Module 5 Employee Group Benefits

Question 1

Which of the following statements regarding a flexible spending account (FSA) is CORRECT?

An FSA is a cafeteria plan consisting of various tax-free benefits funded through employee salary reductions.
There is no maximum amount of salary reduction that can be elected to fund an FSA.
Employee salary reductions applied to qualified nontaxable benefits under the plan are subject to income tax and payroll (FICA) tax.
A)
I and II
B)
I, II, and III
C)
III only
D)
I only

Answer 1

The answer is an FSA is I only. Employee salary reductions applied to the nontaxable benefits offered under the account are not subject to either income tax or payroll (FICA) tax.

Question 2

Which of the following regarding cafeteria plans is CORRECT?

The plan may not include a cash option.
Each employee has a certain number of dollars or credits that can be spent on a variety of benefits.
A flexible spending account is a cafeteria plan consisting of various tax-free benefits that are funded through salary reductions elected by employees each year.
A)
II only
B)
I and III
C)
II and III
D)
I, II, and III

Answer 2

The answer is I and II. Cafeteria plans must include a cash option.

Question 3

Which of the following are classes of benefits payable under workers’ compensation laws?

Rehabilitation benefits
Disability benefits
Survivors death benefits
Medical expenses
A)
II and IV
B)
I and III
C)
I, II, III, and IV
D)
I and IV

Answer 3

The answer is I, II, III, and IV. All of these statements are true of benefits payable under workers’ compensation laws.

Question 4

Which of the following would most likely benefit from a legal services plan?

A)
Middle- and lower-income employees
B)
Key executives
C)
Top hat employees
D)
Highly compensated employees

Answer 4

The answer is middle- and lower-income employees. Legal service plans, sometimes called prepaid legal plans, usually provide various legal services to employees (e.g., will and trust preparation, lawsuit defense, criminal defense). Middle- and-lower income employees would most likely take advantage of this program because they may not as easily afford legal representation. Top hat refers to a type of nonqualified deferred compensation plan and not a type of employee.

LO 5.4.1

Question 5

Which of the following statements describe circumstances that result in an employee’s medical expense reimbursements from a group medical insurance policy being taxable income to the employee?

Medical expense reimbursements are taxable to the employee, to the extent they exceed the expenses incurred.
Medical expense reimbursements are taxable to the employee if the employer paid the premiums for coverage.
A)
II only
B)
Both I and II
C)
I only
D)
Neither I nor II

Answer 5

The answer is I only. Medical expense reimbursements are not taxable to the employee if the employer paid the premiums for coverage.

LO 5.2.3

Question 6

Today, most dental plans are offered through

A)
government insurance.
B)
preferred provider organizations (PPOs).
C)
self-insurance.
D)
health maintenance organizations (HMOs).

Answer 6

The answer is preferred provider organizations (PPOs). Most dental expense plans are offered through PPOs, which have contracted with particular dentists to provide services for agreed-upon fees.

Question 7

Settings
The elimination period in a group disability income policy may be thought of as

A)
a dollar amount deductible.
B)
a time copayment.
C)
a dollar amount copayment.
D)
a time deductible.

Answer 7

The answer is a time deductible. The elimination period is the time period before the benefits will pay after a disability occurs.

Question 8

Which of the following is a characteristic of the regular personal use of an employer-provided automobile?

A)
It is considered a working condition fringe benefit.
B)
It is considered a working condition fringe benefit only if the employee does not allow other family members to drive the vehicle.
C)
The value is tax exempt unless the employee is an owner or key employee.
D)
The fair market value is taxable to the employee based on the cost of leasing the same or a comparable vehicle from an unrelated third party under the same or comparable lease terms

Answer 8

The answer is the fair market value is taxable to the employee based on the cost of leasing the same or a comparable vehicle from an unrelated third party under the same or comparable lease terms.

