Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A small business owner wants to implement a retirement plan that allows them to make tax-deductible contributions for their employees, including themselves. They prefer a plan that is relatively easy to set up and administer, and where employees direct their own investments. Which of the following plans best fits these criteria?
- A401(k) Plan
- BNon-qualified Deferred Compensation Plan
- CDefined Benefit Plan
- DSimplified Employee Pension (SEP) IRA
Show answer & explanationAnswer & explanation
Correct answer: D. Simplified Employee Pension (SEP) IRA
A Simplified Employee Pension (SEP) IRA is ideal for small businesses because it is easy to set up and administer. Employers make tax-deductible contributions to individual IRAs for themselves and their employees, and employees typically direct their investments. It offers higher contribution limits than traditional IRAs.
Why the other options are wrong
- A. 401(k) plans are more complex and costly to administer than SEP IRAs for small businesses.
- B. Non-qualified plans are not tax-deductible for the employer and are typically used for highly compensated employees, not broad employee coverage with tax deductions.
- C. Defined Benefit Plans are complex, expensive to administer, and require actuarial calculations, not fitting the 'easy to set up' criterion.
Simplified Employee Pension (SEP) IRA
A retirement plan primarily for small businesses and self-employed individuals, allowing employers to contribute to employees' IRAs. It's known for its simplicity and high contribution limits.
- Easy to set up and administer
- Employer contributions are tax-deductible
- Employees direct investments
- Higher contribution limits than traditional IRAs
Memory trick: Simple savings for small staffs.