Small Business Retirement Plans in Washington, DC

Small Business Retirement Plans in Washington, DC. Starting up a retirement plan for you and your Washington, DC employees is a great way to retain talent, boost performance, and get those much-desired tax reductions. However, for most business owners, it can be hard to know how to proceed once they decide to establish one. What type of plan is best for your business? What federal regulations do I have to follow? What do I do when a new plan seems like a better option, or if I'm closing my business? Correct Capital's team of Washington, DC financial planners has over 70 years of combined experience helping business owners and their employees get the most out of having a sound retirement plans and understanding the specifics of their individual plans and benefits. 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 online.

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What Types of Retirement Plans Are Available to Small Businesses in Washington, DC?

The federal government and various financial custodians offer a wide array of retirement plans and retirement accounts for small business owners and their employees to better prepare for retirement. Among the most common are:

SEP-IRA

This form 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 tax-free. 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 tax-deductible.

Benefits of a SEP-IRA

• High Contribution Limits: Employers can contribute up to 25% of each employee’s compensation, with a maximum of $69,000 for 2024.
• Flexibility: For businesses with changing profits, this plan is suitable as employers are not obligated to contribute annually.
• 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: You can choose a provider, such as a bank, brokerage firm, or credit union, to hold SEP IRA assets. Alternatively, consider an online financial institution.
• Execute a Written Agreement: Inform eligible employees by establishing a plan document for the SEP IRA plan.
• Make Contributions: Contributions can be made by calculating an established percentage of each employee’s compensation. Alternatively, make payments based on a percentage range determined by business profits.
• Maintain Records: To maintain records, keep thorough records of all contributions made to employee accounts, including time stamps and amounts. Additionally, ensure records are organized and easily accessible for audit 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 fund 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 tax deductible.

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 suitable 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 an extra 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 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 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 promptly.

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 yearly cap. While this plan is highly customizable and allows for significant contributions, there may be beginning expenditures and annual fees 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 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 accounts.
• 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 specializes in defined benefit plans to establish the plan.
• Create a Plan Document: Draft a plan 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, 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: To ensure compliance, a defined benefit plan must be in place for a minimum of five years. Plans that are quickly terminated can be red flags and subject to regulatory scrutiny.

401(k) Plans

401(k)s are available to firms of any size, and are highly adaptable. Employees may allocate 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 pre-tax, 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 the current 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 urgent financial needs.

Setting Up a 401(k) Plan

• Choose a Plan Provider: Choose a provider that offers various investment options, management assistance, and employee learning resources.
• Create a Plan Document: Draft 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 secure 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 changes in a timely manner.

Individual 401(k)

Designed to offer the same benefits as a business 401(k), this plan is also known as a i401(k). It is ideal for individuals who are independent contractors, 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: Pick a financial institution or brokerage that offers Individual 401(k) plans. Search for providers with a range of investment options and reduced fees.
• Create a Plan Document: Prepare the terms of your plan, including contribution limits, investment options, and loan provisions.
• Open an Account: Set up your Individual 401(k) account with the chosen provider. This typically involves completing 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. 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 voluntary 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 determine each year how much to contribute based on the company's profitability. This makes it an adaptable option for businesses with fluctuating earnings.
• Tax Advantages: Contributions are tax-deductible for the business, reducing taxable income. Additionally, the funds grow tax-deferred, which can benefit employees' long-term savings.
• Employee Motivation and Retention: Linking contributions to company profits can 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 25% of an employee’s compensation or $$66k for this year, making it a advantageous option for employee benefits.

Setting Up a Profit Sharing Plan

• Choose a Plan Provider: Pick a financial institution 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: Each year decide the amount to contribute based on company profits and the predetermined formula.
• File Necessary Forms: File IRS Form 5500 every year to report the plan’s status and compliance.

Employee Stock Ownership Plan (ESOPs)

An Employee Stock Ownership Plan (ESOP) is a retirement plan that invests primarily in the employer's stock. ESOPs give employees ownership interest in the company, aligning their interests with the business's success, and potentially helping set up the business's next generation of leadership.

