Navigating the World of Business Retirement Plans: A Comprehensive Guide for Small Business Owners
Owning a small business in California means following strict requirements on providing employees with the right small business retirement plans. Having the best plans in place should help you maintain economic security and benefit from various tax advantages.
Whether you offer simplified employee pension plans or Roth IRAs, having an employer-sponsored retirement plan in place should make it easier for you to attract new employees and retain existing ones. Most employees prioritize retirement benefits when considering job offers.
While California has a new retirement plan mandate, you still have the option of selecting your own small business retirement plans that the federal tax code accepts. The ideal plan for your company depends on such factors as how much you can contribute every year and the overall size of your business. Here's a comprehensive guide on business retirement plans and their importance to your small business.
Retirement Plan Mandate in California
California recently adopted a law that every company with at least five employees must adhere to. If your small business employs five or more people, you'll need to choose either CalSavers or a private retirement option. The CalSavers retirement plan needs to be set up immediately after you have five employees. If you don't comply with this law, you'll be fined around $250 per employee, which can quickly add up.
The purpose of this mandate is to give employees the opportunity to save for retirement even if they work for a smaller business. Keep in mind that businesses aren't required to match employee contributions, which means that your small business should be able to afford putting these plans in place.
When you're trying to determine if your business needs to select a retirement plan, the mandate applies whether you hire part-time or full-time employees. Anyone who receives a W2 will be counted as an employee. While the initial fees for not complying with this mandate amount to $250 for every eligible employee, these costs go up if you're not in compliance after 180 days have passed. In this scenario, the penalty will increase to around $500 for every employee. Working with a financial advisor like Attentive Investments can help your business choose the right plan, adhere to the new mandate and avoid any fees.
Understanding How CalSavers Works
The state-sponsored retirement savings program that you can choose for your small business is known as CalSavers. If you select this program, you'll be able to register online, after which your employees will automatically be enrolled into a Roth IRA.
Once all of your employees have been enrolled, they are able to choose their preferred contribution rate or opt for the default rate. They could also decide to leave the retirement savings program altogether. When using the CalSavers program, your employees are given the ability to use a target date fund or choose specific funds via an investment menu.
Many small businesses choose the CalSavers option out of the belief that it's more convenient. The truth, however, is that there are several drawbacks that become evident once you implement it. For one, most businesses aren't getting the best options. The program has a large amount of automation while also not providing much customization, which makes the government solution less helpful than you might imagine.
You'll also discover that CalSavers isn't going to provide you with investment or financial advice that would help you and your employees make the right decisions when saving for retirement. It's a very plug and play service.
Small Business Retirement Plans to Consider
Instead of using CalSavers, consider choosing a private retirement program to offer your employees. These plans will benefit you and your employees. With the right retirement plan in place, you can save for retirement, obtain matching distributions, and reduce what you owe on your annual tax forms. As mentioned previously, having a robust retirement plan in place also helps with employee retention.
There are numerous types of retirement plans available to small businesses. Before you decide which one is right for your business, you should understand what they entail and the financial benefit packages they provide.
Your main option is a 401(k) retirement plan. These plans provide employees with the ability to place money in a retirement account that will only be taxed after withdrawals are made. There are annual contribution limits your employees must adhere to.
You could also obtain a SEP IRA, which is a kind of individual retirement account that provides business owners and self-employed individuals with the means of contributing as much as 25% of their income into the account. This money can be distributed without paying taxes.
If you want to make sure your employees have options when choosing a retirement plan, consider a Roth IRA, which is common among small businesses and makes it easy for employees to place after-tax dollars in their account. While contributions are taxed before they enter the account, any withdrawals during retirement are tax-free.
The final option at your disposal is a simple IRA plan, which is ideal for small businesses that are looking to provide their employees with an effective retirement savings plan. It's easy to create this plan. If your employees opt in, they can contribute as much as $15,500 of their annual salary in 2023. As the employer, you can choose to match employee contributions.
Which Retirement Plan is Right for Your Business?
There are several factors that must be taken into account when choosing a retirement plan, which include the needs that your employees have and the size of your small business. Make sure that you speak directly with a professional or financial advisor who can help you identify the retirement plan that's most suitable for your business. To be certain that you comply with the latest California mandate, you should seek professional assistance to more effectively navigate this process. Otherwise, you risk high fees that quickly add up.
If you're a business owner who requires employee benefit plans and wants to make sure that you're compliant with California law, Attentive Investments offers comprehensive management and planning services that will provide for all of your needs.