Question 9

All of the following statements regarding converting a group term life insurance (GTLI) policy to an individual permanent policy upon an employee’s separation from service are correct except

A)
an employee who is insurable may find it advantageous to apply for a fully underwritten policy instead of converting the GTLI policy.
B)
converting the GTLI to a permanent life insurance policy may be more expensive than applying for a new policy.
C)
conversion is generally a guaranteed benefit.
D)
there are never any disadvantages to converting the GTLI policy to an individual permanent life insurance policy.

Answer 9

The answer is there are never any disadvantages to converting the GTLI policy to an individual permanent life insurance policy. Conversion is generally a guaranteed benefit upon separation from service but may not always be advantageous for former employees who are still insurable. In addition, the premiums for a converted policy may be higher than the premiums for a new policy because the class of employees who seek conversion may be those with a higher risk of claims, resulting in adverse selection.

Question 10

Which of the following statements regarding individual medical expense insurance is CORRECT?

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires that group health plans allow employees and certain beneficiaries to elect to have their current health insurance coverage extended at group rates for up to 36 months following a qualifying event that results in the loss of coverage for a qualified beneficiary.
COBRA applies to all employers that maintain group health plans.
A)
Both I and II
B)
II only
C)
Neither I nor II
D)
I only

Answer 10

The answer is I only. COBRA applies only to employers with 20 or more employees. A part-time employee counts as half an employee for purposes of the 20-employee rule.

Question 10

All of the following statements regarding converting a group term life insurance (GTLI) policy to an individual permanent policy upon an employee’s separation from service are correct except

A)
an employee who is insurable may find it advantageous to apply for a fully underwritten policy instead of converting the GTLI policy.
B)
converting the GTLI to a permanent life insurance policy may be more expensive than applying for a new policy.
C)
conversion is generally a guaranteed benefit.
D)
there are never any disadvantages to converting the GTLI policy to an individual permanent life insurance policy.

Answer 10

The answer is there are never any disadvantages to converting the GTLI policy to an individual permanent life insurance policy. Conversion is generally a guaranteed benefit upon separation from service but may not always be advantageous for former employees who are still insurable. In addition, the premiums for a converted policy may be higher than the premiums for a new policy because the class of employees who seek conversion may be those with a higher risk of claims, resulting in adverse selection.

Question 11

Which of the following are characteristics of cafeteria plans?

Each employee has a certain number of dollars or credits that can be spent on a variety of benefits.
One type of cafeteria plan, a flexible spending account (FSA), consists of various tax-free benefits that are funded through salary reductions elected by employees each year.
Qualified benefits, which exclude the cash option, are an exception to the constructive receipt rules of income taxation.
A)
I, II, and III
B)
II and III
C)
I and II
D)
I and III

Answer 11

Under a cafeteria plan, employees may, within limits, choose the form of employee benefits from options provided by their employer. Such a plan must include a cash option that is taxable as ordinary income. Qualified benefits, which exclude the cash option, are an exception to the constructive receipt rules of income taxation. A cafeteria plan that is funded entirely through employee salary reductions (with no employer contribution) is known as an FSA.

LO 5.2.2

Question 12

Which one of the following statements regarding health savings accounts (HSAs) and is CORRECT?

HSAs are portable, meaning the plan can be taken intact by the individual when terminating employment.
Distributions are tax free if used to pay qualified medical expenses.
A)
Neither I nor II
B)
II only
C)
Both I and II
D)
I only

Answer 12

The answer is both I and II. Both of these statements are characteristic of HSAs.

LO 5.2.2

Question 13

CDE, Inc., has recently started paying for the long-term care policies for its 45 employees. How are the payments treated for federal income tax purposes if the policies are qualified policies?

A)
Employer payments for the group premiums are not tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
B)
Employer payments for the group premiums are not tax deductible to the employer and not taxable income to the employee.
C)
Employer payments for group premiums are tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
D)
Employer payments for group premiums are tax deductible to the employer and not taxable income to the employee.

