In: Finance
. Larry Kraft owns a restaurant that is open 7 days a week. He has 25 full-time employees, but he has fairly high employee turnover. He believes that he can stabilize his workforce if he has a pension plan for his employees. Larry hears about a small business retirement plan called the SIMPLE IRA.
a) What are the qualifications and limitations for him to establish this plan?
b) What is another type of plan that he could offer and how would that work?
c)What are the pros and cons of the SIMPLE IRA vs the other plan you discussed?
a. In order to establish this plan Larry Kroft will have to meet the following qualifications and requirements:
i. He should have 100 or less than 100 employees and the employees should have earned a minimum of $5000 during the last year (i.e. the year preceding the year in which application was given).
ii. No other plans are maintained by Larry Kroft for his employees.
In terms of limitations Larry Kroft will not be able to employ more than 100 people at his restaurant, if and when he expands in future. Secondly Larry will not be able to maintain any other plans for his employees.
b. Another type of plan that he could offer is SEP IRAs. SEP stands for simplified employee pension. SEP IRA is a retirement plan that Larry Kroft can establish for his employees. Larry Kroft will be eligible to establish SEP IRAs for those employees who have attained 21 years of age, worked in the restaurant for at least 3 of the last 5 years and has received at least $600 as compensation.
c. Pros:
A simple IRA does not require 100% employee inclusion as is the case with SEP IRAs. Secondly a simple IRA does not limit the employer’s ability to make large contributions as is the case with SEP IRAs due to the stipulation that in case of SEP IRA each employee must receive the same contribution as a percentage of salary.
Cons:
One of the biggest drawbacks of Simple IRA is that there are employee limitations. The restaurant cannot expand beyond 100 employees in case of Simple IRA. There is no such restriction in case of SEP IRA.