Life & Health Insurance Exam (National Portion)Taxes, Retirement, and Other Insurance ConceptsMedium
A small business owner wants to offer a retirement plan to their employees that requires minimal administrative burden and allows for tax-deductible contributions by both the employer and employees. They prefer a plan that is relatively easy to set up and maintain, without complex discrimination testing. Which of the following plans best fits these requirements?
- ASEP IRA
- BSIMPLE IRA
- C401(k) Plan
- DDefined Benefit Plan
Show answer & explanationAnswer & explanation
Correct answer: B. SIMPLE IRA
A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is designed for small businesses (100 or fewer employees) and offers relatively easy administration, tax-deductible contributions, and avoids complex discrimination testing.
Why the other options are wrong
- A. SEP IRAs are primarily employer-funded and do not allow for employee salary deferrals, which the question implies with 'contributions by both the employer and employees'.
- C. 401(k) plans are generally more complex and involve more administrative burdens and testing requirements.
- D. Defined Benefit Plans are highly complex, expensive, and involve significant administrative and actuarial costs.
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan designed for small businesses (100 or fewer employees) that allows both employer and employee contributions with minimal administrative burden.
- For businesses with 100 or fewer employees.
- Employer contributions are mandatory (matching or non-elective).
- Employee salary deferrals are permitted.
- Lower administrative costs and complexity compared to 401(k)s.
Memory trick: For small businesses, 'SIMPLE' is often the 'BEST' choice when 'EASY' is the goal.