Answer 13

The answer is employer payments for group premiums are tax deductible to the employer but are not taxable income to the employee. Employer payments for the group insurance premiums are tax deductible to the employer and not taxable income to the employee.

Question 14

Luke is covered by a $190,000 group term life insurance policy. His employer pays the entire cost of the policy, and he is not a key employee. The cost of $1,000 of protection per month from Table I for his age is $0.15. What is the amount of the annual premium that is taxable to Luke as W-2 compensation income?

A)
$0
B)
$342
C)
$162
D)
$252

Answer 14

The answer is $252. The cost of the first $50,000 of coverage under group term life insurance is nontaxable to Luke. The remainder of the cost of coverage ($140,000) is taxable as compensation (W-2) income. Therefore, $252 is taxable ($140,000 × $0.15 ÷ 1,000 × 12 = $252).

LO 5.1.1

Question 15

Which of the following statements about a health maintenance organization (HMO) are CORRECT?

A)
HMOs operate on a prepaid plan approach.
B)
HMOs prevent the under-utilization of their services by physicians with the gatekeeper concept.
C)
HMOs are fee-for-service entities.
D)
HMO subscribers are free to choose any doctor they wish.

Answer 15

The answer is HMOs operate on a prepaid plan approach. PPOs operate on a fee-for-service basis. Subscribers to the HMO pay their fees in advance. HMOs control the overutilization of their services with a gatekeeper.

Question 16

Which of the following statements regarding flexible spending plans (FSAs) in 2022 is CORRECT?

A plan may offer either the rolling over of up to $570 of expenses to the next year, or allowing expenses to be claimed for the first 2½ months of the following year.
Flexible spending plans are exempt from federal, state, and FICA taxes.
Any amount remaining in the plan at the “lose-it-or-lose-it” date, other than the rollover, is forfeited to the employer.
A)
I and II
B)
II and III
C)
I, II, and III
D)
I only

Answer 16

All of these statements are correct.

LO 5.2.2

Question 17

Which of the following statements regarding group long-term care (LTC) insurance is CORRECT?

If an employer pays for LTC insurance, the premiums are tax deductible to the employer and are taxable income to the employee.
Group LTC insurance offers lower rates and employees can get coverage by providing evidence of insurability.
A)
Nether I nor II
B)
II only
C)
I only
D)
Both I and II

Answer 17

The answer is neither I nor II. If an employer pays for LTC insurance, the premiums are tax deductible to the employer and are nontaxable income to the employee. Group LTC insurance offers lower rates and employees can get coverage without providing evidence of insurability.

LO 5.2.1

Question 18

Which of the following benefits may be included in a prepaid legal services plan?

IRS audit representation fees
Preparation of wills
Bankruptcy assistance
Divorce services
A)
II and III
B)
II, III, and IV
C)
I and II
D)
I and III

Answer 18

The answer is II, III and IV. All of these services are commonly offered in prepaid legal plans. IRS audit services are a highly specialized area that may or may not be offered by a prepaid legal service.

LO 5.4.1

Question 18

ABC, Inc., has recently started paying for the long-term care policies for its 19 employees. Which of the following federal income tax treatment of the payments is CORRECT?

A)
Employer payments for group long-term care policies are not tax deductible for ABC and nontaxable income to the employees.
B)
Employer payments for group long-term care policies are not tax deductible for ABC but are taxable income to the employees on the basis of the policy coverage table.
C)
Employer payments for group long-term care policies are tax deductible for ABC but taxable income to the employees.
D)
Employer payments for group long-term care policies are tax deductible for ABC and nontaxable income to the employee.

Answer 18

The answer is employer payments for group long-term care policies are tax deductible for the employer and nontaxable to the employee.

Question 19

Robin is self-employed and the sole shareholder of an S corporation. She pays herself a salary of $96,000 and has a disability income insurance policy that will pay her 50% of her gross salary. Her corporation pays the entire amount of the policy premium. If Robin is in a combined 30% state and federal marginal income tax bracket, how much, if any, is her net-of-tax monthly disability benefit?

