CH 6 - SEPs, SIMPLEs, & 403(b) Plans

Question 1

What is annual contribution limit for a Simplified Employee Pension (SEP) and 403(b) plan related?

Answer 1

$54K

Question 2

What are the THREE features of a SEP?

Answer 2

• Employers can make discretionary contributions
• 25% maximum deductible contribution
• distributions/withdrawals allowed anytime

Question 3

What THREE features make a Simplified Employee Pension (SEP) different than a profit-sharing plan?

Answer 3

• SEPs require 100% vesting and profit-sharing uses cliffing (3 cliff and 6 years)
• funded with IRA
• Allocation formula must be leveled and not skewed to older employees unless you’re using an integration with Social Security

Question 4

Is the administration of a SEP simple or complex?

Answer 4

simple

Question 5

What are the eligibility requirements for a SEP and SIMPLE?

Answer 5

SEP:

Must be 21 years old in the following calendar year or have 3 years of service in last five years with $600 in earnings

SIMPLE:

must cover those who earned $5K in two prior years

Question 6

SEPs do not allow salary deferrals unless…

Answer 6

you have a grandfathered SARSEP.

Question 7

What is the maximum number of employees required to have a SIMPLE?

Answer 7

100 or fewer

Question 8

What makes a SIMPLE unique compared to the other plans?

Answer 8

You CANNOT hold any other tax-advantage plan.

Question 9

What are the deferred limits for a SIMPLE and how does it compare to a 401K?

Answer 9

SIMPLE: $12,500 with a $3K catch-up

401Ks: $18,000 with a $6K catch-up (same as 403(b))

Question 10

SIMPLEs and SEPs are funded with IRAs. Just like SEPs, SIMPLEs have… (3)

Answer 10

• 100% vesting
• NO loans
• distributions allowed anytime

Question 11

What are the TWO employer contribution requirements for SIMPLE plans?

Answer 11

• 2% contribution for all eligible employees OR
• 100% (dollar for dollar) match on first 3% deferral (reduce to 1% two of five years)

Question 12

403(b) plans are funded with ______ and _____.

Answer 12

annuities

and

mutual funds

Question 13

What makes 403(b) plans more unique in comparison to other tax-advantage plans? (2)

Answer 13

• Only established by public schools
• Can’t cover independent contractors (eg - some doctors at hospitals)

Question 14

403(b) plans must allow ________ to make salary deferrals.

Answer 14

ALL full-time employees (20 hours a week)

Question 15

What are the FOUR key features to a 403(b) plan?

Answer 15

• employer match and/or nonelective contribution
• can allow Roth elections
• discretionary loans
• 25% maximum deduction

Question 16

What are the TWO most important 403(b) ERISA requirements?

Answer 16

1. must have a formal plan document if not covered under ERISA
2. matching contributions subject to ACP