An Employee Stock Ownership Plan (ESOP) is a retirement plan that invests primarily in the employer's stock. ESOPs give employees 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.

Benefits of an ESOP

• Employee Ownership: ESOPs provide employees with an partial ownership in the company, which can enhance incentive and dedication.
• Tax Benefits for the Company: Contributions to the ESOP are deductible from taxes, and the company can also gain tax benefits associated with the sale of stock to the ESOP.
• Retirement Savings for Employees: Employees profit from the growth in the value of the company’s stock, granting potentially considerable retirement savings.
• Succession Planning: ESOPs can be an effective strategy for business succession, allowing owners to sell their shares to their best employees, who can steadily take the lead as previous owners ease into retirement.

Setting Up an ESOP

• Feasibility Study: Carry out a feasibility study to determine if an ESOP is a suitable option for your company.
• Hire ESOP Advisors: Retain financial, legal, and ESOP advisors to aid in the setup process.
• Create a Plan Document: Draft a plan document that defines the terms of the ESOP, including how shares will be assigned and vested.
• Establish a Trust: Set up 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 benefits they can expect.
• Compliance and Reporting: File 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 affordable and administratively efficient way to offer retirement benefits to their employees.

Benefits of an MEP

• Cost Savings: By combining resources with other employers, businesses can reduce 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 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: An MEP allows small businesses that might not have the resources to provide a retirement plan on their own can deliver competitive retirement benefits, helping to attract and retain talented employees and offer 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, 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 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 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 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 benefits, 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.

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Benefits of Setting Up a Small Business Retirement Plan in Washington, DC

The specific, financial-based benefits for your Washington, DC small business retirement plan is dependent upon which plan you choose. However, there are many general benefits of setting up a small business retirement plan for both businesses and workers. 60% of workers responded to a survey saying 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:

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

Creating small business retirement plans is far different from setting up a personal savings plan at your local Washington, DC bank. While the federal government does not currently require any business to offer a retirement plan to workers, some states require employers with a minimum number of employees to have a retirement plan. Washington, DC retirement consultants that have spent years helping business owners open retirement plans are usually needed to not only make sure the plan is right for you, but that you abide by ever-changing tax and business laws.

As your Washington, DC retirement plan consultants for your small business, our team will:

• Help you decide which plan works best for you and your employees, and the right custodian to hold plan assets
• Assist you in establishing your plan, including adopting a written plan, establishing a trust for plan assets, helping employees understand how specific of the plan apply to their retirement, and creating a record keeping system
• Help you operate your plan by keeping up-to-date with applicable laws, managing the plan's assets, and distributing benefits
• Help educate your employees on your plan, its benefits, and how it can serve as a part of their continued financial journey

Correct Capital's Washington, DC financial planners are fiduciary advisors, meaning we are legally and ethically obligated to do what's best for you and your employees. We work for you, and not our own firm. Request a consultation with a member of our advisor team today.

Common Challenges and Solutions in Small Business Retirement Plans

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Challenge 1: High Setup and Administrative Costs

Many small businesses are unwilling to set up retirement plans due to the assumed 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 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 payroll processing and fiduciary management.
• 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

Limited employee involvement can limit the effectiveness of a retirement plan.

Solution:

• Automatic Enrollment: Introducing 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 boost 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

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. Our team 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. Adjust the plan as necessary to align with changes in your business environment and workforce demographics.

With the assistance of dedicated Washington, DC financial advisors and retirement plan specialists, your business can manage these challenges to create a small business retirement plan that works for both you and your employees.

Other services we offer in Washington, DC include:

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

Small Business Retirement Plans in Washington, DC | Correct Capital

Operating a small business involves a plethora of 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 in both small and large companies, and represents over $212 million in total plan assets* across the United States. To set up a retirement plan for your small business, or learn what other services we offer to business owners, call Correct Capital today at 314-930-401K or contact us online.

*as of March 2024