Deck 13: Keogh Plans, Seps, and Simple Plans

Question 1

Discuss how retirement plans for the self-employed compare with qualified corporate retirement plans.

Answer 1

Retirement plans
Retirement plans with tax favoured retirement plan is provided for self-employed and employees in the form of Keogh plans. Individual retirement arrangement are available to other individual for their own retirement planning and simplified employee pension (SEP) plan are used by employers for employee retirement plan.
Self-employed retirement plan are set-up by individual for their own benefit while qualified corporate retirement plans are set-up by employers for its employees. The contribution made to self-employed retirement plan by qualified individual is eligible for tax deduction while contribution made by owner to employees qualified retirement plan is eligible for tax deduction to employer similar to in self-employed plan. The distributions from retirement plan are taxable in both the retirement plan.

Question 2

Describe the types of tax-favored retirement plans available to self-employed individuals.

Answer 2

In 1962, Self Employed Individual Tax Retirement Act was passed by the government then in order to provide tax advantages to the self employed individuals like corporate individuals and to remove the present tax inequality.
Various plans were introduced in order to provide retirement plans to self employed individuals. This plans includes -
1.  Keogh Plan (HR-10)
This plan was introduced in 1962 under the name of Self employed individual retirement act which aimed at establishing a qualified plan for self employed individuals but with various restrictions and limitations not commonly found in corporate plans.
2.  Simplified employee pension (SEP) plan
This plan was introduced under The Small Business Job Protection Act of 1996 to provide retirement plans to self employed and their employees. The basic aim of this plan was to simplify the process so that small businesses found it less complex to enter in it.
3.  Savings Incentive Match Plans for employees (SIMPLE)
This plan was introduced in 1997 by The Small Business Job Protection Act and is allowed to be designed as an Individual Retirement Account (IRA) or 401(k) plan.
4.  Solo 401(k) Plan
This plan came into effect from 2002. Under this unique plan, single person or two person firm can enter into retirement plan. It is quite similar to other 401(k) plans.
These are the various tax favoured retirement plan designed for a self employed individual.

Question 3

Discuss the decision factors in the selection of an appropriate retirement plan for a small employer.

Answer 3

Retirement plans
Retirement plans with tax favoured retirement plan is provided for self-employed and employees in the form of Keogh plans. Individual retirement arrangement are available to other individual for their own retirement planning and simplified employee pension (SEP) plan are used by employers for employee retirement plan.
The factors that employer would consider before choosing retirement plan is number of employees which would be eligible for the plan, the frequency of employee turnover and termination. The other factors employer would consider is the tax deductibility on the plan and the return that would be obtained from retirement plan.

Question 4

Distinguish between a self-employed individual and an owner-employee.

Question 5

Evaluate the relative advantages and disadvantages of a conventional deferred profit sharing plan and a SEP in terms of their application to a self-employed individual as a means of establishing a formal program for accumulating retirement funds.

Question 6

Describe the contribution deduction limits available for defined benefit and defined contribution Keogh plans.

Question 7

SEPs are, under law, treated as IRAs with higher limits. Likewise, SIMPLE plans established as IRAs allow for higher limits than standard IRAs. What justification exists for permitting higher-limit IRAs for some individuals and not for others?

Question 8

What annual limitations apply to the maximum amount that may be contributed by or on behalf of an employee under a SEP?

Question 9

For whom must employers make contributions under a SEP?

Question 10

Explain how the limitation on compensation that may be taken into account under a SEP can also affect the percentage of pay that must be contributed for nonhighly compensated employees.

Question 11

What is the deduction limit for employer contributions made to a SEP?

Question 12

Under what circumstances may a SIMPLE plan be offered by an ?employer?

Question 13

What are the different types of employer contributions that can be made to SIMPLE plans?

Question 14

Distinguish between employer and trustee administrative responsibilities in operating a SIMPLE plan.

Question 15

Describe the situation in which a solo 401(k) is appropriate and the legal changes that made such plans viable.