Question

Tom has determined that a simplified employee pension (SEP) plan is the best fit for his business. Which of the following statements regarding implementing the SEP plan is CORRECT for 2021?

1. Tom may contribute up to 25% of his net earnings, not to exceed $58,000, for 2021.
2. A large corporation with thousands of employees.
3. A small business with a few employees.
4. An individual self-employed consultant.

Answer 1

For Tom's SEP plan in 2021, the correct implementation would be to contribute up to 25% of his net earnings without exceeding $58,000, suitable for small businesses and self-employed consultants. Therefore the correct answer is 1. Tom may contribute up to 25% of his net earnings, not to exceed $58,000, for 2021.

Step-by-step explanation:

In 2021, if Tom has determined that a simplified employee pension (SEP) plan is the best fit for his business, the correct statement regarding implementing the SEP plan is that Tom may contribute up to 25% of his net earnings, not to exceed $58,000, for the year. SEP plans are a type of defined contribution plan favorable for small businesses, including those operated by individual self-employed consultants, due to their simplicity and flexibility. Unlike traditional pensions, these tax-deferred savings vehicles allow for a fixed contribution from the employer to the worker's retirement account and are portable across different employers, which can protect against inflation costs.