A)
$4,000
B)
$0
C)
$2,800
D)
$1,200

Answer 19

The answer is $4,000. Robin is a shareholder of more than 2% of an S corporation, for whom the corporation paid the disability policy premium. Therefore, the S corporation must add the cost of the policy premium to Robin’s W-2, making the entire monthly benefit amount of $4,000 ($96,000 × 0.50 ÷ 12) tax free. If Robin had not been self-employed (e.g., her employer was a C corporation), then the answer would have been $2,800, or, $4,000 × (1 – 0.30).

LO 5.3.1

Question 19

Which of the following benefits may NOT be included in a Section 125 cafeteria plan?

Scholarships and fellowships
Educational assistance
Employee discounts
Nonqualified plan benefits
A)
I only
B)
II, III, and IV
C)
I, II, III, and IV
D)
II and III

Answer 19

None of the benefits listed may be included in a Section 125 plan.

Question 20

Greg, 61, is covered by a health savings account (HSA) provided by his employer. His marginal federal income tax rate is 24%. This year, he takes a $5,000 distribution from the HSA but fails to apply it to qualified medical expenses. Which of the following statements regarding the income tax consequences of this distribution is CORRECT?

A)
Greg owes tax of $1,200 and a penalty of $1,000.
B)
Greg owes tax of $1,200 and a penalty of $500.
C)
Greg owes no tax and no penalty.
D)
Greg owes tax of $1,200 but no penalty.

Answer 20

The answer is Greg owes tax of $1,200 and a penalty of $1,000. A distribution from an HSA that is not used for qualified medical expenses is taxable and, if made before age 65, is subject to an additional 20% penalty.

Question 21

Which of the following describes a characteristic of a self-funded plan?

A)
The employer pays the premium, communicates information regarding coverage, and collects any employee contributions.
B)
Life and long-term disability insurance are less common in self-funded plans.
C)
Medical and short-term disability insurance are less common in self-funded plans.
D)
The insurance company assumes the risk and administrative burden.

Answer 21

The answer is life and long-term disability insurance are less common in self-funded plans. It is uncommon for life or long-term disability plans to be self-funded plans. An insurance company assumes the risk and administrative burden in a traditional plan. Employers pay the premium in a traditional plan. Self-funded plans are normally medical or short-term disability coverage because of their relative predictability.

LO 5.2.2

Question 22

If Bonita, age 52, pays for her group disability income with pretax dollars, how would the benefit payments she receives be taxed?

A)
They would be subject to a 10% penalty because Bonita is under age 59½.
B)
They would not be subject to income tax.
C)
They would be tax deductible.
D)
They would be subject to income tax.

Answer 22

If disability premiums are paid with pretax dollars, any benefits received would be subject to income tax, and the employer would be required to match the FICA portion of payroll taxes.

LO 5.3.1

Question 23

Which of the following types of group life insurance offers tax advantages to both the employer and employee?

A)
Group paid-up life insurance
B)
Group term life insurance
C)
Group universal life insurance
D)
Group ordinary life insurance

Answer 23

Group term life insurance premiums are deductible by the employer and excludable from income by the employee if the face value does not exceed $50,000.

Question 23

Emmitt works for XYZ Co., which has a self-funded health insurance plan. XYZ Co. has a total of 20 employees, of which, only 15 are covered by the health plan. Emmitt is a covered employee. If he is involuntarily terminated (fired, not due to gross misconduct) by XYZ Co., which of the following correctly describes his COBRA rights?

A)
Emmitt is not covered because XYZ Co. covers fewer than 20 employees.
B)
Emmitt is not covered because COBRA does not apply to employees who are fired from their jobs.
C)
Emmitt is not covered because COBRA does not apply to employers who self-fund health insurance coverage.
D)
Emmitt may elect to continue health insurance coverage for 18 months at up to 102% of the employer premium.

