Life & Health Insurance Exam (National Portion)Taxes, Retirement, and Other Insurance ConceptsMedium
A small business owner establishes a Simplified Employee Pension (SEP) plan for their employees. Which of the following is a key characteristic of a SEP plan?
- AIt is subject to the same complex administrative requirements as a 401(k) plan.
- BEmployees are immediately vested in employer contributions, but only after 5 years of service.
- CContributions are made by the employer directly into an IRA established for each eligible employee.
- DIt allows employees to make pre-tax contributions through payroll deductions.
Show answer & explanationAnswer & explanation
Correct answer: C. Contributions are made by the employer directly into an IRA established for each eligible employee.
SEP plans are employer-funded retirement plans where contributions are made to individual IRAs established for each eligible employee, offering a simpler alternative to more complex plans.
Why the other options are wrong
- A. SEPs are known for their simplicity and fewer administrative burdens compared to 401(k)s.
- B. Employees are immediately 100% vested in all employer contributions to a SEP, without a waiting period.
- D. This describes a SIMPLE IRA or 401(k), not a SEP.
Simplified Employee Pension (SEP)
A retirement plan for small businesses and self-employed individuals, allowing employers to contribute to individual retirement accounts (IRAs) set up for their employees.
- Employer-funded only.
- Contributions made to IRAs.
- Simpler administration than 401(k)s.
- Immediate 100% vesting for employees.
Memory trick: SEP: Simple Employer's Plan for Employees.