Business Uses Of Life Insurance And Employee Benefits

Question 1

Group life as employee benefits

Life insurance premiums paid by the employer are tax exempt to the employee up to what amount?

Answer 1

$50,000 applies to both current and former employees including retirees

Question 2

Group life as employee benefits

What amount of schedule premium is included in the employees W-2 income less the employees contribution?

Answer 2

Group term coverage greater than 50,000 the schedule premium per $1000 is included in employees W-2 income less employees contribution

Question 3

Group life, as employee benefits

What is required for favorable tax treatment?

Answer 3

Must be non-discriminatory

Which means plan must cover 70% or more of all employees and at least 85% of the non-key employees

Question 4

Group life, as employee benefits

Premiums paid by the employer for group health insurance are tax exempt, two and deductible by who?

Answer 4

Tax exempt to the employee

Deductible by the employer

Question 5

Group life has employee benefits

Employer provides permanent life insurance coverage and pays the entire premium. What is the employee taxed on and is it deductible by the employer?

Answer 5

Employee is tax on the non-term portion of the premium

Premium his deductible by the employer

Question 6

Group life, as employee benefits

Does group universal life provide any tax advantages to the employer?

Answer 6

No because premiums are usually paid by the employee

Question 7

Split dollar life insurance

What is it?

Answer 7

Arrangement typically between an employer and employee, in which the cost and benefits of the life insurance policy are shared

Question 8

Split dollar life insurance

What are the appropriate applications of split dollar life insurance?

Answer 8

Employer wishes to provide an executive with a life insurance benefit had a low cost and low cash outlay to the executive

When a pre-retirement death benefit for an employee is a major objective

Employers seeking a selective executive fringe benefit

Cannot use this for officers or directors of the corporation

Question 9

Split dollar life insurance

What aspects of the policy can be subject to different types of splits?

Answer 9

Premium cost

Cash value

Policy ownership

Question 10

Split dollar life insurance

What are the two premium cost split categories?

Answer 10

Classic or standard: employer pays a portion of the premiums, equal to the increase in cash surrender value of the policy

Level premium plan: employees premium share is level over an initial number of years

Question 11

Split dollar life insurance

What is the cash value and death proceeds split

Answer 11

Purpose of the split of cash value or death proceeds is to reimburse the employer in whole or in part for its share a premium outlet in the event of employees, death or termination

Question 12

Split dollar life insurance

What are the 2 policy ownership method splits?

Answer 12

Endorsement method: employer owns the policy, pays the entire premium, employee dies, split beneficiary designation provides for the employer to receive a portion of the death benefit equal to its premium outlay with the remainder of death proceeds going to the beneficiary, if employer terminates, the plan employer will receive cash surrender value the employee will receive nothing

The collateral assignment method: employee is the owner of the policy and responsible for premiums employer, makes interest free loans in the amount of the premium policy, assigned as collateral to the employer employees, death employer recovers the loan the remainder of the proceeds are paid to the beneficiary employer terminates, the plan employer will receive an amount equal to premium payments loaned employee will receive the policy.

Book 2 page 53

Question 13

Split dollar life insurance

What is the income tax treatment?

Answer 13

Payment made by an employer must be accounted for either as a loan to the employee, or the economic benefit received by the employee must be treated as compensation

Book 2 page 53

Question 14

Key employee life insurance

Who pays the premiums? Is the beneficiary and owns the policy?

Answer 14

The business

Question 15

Key employee life insurance

Are premiums tax deductible, and are death benefits received tax free?

Answer 15

Premiums are not tax deductible

Death benefit is received income tax free by the business

Two page 53

Question 16

Executive bonus life insurance plan

What is it?

Answer 16

Employer pays a bonus to executive for purpose of purchasing cash value life insurance

Question 17

Executive bonus life insurance plan

What are the mechanics of the plan?

Answer 17

Executive, his policy, owner insured and designates the beneficiary

Maybe discriminatory

Income tax deduction for the bonuses paid

Employee has taxable income, when the bonus is paid, even if paid directly to the insurer

Two page 54

Question 18

Life insurance and qualified plans?

Answer 18

Can be provided to a qualified plan as long as the incidental death benefit requirement is met…one of two test must be passed. The 25% test and the hundred to one ratio rule.

Question 19

Cafeteria plans and flexible spending accounts

What are they?

Answer 19

Plan in which employees may within limits choose the form of employee benefits from options, provided by their employer

Must include cash option, which is to receive cash in lieu of non-cash benefits of equal value

Question 20

Cafeteria plans

What are the advantages?

Answer 20

Employees appreciate the value

Helps control employer costs

Question 21

Cafeteria plans

What is the disadvantages?