Answer 23

The answer is Emmitt may elect to continue health insurance coverage for 18 months at up to 102% of the employer premium. As long as an employer has at least 20 employees, COBRA continuation coverage must be provided (the number of covered employees is irrelevant). In addition, COBRA rights must be accorded to involuntarily terminated employees. The only exception to this rule is for employees who are fired as a result of gross misconduct (as defined by the courts). Finally, employers who self-fund their insurance programs are also subject to COBRA.

LO 5.2.3

Question 24

All of the following statements regarding unemployment insurance are correct except

A)
unemployment compensation is taxable to the recipient.
B)
typically, unemployment benefits are paid out for 52 weeks.
C)
benefits are determined by previous wage levels.
D)
the employer pays a tax to fund the unemployment benefit to the out-of-work employee.

Answer 24

Typically, unemployment benefits are paid out for 26 weeks. The temporary CARES Act extensions of 2020 were extraordinary and unusual.

LO 5.4.1

Question 25

Which of the following is a principle of the workers’ compensation law in most states?

The indemnity paid to the injured employee is partial but is to be considered final.
The costs for workers’ compensation benefits are funded through payroll taxes to which employees are expected to contribute.
A)
I only
B)
Neither I nor II
C)
Both I and II
D)
II only

Answer 25

The answer is I only. Workers’ compensation is funded though insurance premiums paid by the employer.

Question 26

Which of the following is NOT a class of benefits payable under workers’ compensation coverage?

A)
Total temporary disability
B)
Partial permanent disability
C)
Legal expenses
D)
Partial temporary disability

Answer 26

The answer is legal expenses. Legal expenses are not included under benefits paid under workers’ compensation.

Question 26

All of these are key differences between an HRA and FSA, except

A)
an HRA allows for the carryover of unused funds, whereas FSAs contain a “use-it-or-lose-it” provision.
B)
HRAs are generally not funded until the employee draws on their account, whereas FSAs are funded on a continuous basis through salary reduction contributions.
C)
an HRA is funded through salary reductions, whereas an FSA is solely employer funded.
D)
HRA reimbursements are limited by contributions into the HRA, whereas FSA reimbursements are not.

Answer 26

An HRA is funded solely through employer contributions; no employee contributions are allowed. FSAs, however, are funded through employee salary reduction contributions. All other statements are true.

LO 5.2.2

Question 27

Which of the following are benefits of prepaid legal services?

Legal services for divorce
Adoption assistance
Bankruptcy
Estate planning document preparation
A)
I and II
B)
I, II, III, and IV
C)
III and IV
D)
I, II, and IV

Answer 27

The answer is I, II, III, and IV. Legal services for divorces, bankruptcy, adoption assistance, and estate planning document preparation are commonly included within prepaid legal coverage.

LO 5.4.1

Question 28

All of the following statements about short-term disability are true except

A)
short-term disability policies have long elimination periods.
B)
short-term disability coverage usually is provided through an insurance company plan
C)
short-term disability benefit amounts are generally one-half to two-thirds of the employee’s compensation.
D)
short-term disability benefits are normally for 13-52 weeks

Answer 28

The answer is short-term disability policies have long elimination periods. Short-term disability policies have short elimination periods—sometimes just a few days or even no elimination period at all. The benefit period is normally 13-52 weeks months. Benefit amounts are generally one-half to two-thirds of the employee’s compensation.

LO 5.3.1

Question 29

Settings
Which of the following statement(s) regarding group life insurance is CORRECT?

Employers may provide up to $50,000 of group whole life insurance on an income tax free basis to employees.
Group term life insurance typically includes a provision for conversion to individual permanent life insurance upon the employee’s separation from service.
A)
II only
B)
Both I and II
C)
Neither I nor II
D)
I only

Answer 29

The answer is II only. Group term life insurance—not group whole life insurance—up to $50,000 is income tax free to employees.

Question 30

Which of the following statements regarding Voluntary Employees’ Beneficiary Associations (VEBAs) are CORRECT?

