CFP - 2.2 Insurance Flashcards
Is the granting of stock options a taxable event?
No
What are the two types of stock options?
Non-qualified Stock Option (NQSO)
Incentive Stock Option (ISO)
NQSOs can be granted to which of the following:
A. Employee B. Independent contractor C. Family member of A or B D. Beneficiary of A or B E. All of the above
E. All of the above
Is there a limit to the exercise period of NQSOs?
No
When are NQSOs taxed?
At exercise
How are NQSOs taxed?
As ordinary income, subject to payroll taxes for the difference between the exercise price and the current fair market value
What is the tax basis of a stock from an exercised NQSO?
The exercise price plus the ordinary income recognized (approximately equal to the FMV on the date of exercise)
When does holding period begin for the stock of an exercised NQSO?
Date of exercise
When is income recognized by the employee if an NQSO is transferred to a family member or other person?
When the transferee exercises the option
Are gifted NQSOs valued on date of gift or date of exercise?
Date of gift
NQSO transfers are completed gifts on the latter of what two dates?
Date of transfer or date of vesting (when it becomes exercisable)
When is income recognized by the employee if an NQSO is transferred to a charity?
When the charity exercises the option, if the employee is still living
If an employee gifts an NQSO to a charity and then passes before exercise, who pays the income tax?
There is no ordinary income in this case
When can the employee deduct an NQSO gift to charity?
On the latter of the date of transfer or date of vesting
If an employee gifts an NQSO to a charity and then passes within __#__ years of exercise, the employee’s gross estate must include the value the options would have had at the date of death.
3
Who can deduct an NQSO gifted to charity if the employee passes before its exercised?
The estate is eligible for the estate tax charitable deduction
What is an ISO?
incentive stock option
Do ISOs have to be approved by stockholders?
Yes
The expiration date of an ISO cannot exceed _____
10 years from the date of grant
The exercise price of an ISO cannot be less than:
The market price of the stock at the time of grant
The maximum value of stock with respect to which ISOs may first become exercisable in any one year is $XXXXXXX
$100,000
Who can be granted ISOs?
Only employees of the company
Are ISOs transferable?
No, only at death by will
ISOs must be exercised within ______ from the date of retirement or termination
3 months
If ISO stock is sold within ______ year(s) of grant and _____ year(s) of exercise, the gain is considered what type of income?
2, 1, W-2 compensation income. Not subject to payroll tax.
How are ISOs taxed when they are granted?
They aren’t
what is the AMT adjustment for ISOs?
FMV - Exercise price
What is the tax basis of stock from an exercised ISO?
The exercise price
What is the AMT basis?
FMV of the stock on the date of exercise
What tax benefits do ISOs have over NQSOs?
ISOs are not included in gross income. If sold properly, only will incur long-term capital gains.
What is an ISO disqualifying disposition?
Selling ISO stock before the holding period expires (1 year from exercise, 2 years from grant)
1/1/2015 FMV is $20. Exercise price is $10.
stock is sold a year later for $15. The employee will recognize how much ordinary income?
$5
Proceeds from sale - exercise price
No capital gain or loss
What is a cashless exercise?
Employee exercises stock option and the cash required to buy the stock is made up by selling some of the stock
What is an ESPP?
Employee Stock Purchase Plan
Do employees pay income tax on ESPPs?
No
Are ESPPs subject to nondiscrimination rules?
Yes
Do ESPPs need to be approved by shareholders?
Yes
ESPP option grant prices must not be less than the lesser of:
___ % of the FMV on grant date
___ % of the FMV on exercise date
85% and 85%
ESPPs must be exercised within _____ of leaving the company.
3 months
Employee’s owning more than ____% of the company cannot participate in ESPPs.
5%
_____ are stock options designed for key employees, _____ are stock options intended for rank-and-file employees
ISOs
ESPPs
All employees must be included in an ESPP except for (3)
- Employees with less than 2 years of employement
- Highly compensated employees
- Part-time/seasonal employees
No employee can have the right to buy more than $XXXXXXXX of stock per year with an ESPP plan.