Answer 21

Are complex and expensive

Highly compensated employees may lose the tax benefits of the plan, if discriminatory

Book to page 56

Question 22

Cafeteria plans

What are the tax implications?

Answer 22

Must comply with section 125, which provides an exception to the constructive receipt doctrine

Section 125 are not met. Employees are taxed on the value of benefits.

Limitation on non-taxable benefits to keep employees must not be graded and 25% of benefits provided to all employees

If employee chooses to benefit, it remains non-taxable. If employee chooses, cast equal to the cost of the benefit, cash is included in income.

The two page 56

Question 23

Cafeteria plans

What benefits can be made available in the cafeteria plan?

Answer 23

Accident and health benefits, but not long-term care insurance

Dependent care services

Group term life insurance

Health savings accounts HSAs

Two page 56

Question 24

Cafeteria plans

What benefits may not be provided?

Answer 24

Scholarships and fellowships

Educational assistance

Employee discounts, other than fringe benefits

Retirement benefits, such as qualified or nonqualified, deferred compensation, but 401(k) plan can be included

Question 25

Simple cafeteria plans for small business

Eligible employers?

Answer 25

Employed on average 100 or fewer employees during either of the preceding two years

Can maintain the plan until they exceed 200 employees

Question 26

Simple cafeteria plans for small businesses

What employees are eligible?

Answer 26

Oh employees with at least 1000 hours of service during the plan year non-employees, example partners, 2% or more owners of S corporations and sole proprietors are not eligible

To page 57

Question 27

Simple cafeteria plans for small businesses

What employees are excludable?

Answer 27

Under age 21

Less than one year of service

Covered under collective-bargaining agreement

Nonresident aliens, working outside the United States

To page 57

Question 28

Flexible spending accounts (FSAs)

What is it?

Answer 28

Is a cafeteria plan under which employees can be reimbursed for certain types of qualified expenses?

Funded by voluntary pretax salary reductions, may also include employer contributions

Question 29

Flexible spending accounts FSAs

What are the two types?

Answer 29

Health and dependent care assistance

Question 30

Flexible spending accounts (FSAs)

What is the maximum amount available for reimbursement of incurred medical expenses?

Answer 30

$3200 for 2024

Question 31

Flexible spending accounts FSAs

when are they appropriate?

Answer 31

Employer wants to expand employee benefit choices without significant extra out-of-pocket cost

Employees have employed spouses with duplicate medical coverage

Employees contribute to health insurance cost

Employers medical plans have large deductibles, are coinsurance provision

Employees are nonunion

There is a need for benefits that are difficult to provide on a group basis, such as dependent care

Employee can choose to participate in both the health and dependent care for a total salary reduction of $8200 for 2024

Two page 58

Question 32

Flexible spending accounts FSAs

I can they be provided to self-employed person’s are partners

Answer 32

No

Question 33

Flexible spending account FSAs

What are the advantages?

Answer 33

May be in funded entirely through employees salary reductions, except for administrative costs by the employer

Dependent care expenses, if allowed may provide more tax savings than using the child and dependent care credit

To page 58

Question 34

Flexible spending account FSAs

What are the disadvantages?

Answer 34

Must meet all nondiscrimination requirements of cafeteria plans

Employees must evaluate their personal and family situation and file a timely election form every year to estimate their benefit needs

Could result in adverse selection that would ultimately raise benefit cost

Admin cost or greater

Employee fails to use all contributed amounts within a certain period unused amount is forfeited

Long-term care services cannot be reimbursed

Over the counter, medication’s, not eligible for reimbursement, except insulin

Two page 58

Question 35

Flexible spending accounts FSAs

And what are the tax implications?

Answer 35

Employee not subject to income tax, your payroll tax

Employer receives a tax deduction, for any amount paid

Employers payroll, subject to payroll taxes is reduced by the amount of the employees salary reduction contributions are not subject to FICA or FUTA

Question 36

Prepaid legal services

If employer pays the cost of the services, what are the tax consequences?

Answer 36

Deductible by the employer

Included in gross income of the employee

Question 37

Employer and child and dependent services

What are the tax consequences for the employee?

Answer 37

Employee does not have to include in gross income, the value of child and dependent care services paid for by the employer

Cannot exceed 5000 per year

Question 38

Qualified employee discounts

Discount can be excluded from gross income under the following conditions?

Answer 38

Not available for real property or for personal property commonly held for investments

Property or services must be in the same line of business and watch the employee works

In case of property exclusion is limited to the gross profit component of the price to customers

In case of services, exclusion is limited to 20% of the regular customer price

Question 39

Dental insurance

What are the tax implications for the employer and the employees?

Answer 39

Premiums paid by an employer or tax deductible

Benefits received by employee our income, tax free