VEBAs permit an acceleration of the employer’s tax deduction in funding future benefits.
Income from VEBAs may be tax exempt to the employer.
A)
II only
B)
Neither I nor II
C)
Both I and II
D)
I only

Answer 30

The answer is both I and II. If structured properly, a VEBA accelerates the employer’s tax deduction for providing these benefits. Income from the VEBA may be tax exempt to the employer.

LO 5.2.2

Question 30

Which of the following statements regarding group dental expense insurance is CORRECT?

Coverage is generally provided for routine dental care such as cleanings, fillings, crowns, root canals, and braces.
Many dental expense plans are offered through PPOs that have contracted with select dentists to provide services for prearranged fees.
A)
II only
B)
I only
C)
Both I and II
D)
Neither I nor II

Answer 30

The answer is most dental expense coverage is integrated into a comprehensive health plan. Regarding employer group coverage, dental expense coverage may be integrated within a comprehensive health plan or provided as a stand-alone supplement along with a health plan. When integrated into a comprehensive health plan, the dental expense coverage will not have a separate deductible—only the health plan deductible needs to be satisfied. More often, dental expense coverage is offered as a stand-alone supplement with its own deductible and coinsurance requirements.

Question 30

Robert’s employer provides him with $150,000 of group term life insurance. Robert is 43 and not a key employee. The cost of $1,000 of protection per month for someone in Robert’s age bracket is $0.10. Robert’s employer also provides him with health care coverage at an annual cost of $10,000. Robert does not contribute toward the cost of either plan. What amount is included in Robert’s annual gross income as a result of his health insurance and group term life insurance coverage?

A)
$10
B)
$0
C)
$120
D)
$100

Answer 30

The answer is $120. Robert must include the cost of his excess group term life insurance in his gross income. His excess coverage is $100,000 ($150,000 − $50,000). The monthly cost of his excess coverage is $10.00 (100 × $0.10), and the annual cost is $120 ($10 × 12 = $120). He must include the entire $120 in gross income because he does not contribute toward the cost of the coverage. Employer-paid premiums for health insurance are excluded from the employee’s gross income.

Question 30

Jolene is insured through her employer in a group major medical health insurance plan. Her annual deductible is $250, after which she must pay 30% of all additional charges, to a maximum out of pocket of $10,000. In her first claim of the year, Jolene has $6,000 of covered medical expenses. How much will the insurance company pay toward the claim?

A)
$1,975
B)
$4,025
C)
$5,500
D)
$5,750

Answer 30

The answer is $4,025. Subtract the $250 deductible from the $6,000 of covered expenses, then multiply the remaining $5,750 by 70%, which represents the insurer’s share because Jolene’s share is 30%. ($6,000 – $250) × 70% = $4,025.

Question 31

Which of the following statements concerning employer-provided disability income insurance is CORRECT?

To determine whether the benefits under the plan are taxable income, it is necessary to look at whether the employer or the employee pays the premiums.
If the entire cost is paid by the employee, benefits are included in gross income.
A)
Both I and II
B)
II only
C)
I only
D)
Neither I nor II

Answer 31

The answer is I only. Disability income insurance benefits are income tax free if the employee pays the entire premium.

Question 31

Generally, employer-paid premiums for a $50,000 group term life policy

A)
are tax deductible by the employee and the employer.
B)
may be tax deductible by the employer and are not taxable to the employee.
C)
are tax deductible by the employer and represent a tax liability for the employee.
D)
are considered a part of compensation to the employee and included as gross income on his W-2.

Answer 31

The answer is may be tax deductible by the employer and are not taxable to the employee. The payments are deductible to the employer if the plan meets certain nondiscrimination requirements. The employee can exclude the cost of up to $50,000 of coverage from gross income.

LO 5.1.1

Question 31

Your client is covered under his employer’s long-term disability insurance plan. Benefits under this coverage are usually

A)
payable to age 65, at which time graded benefits may paid until age 80.
B)
equal to 50%–70% of base pay.
C)
equal to 50%–65% of base pay plus projected commissions and bonuses.
D)
provided during the first 12–24 months when the insured is unable to perform “any occupation.”