$25,000
ESPP recognized ordinary income equals the lesser of…
FMV on grant date - Ex Price
and
FMV on disposition date - Ex price
What is phantom stock?
Fake stock. Anytime the real stock pays a dividend, the phantom stock owner is credited the amount of the dividend to a special account. At retirement or termination, they receive the balance of the account.
When are phantom stock dividends taxed to employee and deducted for employer?
When the payment is received by the employee at retirement or termination
A method for companies to give their management or employees a bonus if the company performs well financially. This plan resembles employee stock options in that the holder/employee benefits from an increase in stock price.
Stock Appreciation Rights (SARs)
Employer stock that is forfeited if the executive’s performance is subpar, if the executive terminates employment before a stated period, or if the executive works for a competitor
Restricted stock
When and how is restricted stock taxed?
W-2 income in the amount of the FMV of the stock, when it is no longer subject to substantial risk of forfeiture.
What is a Section 83(b) election?
Employee elects to recognize the income on received restricted stock immediately
What is the advantage of a Section 83(b) election?
The income recognized equals FMV. All subsequent gains are capital gains and can be taxed lower.
Section 83(b) election must be made within ____ days of receiving restricted stock.
30
Upon the sale of common shares (converted from junior class shares), what is the tax basis?
The amount paid for the junior class shares
What is an employee taxed when junior shares convert to common shares?
Nothing
What option must all cafeteria plans offer?
Cash in lieu of benefits
True or False:
Cafeteria plans are easy and inexpensive to administer
FALSE
True or False:
Cafeteria plans help control employer costs by reducing the cost of provisions for benefits that employees do not need
TRUE
Key employee non-taxable benefits in a cafeteria plan cannot exceed ___% of the total nontaxable benefits provided under the plan to all employees
25%
Cafeteria plans can cover what benefits?
AHDGH
Accident Health Dependent care Group term life HSAs
Cafeteria plans can NOT cover what benefits?
LSEFR
Long term care Scholarships Education Fringe benefits Retirement benefits
Employers with __#__ or fewer employees during either of the previous 2 years can adopt a SIMPLE cafeteria plan.
100
A SIMPLE cafeteria plan in existence cannot exceed __#__ employees during the last year.
200
Are nonemployees eligible for SIMPLE cafeteria plans?
No
Eligible employees for a SIMPLE cafeteria plan must have worked __#__ hours during the preceding year.
1,000
Is an employee under 21 included in a SIMPLE cafeteria plan?
No
Is an employee with less than one year of service included in a SIMPLE cafeteria plan?
No
Is an employee who is a nonresident alien included in a SIMPLE cafeteria plan?
No
Is an employee covered under collective bargaining agreement included in a SIMPLE cafeteria plan?
No
SIMPLE Cafeteria plan contribution requirements are one of the two following…
2% uniform of every employee’s compensation
OR
The lesser of 6% of the employee’s compensation or 200% of the employee’s salary reduction contributions
Are SIMPLE cafeteria plans subject to nondiscrimination rules?
No
What are the 2 types of FSAs?
Health FSA, Dependent care FSA
What is the max amount available for reimburesment for a Health FSA plan per year?
$2,650
What is the max amount available for reimburesment for a Dependent Care FSA plan per year?
$5,000
An employee who participates in Health and Dependent Care FSAs can have a total salary reduction of…
$7,650
How are FSA salary reduction contributions taxed?
Payroll, medicare, SS, and income tax free
Meals and lodging provided by the employer are excluded from income as long as that meet what two criteria?
- Meals are furnished by the employer, on the premises, for the employer’s convenience.
- Employee is required to accept lodging as a condition of employment
Are prepaid legal services as a benefit deductible by the employer?
Yes
Are prepaid legal services as a benefit included in the gross income of the employee?
Yes
Child and dependent care services provided by the employer to enable the employee to work are not included in gross income as long as it doesn’t exceed $XXX for MFJ and $XXX for single filers.
