Chapter 4

Question 1

A retail sales clerk took advantage of the company’s employee
discount program to purchase clothes at 10% off the normal retail
price. This service represents:
❑ a. taxable compensation.
❑ b. a qualified employee discount.
❑ c. a working condition fringe.
❑ d. a no-additional-cost service.

Answer 1

b. This represents a qualified employee discount. The discount is
10% less than the cost to customers (the limit is the company’s
gross profit percentage). Since it is available to sales clerks (and
not just to highly compensated employees), it does not have to be
included in her taxable compensation.

Question 2

An employee belongs to a professional organization. When his company
pays his dues, the payment is:
❑ a. taxable compensation.
❑ b. a de minimis fringe.
❑ c. a working condition fringe.
❑ d. a no-additional cost service.

Answer 2

c. Dues to professional organizations are tax-free as working condition
fringe benefits.

Question 3

An employee’s parking garage is two blocks away from his downtown
office. It costs $280.00 per month to rent a stall there, but the
employee doesn’t mind because it’s convenient and his employer
reimburses him for 100% of the costs. How much of his monthly
parking is taxable?
❑ a. $10.00
❑ b. $20.00
❑ c. $270.00
❑ d. $280.00

Answer 3

a. Up to $270.00 per month in 2021 for employer-paid parking can
be excluded from the employee’s income. The amount over $270.00
($280.00 - $270.00 = $10.00) is included in the employee’s income.

Question 4

An employer provides an employee $300.00 each month in bus
tokens so she can commute to work. How much of this expense is
nontaxable?
❑ a. $135.00
❑ b. $270.00
❑ c. $280.00
❑ d. $300.00

Answer 4

b. Employer-provided tokens for public transportation commuting
expenses are nontaxable up to $270.00 per month in 2021.

Question 5

A salesperson drives a company-owned vehicle valued at $25,000. In
the year, he logs 12,000 miles for business travel and 4,000 miles for
personal use.
1. Use the annual lease value method (see table on page 4-15) to calculate
the value of his personal use of the vehicle.
$ __________
2. Determine the value of the salesperson’s personal use of this vehicle
using the cents-per-mile method based on 10,000 business miles
and 5,200 personal miles.
$ __________
3. What federal taxes, if any, must the salesperson’s employer withhold
for his personal use of the company vehicle?
❑ a. Social security tax and Medicare tax only
❑ b. Federal income tax only
❑ c. Federal income tax, social security tax, and Medicare tax
❑ d. No taxes are required to be withheld

Answer 5

1. $1,712.50. The salesperson uses the car 75% for business use and
   25% (4,000 ÷ 16,000 total miles) for personal use. The lease value of
   a $25,000 automobile is $6,850 and $6,850 x 25% = $1,712.50.
2. $2,912.00 (5,200 personal miles x $0.56 per mile = $2,912.00 for
   personal
   use of the vehicle)
3. a. If the employee is notified by January 31, the employer is not
   required to withhold federal income tax. Social security tax and
   Medicare tax must be withheld for the employee’s personal use of
   the vehicle.

Question 6

For her 10 years of service, an employee was given a gold necklace
valued at $100. Which of the following is true?
❑ a. The gift must be included in her taxable compensation.
❑ b. The gift is tax-free.
❑ c. Only social security tax and Medicare tax should be withheld
on the fair market value of the award.
❑ d. Only federal income tax should be withheld on the fair market
value of the award.

Answer 6

b. The gift is tax-free.

Most prizes and awards are taxable wages. One exception is
qualified awards for length of service or safety.

Question 7

All of the following deferred compensation plans limit the employee
to making a deferral contribution of $19,500 in 2021 except:
❑ a. 401(k)
❑ b. 403(b)
❑ c. 457(b)
❑ d. Nonqualified

Answer 7

d. Nonqualified

Question 8

Under which type of plan(s) are employee contributions subject to
social security and Medicare taxes?
❑ a. 401(k) only
❑ b. 403(b) only
❑ c. 457(b) only
❑ d. 401(k), 403(b) and 457(b)

Answer 8

d. 401(k), 403(b) and 457(b)

Question 9

An employer may provide all of the following features in a 401(k)
plan except:
❑ a. matching contributions.
❑ b. lower ceilings on contributions.
❑ c. higher benefits for highly compensated employees.
❑ d. catch-up contributions.

Answer 9

c. higher benefits for highly compensated employees.

Question 10

A superintendent of schools who will be 49 years of age on December
31, 2021, earns $100,000. His school district has a 403(b) plan.
What is the maximum that he can contribute to this plan before
taxes in 2021?
❑ a. $19,000
❑ b. $19,500
❑ c. $25,000
❑ d. $26,000

Answer 10

b. The maximum that employees who are not yet 50 years old can
contribute to a 403(b) plan is $19,500. Such plans are available only
to employees of tax-exempt organizations and public schools.