Answer 31

The answer is equal to 50%–70% of base pay. For the first 12–24 months, the definition of disability is own occupation. Benefits are generally payable to age 65, with graded benefits often being paid until age 70.

Question 32

Employer-paid group medical and dental health insurance benefits are tax free, and the premiums are

A)
deductible to the employee.
B)
not deductible.
C)
deductible to both the employee and employer.
D)
deductible to the employer.

Answer 32

The answer is deductible to the employer. If the employer pays the premiums, they are entitled to the deduction.

LO 5.2.3

Question 33

Until what age do applicable 2010 Patient Protection and Affordable Care Act plans provide protection for dependent adult children?

A)
21
B)
19
C)
26
D)
25

Answer 33

The answer is 26. Plans covering dependents must allow coverage for adult children until age 26. The legislation also prohibits lifetime coverage limits for essential health benefits and requires plans to provide preventive services without charging deductibles, copayments, or coinsurance.

Question 33

Rudolph’s employer maintains a group term life insurance plan for its employees. He is 55 and receives $200,000 in coverage under the plan. He is not a key employee. The cost of $1,000 of protection per month for someone in Rudolph’s age bracket is $0.43, and Rudolph contributes $240 annually toward the cost of the coverage. What amount is included in Rudolph’s annual gross income as a result of his group term life insurance coverage?

A)
$534
B)
$294
C)
$0
D)
$774

Answer 33

The answer is $534. Rudolph’s excess coverage is $150,000 ($200,000 − $50,000 = $150,000). The monthly cost of his excess coverage is $64.50 (150 × $0.43 = $64.50), and the annual cost is $774 ($64.50 × 12 = $774). The annual cost of the excess coverage, less Rudolph’s contribution, is $534 ($774 − $240 = $534).

Question 34

Settings
Which of the following statements concerning disability income insurance is CORRECT?

Employer contributions for an employee’s disability income insurance are fully deductible by the employer as an ordinary and necessary business expense.
Contributions by an individual employee are considered payments for personal disability income insurance and are not tax deductible.
A)
Both I and II
B)
Neither I nor II
C)
II only
D)
I only

Answer 34

The answer is both I and II. Premiums paid toward a group disability contract for an employee are deductible as an ordinary and necessary business expense by the employer. Any disability benefit received by the employee under this arrangement is fully taxable. Employee contributions on split premium disability income insurance policies are not tax deductible to the employee, and benefits received are not taxable.

LO 5.3.1

Question 35

Which of the following statements regarding voluntary employees’ beneficiary associations (VEBAs) is CORRECT?

The income cannot be used to provide employee vacation benefits.
The income from VEBAs may be tax exempt.
They permit an acceleration of the employer’s tax deduction in funding future benefits.
A)
II only
B)
I, II, and III
C)
II and III
D)
I only

Answer 35

The answer II and III. VEBAs can be used to provide vacation benefits, as well as severance benefits. If structured properly, a VEBA accelerates the employer’s tax deduction for providing these benefits. Income from the VEBA may be tax exempt to the employer.

Question 36

CDE, Inc., has recently started paying for the long-term care policies for its 45 employees. How are the payments treated for federal income tax purposes if the policies are qualified policies?

A)
Employer payments for group premiums are tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
B)
Employer payments for the group premiums are not tax deductible to the employer and not taxable income to the employee.
C)
Employer payments for the group premiums are not tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
D)
Employer payments for group premiums are tax deductible to the employer and not taxable income to the employee.

Answer 36

The answer is employer payments for the group premiums are tax deductible to the employer and not taxable income to the employee.

Question 36

What is the length of the coverage period for a terminated employee under COBRA?

A)
29 months
B)
18 months
C)
36 months
D)
0 months

Answer 36

The answer is 18 months. Terminated employees qualify under COBRA, and the required coverage period is 18 months. If an employee meets the definition of Social Security disability, the required period of coverage under COBRA is 29 months.