$5,000
$2,500
Is on premise gym access included in employee’s gross income?
No
Are dues paid to a gym/health club by the employer taxable to the employee?
Yes
The annual exclusion ceiling for qualified employer-provided educational assistance is…
$5,250
What are de minimis fringe benefits?
Benefits so small that it would impractical to account for them
What is a Voluntary Employees’ Beneficiary Association? (VEBA)
Trust or corp set up as a welfare benefit plan. Deposits are made by the employer for specified future employee benefits.
Short-term disability usually covers up to _____ years.
2
Long-term disability covers until a certain age, usually ______.
65
Which type of disability insurance is the most expensive?
Own occupation
What is the difference between own occupation disability insurance and modified own occupation?
With modified own occupation, you cannot be working and receiving benefits at the same time, even if the job is different
What is the difference between any occupation and modified any occupation disability insurance?
Modified is any reasonable occupation suited by education, experience, etc.
SS definition of disability is it must have lasted for at least ____ months and last for a total of _____ months or result in death.
5, 12
The type of disability policy rider that pays the difference between former pay and current pay is called…
Residual
If disability benefits are received from a personally paid disability policy, are the benefits taxable income?
No
If disability benefits are received from an employer-paid disability policy, are the benefits taxable income?
Yes, taxable income in lieu of wages
Group disability benefits are includable in income to the extent of…
The employer pro rata share of premiums
Earl is covered by a group long-term disability plan provided by his employer. The premium is $100 per month. Earl pays $25, his employer pays $75. The monthly benefit is $1,000. Earl is injured and receives disability benefits for 10 months. How much must he include as income?
$7,500
Disability benefits are paid in arrears (end of the month). True or false?
True
A client’s emergency fund should cover what time period for their disability insurance to kick in?
Elimination period plus 30 days, since the benefits are paid month end (in arrears)
A. Noncancelable B. Guaranteed Renewable C. Conditionally Renewable D. Single-Term E. Cancelable
Which type of policy guarantees the insured the right to renew until a specific age with no increase in premium?
A. Noncancelable
A. Noncancelable B. Guaranteed Renewable C. Conditionally Renewable D. Single-Term E. Cancelable
Which type of policy guarantees the right to renew, but the insurance company is allowed to adjust the premiums by policyholder class?
B. Guaranteed Renewable
A. Noncancelable B. Guaranteed Renewable C. Conditionally Renewable D. Single-Term E. Cancelable
Which type of policy can the insurance company terminate if certain conditions are met?
C. Conditionally Renewable
A. Noncancelable B. Guaranteed Renewable C. Conditionally Renewable D. Single-Term E. Cancelable
Which type of policy does not contain a renewability provision?
D. Single-Term
A. Noncancelable B. Guaranteed Renewable C. Conditionally Renewable D. Single-Term E. Cancelable
Which type of policy can be terminated at the insurance company’s discretion?
E. Cancelable
The insured must notify the insurance company of a claim within _____ days after the occurrence.
20
The insured must furnish written proof of loss within ___ days from date of loss.
90
The time limit on certain defenses provision says what?
An insurance policy is incontestable after two years except for fraud
Do all policies have a grace period?
Yes
When are benefits payable by the insurance company?
Immediately upon proof of loss
What are the two types of hospitalization insurance?
Expense reimbursement - a cash amount reimbursed for costs
Service contract - # of days of hospital services covered
What is the difference between stop-loss limit on health insurance and max out of pocket?
Max out of pocket includes deductible.
Stop-loss is a max dollar amount that the coinsurance applies to after the deductible
What is a health insurance policy breakpoint?
The stop loss plus the deductible. The insurer pays 100% after these are met.
What is the difference between an HMO and a PPO?
HMO is in network only. PPO can go outside the network.
What percentage of health insurance costs can self-employed people deduct from their gross income?
