Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceHard
A small business owner wants to implement a retirement plan that allows them to make tax-deductible contributions for themselves and their employees, with relatively simple administration. They anticipate varying contribution amounts each year based on business profitability. Which type of plan is most suitable?
- ASimplified Employee Pension (SEP) IRA
- BDefined Benefit Plan
- CPayroll Deduction Plan
- D401(k) Plan
Show answer & explanationAnswer & explanation
Correct answer: A. Simplified Employee Pension (SEP) IRA
A Simplified Employee Pension (SEP) IRA is ideal for small businesses because it offers tax-deductible contributions, simple administration compared to 401(k)s, and allows the employer to vary contribution amounts each year based on profitability. Contributions are made to individual IRAs set up for each eligible employee.
Why the other options are wrong
- B. Defined Benefit plans are complex, expensive, and require actuarial calculations, not suitable for simple administration with varying contributions.
- C. A Payroll Deduction Plan is a non-qualified plan where employees contribute after-tax dollars; it does not involve employer contributions or tax deductions for the employer in the same way.
- D. 401(k) plans are more complex to administer and have higher setup costs, though they allow employee contributions.
Simplified Employee Pension (SEP) IRA
A retirement plan for small businesses and self-employed individuals that allows employers to make tax-deductible contributions to an IRA for themselves and their employees. It offers simple administration and flexible contribution amounts.
- For small businesses and self-employed
- Employer makes contributions to employee IRAs
- Contributions are tax-deductible for the employer
- Simple to set up and administer
- Employer contributions can vary each year (up to limits)
Memory trick: SEP: Simple, Easy, Profitable (for small businesses).