment firm 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 contribution requirements and how benefits are calculated.
- Actuarial Calculations: Have an actuary calculate the necessary contributions to meet the promised benefits, per IRS requirements.
- Annual Administration: To manage the plan’s investments, ensure that required contributions are made annually and conduct annual actuarial reviews to adjust for any changes in funding requirements.
- Compliance and Reporting: Ensure compliance by filing IRS Form 5500 annually to report on the plan’s status.
- Permanence: A defined benefit plan needs to be in place for at least five years. Plans established that are quickly terminated are often signals and open to regulatory scrutiny.
401(k) Plans
401(k)s are available to companies of any size, and are highly adaptable. Employees may defer 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 without immediate tax.
- 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 $$23k, 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 financial emergencies.
Setting Up a 401(k) Plan
- Choose a Plan Provider: Select a provider that offers multiple investment choices, administrative services, and employee education.
- 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 employees.
- 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 i401(k), is designed to provide the same benefits as a business 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 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: Select a financial institution or brokerage that offers Individual 401(k) plans. Search for providers with various investment options and lower fees.
- Create a Plan Document: Establish 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: Determine your contribution amounts for the year and make regular contributions. Ensure you stay within the IRS limits for total contributions.
- Compliance and Reporting: If your plan assets exceed $250,000, you must file IRS Form 5500 annually. Ensure detailed 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 versatile 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 25% of an employee’s compensation or $sixty-six thousand dollars for this 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: Develop 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 annually to report the plan’s status and compliance.
Employee Stock Ownership Plan (ESOPs)
An Employee Stock Ownership Plan (ESOP) is a retirement plan that invests primarily in the employer's stock. ESOPs give employees ownership interest in the company, aligning their interests with the business's success, and potentially helping set up the business's next generation of leadership.
An Employee Stock Ownership Plan (ESOP) is a retirement plan that invests primarily in the employer's stock. ESOPs give employees equity in the company, matching their interests with the business's success, and potentially helping set up the business's future generation of leadership.
Benefits of an ESOP
- Employee Ownership: ESOPs provide employees with an equity share in the company, which can enhance drive and commitment.
- 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, providing potentially significant retirement savings.
- Succession Planning: ESOPs can be an effective method for business succession, permitting owners to sell their shares to their best employees, who can gradually take the lead as previous owners transition into retirement.
Setting Up an ESOP
- Feasibility Study: Carry out a feasibility study to determine if an ESOP is a viable option for your company.
- Hire ESOP Advisors: Consult financial, legal, and ESOP advisors to guide the setup process.
- Create a Plan Document: Prepare a plan document that defines 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: Inform employees about the ESOP, how it works, and the perks they can expect.
- Compliance and Reporting: Submit necessary documents with the IRS and the Department of Labor, including Form 5500, to keep your plan compliant.
Multiple Employer Plans (MEPs)
A Multiple Employer Plan (MEP) is a type of retirement plan that allows multiple, unrelated employers to take part in a single retirement plan and achieve economies of scale. MEPs are designed to provide small businesses with a 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 attractive option for small businesses looking to save on expenses.
- Administrative Efficiency: MEPs ease 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: Through an MEP, small businesses that might not have the resources to provide a retirement plan on their own can provide competitive retirement benefits, helping 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, reducing 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: 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 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 Rancho Cucamonga, CA
The particular, financial-based benefits for your Rancho Cucamonga, CA small business retirement plan is dependent upon which plan you choose. However, a small business retirement plan, whichever one you choose, benefit employers and employees in the same way. 60% of workers say that a retirement plan is a "very important" factor in job satisfaction, 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 having a small business retirement plan:
Employee Benefits
- Better confidence in their retirement planning
- Tax deductions
- Contributions can be easily made through payroll deductions
- They do not pay taxes on contributions or investments gains until they take them out
- Over the years small savings grow into considerable sums of money
- Ability to perform a 401(k) rollover if they change employers
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
Do I Need a Financial Advisor in Rancho Cucamonga, CA to Help With My Small Business Retirement Plan?
Creating small business retirement plans is complicated. While the federal government does not currently obligate any business to offer retirement savings options to employees, certain states require employers of a certain size to have a retirement plan. Rancho Cucamonga, CA retirement consultants that have spent years helping business owners create retirement plans are usually needed to not only make sure you and your employees get the most out of your plan, but that you abide by ever-changing tax and business laws.
As your Rancho Cucamonga, CA 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 establishing your plan, including creating a document that complies with IRS code, establishing a trust for plan assets, helping employees understand the plan's terms, and developing a record keeping system
- Help you operate your plan by adapting as we need to to 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 continued financial journey
Correct Capital's Rancho Cucamonga, CA 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. The only product we offer is trust. Schedule 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 perceived high costs.
Solution:
- SIMPLE IRA and SEP IRA: These plans have reduced 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, with 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 payroll integration and fiduciary management.
- Multiple Employer Plans (MEPs): Joining 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: Using 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.
Challenge 4: Compliance with 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 change with changing business conditions.
Solution:
- Flexible Plans: Select 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 assistance of dedicated Rancho Cucamonga, CA financial advisors and retirement plan specialists, your business can navigate these challenges to create a small business retirement plan that works for both you and your employees.
Other services we offer in Rancho Cucamonga, CA include:
- 401(k) Audit
- High-Net-Worth Wealth Management
- Retirement Planner
- Financial Planning
- Retirement Plan Consultants
- Fiduciary Financial Advisor
Small Business Retirement Plans in Rancho Cucamonga, CA | Correct Capital
Owning a small business involves a mountain of daily, monthly, and annual 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 in both small and large companies, 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 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