Problem 19-45 (LO. 4, 5,9) Sara Reid, age 35, is the owner of a small business. She is trying to decide whether to use a $ 401(k) plan or a simplified employee pension plan. She is not interested in a SIMPLE 401(k) plan. Her salary will be approximately $45,000, and she will have no employees. She asks you to provide her with information on the advantages and disadvantages of both types of plans and to give your recommendation Complete the letter to Sara that contains your response. Young, Nellen, Raabe, Hoffman, & Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 February 12, 2020 Ms. Sara Reid 1414 Canal Street New Orleans, LA 70148 Dear Ms. Reid: This letter is in response to your request for a comparison of a $ 401(k) plan and a simplified employee pension (SEP) plan for your small business. With your salary of approximately $45,000, you would be able to place $ into a $ 401(k) plan. This amount is indexed each year, and it is calculated from the lesser of $ or approximately % of total earnings. The favorable 10-year averaging technique on distributions is not available. could contribute the lesser of $ % of your earned income. Thus, would With a SEP, be limited to $ 11,250 The favorable 10-year averaging technique on distributions is not available. With a S 401(k) plan employers must keep records and monitor for compliance with anti-discrimination tests, whereas a SEP does not require an annual report to the IRS. Therefore, compliance cost is a factor. are fully vested, whereas vesting can take place over a 3-7 year Should you hire other employees, contributions to a SEP period for a 401(k) plan Under your current circumstances, if you want to maximize your contributions, I would recommend a 401(k) plan Should you need more information, please contact me. As you requested, we did not include the SIMPLE $ 401(k) plan in our analysis