100%
Employer paid health insurance premiums are taxable to the employee. T or F
False
Employer paid health insurance premiums are deductible for the employer. T or F
True
COBRA extends coverage for ____ months for employees and dependents for a reduction in hours.
18
COBRA extends coverage for ____ months for employees and dependents for normal termination from work.
18
COBRA extends coverage for ____ months if employee meets the Social Security definition of being disabled.
29
COBRA extends coverage for ____ months for divorce.
36
COBRA extends coverage for ____ months for death.
36
COBRA extends coverage for ____ months for Medicare.
36
COBRA has to be elected within _____ days of a qualifying event.
60
COBRA applies for what 6 events?
D T S D C M
Death Termination (disability, lay off, voluntary included. Gross misconduct firing NOT included) Status - to part time Divorce Child exceeds age of coverage Medicare
Can insurers rescind coverage if the insured gets sick?
No. Affordable Care Act 2010
Can new Archer MSA accounts be opened?
No
Can Archer MSA accounts be maintained?
Yes
Can Archer MSAs be rolled into HSAs?
Yes
Can employers and employees both contribute to an MSA?
No, one or the other in a given year
Nonmedical expense distributions before the age of 65 in an MSA or HSA account causes how much of an excise penalty tax?
20%
Are HSA contributions tax deductible for individuals?
yes, if they are in a high deductible plan
20% penalty on nonmedical withdrawals from an HSA do not apply for what 3 conditions?
- Over the age of 65
- Disabled
- Death
HSA catch up contributions are allowed between what two ages?
55 and 65
HSA contributions cannot be made after age…
65
What is the last month rule for HSAs?
If you are HSA eligible on Dec 1 of a given year, you can contribute the max for the entire year
_____% excise tax applies to HSA contributions over the limit.
6%
Are employer HSA contributions taxable income to the employee?
No, as long as they are a qualified individual
HSA: What makes someone a qualified individual (3 things)
- Subject to high deductible plan
- Not eligible for Medicare
- Not claimed as a dependent
Are HSAs subject to RMDs?
No
Can IRAs be rolled into HSAs?
One-time. Only for the max annual contribution amount. Not deductible
Can SEP or SMIPLE IRAs be rolled into HSAs?
No
Who can contribute to HRAs?
Only employer
The look back period for assets transferred for medicaid is ____ months.
60
Chronically ill is defined as being unable to perform how many of the 6 activities of daily living (ADLs) for at least 90 days?
2
What are the 6 ADLs?
- Eating
- Bathing
- Dressing
- Transferring from bed to chair
- Using the toilet
- Continence
Chronically ill is defined as being unable to perform 2 of the 6 activities of daily living (ADLs) for at least ___ days?
90
Can long-term care policies have exclusions?
No, except for pre-existing conditions
What must a long-term care representative provide when communicating a recommendation?
Outline of coverage and a shopper’s guide
Is there a ceiling on Medicare tax?
No
How much is Medicare tax?
2.9%, half paid by employer, half by employee
How much is the additional Medicare tax and who pays it?
0.9%, only paid by employee.
If someone is working and covered under an employer health insurance plan, can they receive Medicare benefits?
They can be covered, but Medicare would be secondary and they would have to exhaust the employer benefits first.
People age ____ and up are covered by Medicare Part A
65
People under 65 can be covered by Medicare Part A under what two conditions?
- They have end-stage renal disease
2. They have been receiving SS disability benefits for 24 months
Who is exempt from Part A premiums?
Any one or their spouse who has 40+ quarters of Medicare covered employment
How much is the Part A monthly premium for people with 0-30 and 30-39 quarters of Medicare covered employment?
$422, $232
Part B premium is ____ for 2018
$134
What does Part A cover?
- Hospital
- Skilled nursing
- Hospice
- Home health care
What does Part B cover?
Physician fees and outpatient services
Part A covers up to _____ days of hospital services per benefit period
90
A Part A benefit period resets when a patient has been out of the hospital for ____ days
60
What is the lifetime reserve of additional hospital days covered by Part A once the 90 have been exhausted?
