Life & Health Insurance Exam (National Portion)Taxes, Retirement, and Other Insurance ConceptsHard
A business owner is planning for their retirement and wants to establish a qualified retirement plan for themselves and their employees. They are looking for a plan that is relatively simple to administer and allows for high contribution limits. Which of the following plans best fits this description for a small business?
- A401(k) plan.
- BSEP IRA.
- CDefined Benefit plan.
- DSIMPLE IRA.
Show answer & explanationAnswer & explanation
Correct answer: A. 401(k) plan.
A 401(k) plan allows for high employee and employer contribution limits and is common in small businesses, balancing high limits with relative administrative simplicity compared to defined benefit plans. While SEP IRAs are simpler, their contribution limits are typically lower than a 401(k) for individual employees, and SIMPLE IRAs have much lower limits.
Why the other options are wrong
- B. SEP IRAs are very simple and have high employer-only contribution limits, but 401(k)s allow for higher overall contributions when combining employee deferrals and employer contributions.
- C. Defined Benefit plans have high limits but are very complex and expensive to administer, not 'relatively simple'.
- D. SIMPLE IRAs are simple but have significantly lower contribution limits than 401(k)s or SEPs.
Small Business Qualified Retirement Plans
Various tax-advantaged retirement plans available to small businesses, each with different administrative complexity, contribution limits, and flexibility.
- 401(k): High limits, employee/employer contributions, moderate complexity.
- SEP IRA: Employer-funded, high limits (as % of salary), very simple.
- SIMPLE IRA: Lower limits, employee/employer contributions, simple.
- Defined Benefit: Highest limits, complex, employer takes investment risk.
Memory trick: Small businesses need a plan that balances Contribution, Simplicity, and Employee involvement.