Question 11

An employee earns $40,000 annually. Claiming single with no
entries on Steps 2, 3, or 4 on her 2021 Form W-4, she contributes
$6,000 annually to her 401(k). How much must be withheld for federal
income tax, social security, and/or Medicare tax on the contribution?
❑ a. $0.00
❑ b. $459.00
❑ c. $918.00
❑ d. $1,779.00

Answer 11

b. You must withhold social security tax and Medicare tax but not
federal income tax from 401(k) contributions. Employee social security
tax on $6,000 is $372.00 ($6,000 x 6.2%); Medicare tax is $87.00
($6,000 x 1.45%); $372.00 + $87.00 = $459.00

Question 12

The owners of a company want to set up a retirement program for
themselves, but do not want to make contributions on behalf of
their employees. All of their employees are under age 30. What can
they do?
❑ a. Establish only a 401(k) plan that restricts eligibility to employees
over age 30.
❑ b. Set up a nonqualified deferred compensation plan only.
❑ c. Establish only a 401(k) plan that restricts eligibility to employees
over age 30, and set up a nonqualified deferred
compensation plan.
❑ d. Establish a 403(b) plan for all employees.

Answer 12

b. Nonqualified deferred compensation plans can discriminate on
behalf of key executives.

Question 13

Which of the following plans applies only to employees of public
schools, colleges and universities, and public charities?
❑ a. 401(k) plans
❑ b. 403(b) plans
❑ c. 457(b) plans
❑ d. Both b and c

Answer 13

b. Section 403(b) of the Internal Revenue Code creates a tax-sheltered
retirement plan for employees of tax-exempt nonprofit organizations
like schools, colleges, universities, hospitals, or charities.

Question 14

Payroll must withhold federal income tax from:
❑ a. Contributions to 401(k) plans.
❑ b. Contributions to 457(b) plans.
❑ c. Contributions to nonqualified deferred compensation plans.
❑ d. Contributions to Roth 401(k) plans.

Answer 14

d. Contributions to Roth 401(k) plans are subject to withholding for
federal income tax, social security tax, and Medicare tax.

Question 15

Which plan is specifically set up for government employees?
❑ a. 401(k) plan
❑ b. 457(b) plan
❑ c. 403(b) plan
❑ d. Nonqualified deferred compensation plan

Answer 15

b. 457(b) plans cover employees of state, county, and local governments.

Question 16

What benefits can be provided in a Section 125 Cafeteria Plan?
❑ a. Scholarships
❑ b. Discounts
❑ c. Medical insurance
❑ d. Commuter vans

Answer 16

c. Medical insurance

Question 17

All of the following are tax implications of a Cafeteria Plan
except:
❑ a. no income tax withholding.
❑ b. no social security and Medicare tax withholding.
❑ c. must withhold income, social security and Medicare taxes.
❑ d. no Form W-2 reporting.

Answer 17

c. must withhold income, social security and Medicare taxes.

Question 18

An employee earmarked $100 per month for a health care FSA.
On March 31, the employee had contributed $300 to the plan and
submitted a claim for $400 of substantiated expenses. At that time,
how much must the plan reimburse to the employee?
❑ a. $0
❑ b. $100
❑ c. $300
❑ d. $400

Answer 18

d. All money allocated to a health flexible spending account
(also called a reimbursement account) must be available up to the
amount of the employee’s annual election even if the claim exceeds
the employee’s account balance. This is the uniform coverage requirement.

Question 19

An employer contributes $200 per month to an employee cafeteria
benefit plan. The pretax medical/dental package that she has chosen
costs $250 per month. She contributes the extra $50 for this
benefit plan. Payroll must withhold:
❑ a. Social security tax and Medicare tax from only the employee
contribution.
❑ b. Social security tax, Medicare tax, and federal income tax
from only the employee contribution.
❑ c. No tax from either the employee or employer contribution.
❑ d. Social security tax and Medicare tax from only the employer
contribution.

Answer 19

c. Both the employer’s contribution ($200 per month) and the
employee’s
contribution ($50 per month) to the cafeteria benefit
plan are in pretax dollars. Do not withhold any taxes.

Question 20

An employer contributes $175 per month to an employee’s cafeteria
benefit plan. Since her husband has medical/dental coverage
through his employer, she wants to take the $175 per month in cash.
Which of the following statements is true?
❑ a. This option is not available; if the amount is not spent, it is
lost.
❑ b. The $175 becomes taxable income.
❑ c. Only social security tax and Medicare tax are withheld from
the $175 per month.
❑ d. The $175 is a tax-free benefit to her.

Answer 20

b. Benefits converted to cash are added to an employee’s taxable
income. Federal income tax, social security tax, and Medicare tax
must be withheld from the sum. The use it or lose it rule applies
only to a flexible spending account.

Question 21

At the beginning of the year, an employee elected to buy group-term
life insurance as part of his benefit package through his company’s
cafeteria benefit plan. In May, he took out an individual life insurance
policy. Since he no longer needs group coverage, he wants to
replace the insurance option with increased contributions to his
401(k) plan. Is this possible?
❑ a. Yes. If both group-term life and the 401(k) plan are part of
the same cafeteria benefit program, he can switch.
❑ b. Yes, but he will have to pay taxes on the amount.
❑ c. No

Answer 21

c. Once selected, benefits cannot be changed or added to during the
plan year (except for a change in family status).