60
What is the hospital deductible for Part A?
$1,340
How many hospital days are covered in FULL for Part A?
60
What is the coinsurance for Part A hospital days after 60 days?
$335
Medicare Part A will pay for _____ days of skilled nursing care.
20
Coinsurance for skilled nursing (Med Part A) lasts how many days?
21 - 100
What is the coinsurance amount for Part A skilled nursing coverage?
$167.50/day
Is Medicare Part A a sufficient substitute for long-term care insurance?
NO
Part A home health benefits for equipment has what coinsurance split?
80/20
Part A home health covers how many days?
100, must be ordered by a physician
What is the day limit on Part A hospice care?
210
How much is the Part B deductible?
$183
What is the Part B coinsurance after the deductible?
80/20
What is a package policy?
Combines two or more separate coverages into one policy
What 3 things are combined in a homeowners policy?
Fire, theft, personal liability
What are the 3 homeowners eligibility requirements?
- Must be an owner-occupied dwelling
- No more than 2 families occupying dwelling
- Each family may have a max of 2 boarders/roomers
What are the 2 main levels of homeowners insurance?
Named perils coverage and Open perils coverage
Which has higher premiums, Open perils coverage or Named perils coverage?
Open
Which HO policies are open perils?
HO-3 and HO-5
How many employees does a company have to have to qualify for COBRA?
20 or more
What are the two ways to value a property loss?
Actual Cash Value and Replacement Cost
Calculate ACV
ACV = Replacement Cost - Depreciation
Does RC payment occur before or after repairs?
After, insurer will not pay more than ACV before the replacement or repair of damaged property
How many perils does HO-2 cover?
18
What is covered under HO-2?
Dwelling, structures, and personal property
Is HO-2 broad form or special form?
Broad
What is the difference between HO-2 and 3?
HO-3 is open perils, HO-2 is named
Difference between open and named perils?
Open covers all but those excluded. Named only covers those specified.
Does HO-3 cover open perils on personal property?
No, named
What does HO-4 cover?
Residential and tenant - just like HO-2
What does HO-5 cover?
Same as HO-3 but with open perils on personal property
What does HO-6 cover?
Unit owners, condominium. Just like HO-2
What does HO-8 cover?
Dwellings with a FMV below their replacement value (old homes)
HO-2 HO-3 HO-4 HO-5 HO-6 HO-8
2 Named perils
3 Open perils, not for personal property
4 Residential and tenant named
5 Open perils for all including personal property
6 Named perils, condominiums
8 Houses with a FMV below their Replacement Value (old homes)
What does Section I of a HO policy cover?
Property and the loss of use of property
What does Section II of a HO policy cover?
Liability and medical expenses
Does a homeowner’s deductible apply to loss of credit cards, counterfeit money, check forgery, or debit cards?
no
Does a homeowner’s deductible apply to liability loss or medical payments?
no
What are the 5 sections of Section I
A - Dwelling B - Other structures C - Personal Property D - Loss of use Additional Coverage - debris removal, tree damage, credit card loss
How much homeowner’s insurance should a financial planner recommend in the event of a total loss?
100% of the replacement cost value of the home
Should the value of land be included in the homeowner’s insurance calculation?
No
What is the minimum homeowners coverage for a partial loss?
80%
What is the max Coverage C for cash/notes/bullion/etc?
$200
What are the two forms of Section II Coverage?
E - Personal Liability
F - Medical Payments to Others
What does Coverage E entail?
Protects against claims from bodily injury and property damage that may occur on or off the premises because of negligence
Does Coverage E cover personal injury?
No
COBRA premium is due within _____ days of electing to receive coverage.
45
How much does medicare part B cover after deductible?
80%
Is worker’s comp taxed?
No
If Debbie ends up qualifying for Social Security disability benefits, she will become eligible for Medicare benefits after receiving these benefits for at least _______ months.
24
Which insurance rating agency uses public information AND interviews with management?
AM Best
