TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th Edition
College Course Materials
Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®
Associate Professor
CFP® Program Director
Personal Financial Planning Department
University of Missouri-Columbia
Please Note: Correct answers for each question are indicated in bold type. After each question,
the number of the page containing information relevant to answering the question is given. When a
calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale
for the correct answer is also given.
Part A: Retirement Planning
Other Employer Retirement Plans
Chapter 24: Simplified Employee Pension (SEP)
True/False
24.1
Currently, a SEP provides for employer contributions only.
24.2
An employer must make SEP contributions every year, regardless of company
performance.
24.3
Plan loans are allowed in a SEP.
Answers:
24.1 true [p. 204]
24.2 false [p. 204]
24.3 false [p. 205]
Multiple Choice
24.4
Each of the following is true regarding a SEP except:
a. direct employer contributions to a SEP are not subject to Social Security (FICA) or
Federal unemployment (FUTA) taxes
b. in a SEP, employer contributions are made directly to an employee’s IRA
c. SEP contributions must be ‘recurring and substantial’ to maintain tax favored status
d. employer contributions to a SEP reduce the amount the employer can deduct for
qualified plan contributions for an employer who maintains a SEP and a qualified plan
e. distributions from the plan follow the IRA distribution rules
Answer: C [p. 204-206]
24.5
Advantages of a SEP include
a. portable benefits for employees
b. contribution, deduction, and exclusion amounts equal those available in other defined
contribution plans
c. flexibility for employer in timing plan contributions
d. a and b
e. a and c
Answer: E [p. 203-204]
24.6
To install a SEP, an employer must
a.
b.
c.
d.
e.
complete the appropriate tax form
file the appropriate tax form prior to tax filing date for year the SEP is to take effect
send the appropriate tax form to the IRS
all of the above
only a and b
Answer: E [p. 207]
Application
24.7
Jack Mattingly, owner and employee of the Crab Shack, a local seafood restaurant, has a
SEP for his business. Currently, there’s Star, his head cook who has been with him for 4
years, Dot and Skip, his head waitress and waiter, who have been with him for 5 years,
and Andy, another waiter who has been there 3 years. He has five part-timers who started
between one and two years ago. His 16 year old son busses tables on the weekends, but
never makes more than $400. All of his other employees except one part-timer are over
age 21. How many employees must Jack cover under the SEP?
a.
b.
c.
d.
e.
1
4
5
10
11
Answer: C [p. 204 – Jack must cover himself, Star, Dot, Skip, and Andy. All have been with the
business at least 3 out of the last 5 years. The part-timers are not covered because they were all
employed less than 3 years. His 16 year old son is not old enough to be required to be covered
under the plan.]
24.8
Gym-Fantastic, a local gymnastics studio, has a SEP for the 5 full time employees. This
year, as in the previous five years, the business has made a substantial profit. GymFantastic
a. must make a contribution to the SEP every year, whether there is profit or not
b. must make a contribution to the SEP every year that there is profit
c. can choose to make a contribution or not, but must be sure to make ‘substantial and
recurring’ contributions to the SEP
d. must make contributions at least as often as comparable defined contribution plans
e. can omit any year’s contribution to the SEP without concern of disqualification of plan
or loss of tax advantages
Answer: E [p. 204]
24.9
It is late March, and the owner of the Loud ‘n’ Crazy Music store is reviewing the business’
tax return and realizing that it would be a great advantage if the store could have
implemented a SEP the previous year. The owner
a. cannot implement a plan for last year but can start the process this year to have a plan
in place for next calendar year
b. cannot implement a plan for last year but can implement a SEP for the current calendar
year before submitting a tax return for this year
c. cannot implement a plan for last year but can implement a SEP for the current calendar
year after submitting a tax return for this year
d. can implement a SEP for last year only because it is the first quarter of the new
calendar year
e. can set up a plan for the previous calendar year as late as the date that taxes are due,
including extensions
Answer: E [p. 203]
24.10 Anchor Hardware Store has a SEP and a qualified profit sharing plan. When Anchor
Hardware makes a contribution to the SEP, contributions to the qualified profit share plan
are not affected.
a. true
b. false
Answer: B [p. 206]