Question 37

Which of the following are among the characteristics of cafeteria plans?

Each employee has a certain number of dollars or credits that can be spent on a variety of benefits.
A flexible spending account is a cafeteria plan consisting of various tax-free benefits that are funded through salary reductions elected by employees each year.
Qualified benefits, which exclude the cash option, considered tax-free to the employee
The plan must include a cash option.
A)
I and IV
B)
II and III
C)
I, II, III, and IV
D)
II, III, and IV

Answer 37

The answer is I, II, III, and IV. All of these statements are correct.

Question 38

Which of the followings statements describing a Voluntary Employees’ Beneficiary Association (VEBA) is CORRECT?

A)
A VEBA is a taxable welfare benefit trust.
B)
If structured properly, a VEBA permits an acceleration of the employer’s tax deduction in funding future benefits.
C)
A VEBA is a useful vehicle for retirement benefits.
D)
Vacation pay cannot be a benefit included in a VEBA.

Answer 38

The answer is if structured property, a VEBA permits an acceleration of the employer’s tax deduction in funding future benefits. If structured properly, a VEBA permits for a prefunding of employee benefits and accelerates the employer’s tax deduction for the same. A VEBA is a useful vehicle for non-retirement benefits.

LO 5.2.2

Question 39

Which of the following statements regarding group carve-out plans are CORRECT?

A group carve-out plan is subject to nondiscrimination requirements.
Split-dollar life insurance is one method of implementing the individual coverage in a group carve-out plan.
A)
II only
B)
Both I and II
C)
I only
D)
Neither I nor II

Answer 39

The answer is II only. Statement I is incorrect. A group carve-out plan is not subject to any nondiscrimination requirements.

Question 40

Donna’s employer maintains a group term life insurance plan that discriminates in favor of key employees. Donna, 50, is a key employee and is provided with $500,000 in coverage under the plan. The cost of $1,000 of protection per month for someone in Donna’s age bracket is $0.23, and Donna does not contribute toward the cost of her coverage. What amount is included in Donna’s annual gross income as a result of her group term life insurance coverage?

A)
$1,380
B)
$138
C)
$0
D)
$1,242

Answer 40

The answer is $1,380. Donna must include the cost of the entire $500,000 in coverage in her gross income because the plan is discriminatory and she is a key employee. The annual cost of her coverage is $1,380 (500 × $0.23 × 12). The entire $1,380 is included in her gross income because she does not contribute toward the cost of the coverage.

Question 41

Which of the following are the common benefits afforded to employees in a Voluntary Employees’ Beneficiary Association (VEBA)?

Severance pay
Vacation benefits
Sabbatical benefits
A)
II and III
B)
Both I and II
C)
I only
D)
Neither I nor II

Answer 41

The answer is Both I and II. Both of these benefits are typically available within a VEBA.

Question 42

Rollie voluntarily resigns from International Shipping Co. to go on an extended missionary trip. The International Shipping Co. group health plan is subject to the COBRA continuation requirements. Which of the following statements regarding Rollie’s COBRA rights under the health plan is CORRECT?

A)
Rollie is eligible for continuation coverage for up to 18 months.
B)
Rollie is not eligible for continuation coverage because his termination of employment was voluntary.
C)
Rollie is eligible for continuation coverage for up to 29 months.
D)
Rollie is eligible for up to 36 months of continuation coverage.

Answer 42

The answer is Rollie is eligible for continuation coverage for up to 18 months. Termination of employment is a qualifying event under COBRA, regardless of whether it is voluntary or involuntary. The maximum period of continuation coverage following a termination of employment is 18 months for the employee and covered dependents.

Question 43

Which of the following statements concerning employer-provided disability income insurance is CORRECT?

To determine whether the benefits under the plan are taxable income, it is necessary to look at whether the employer or the employee pays the premiums.
If the entire cost is paid by the employee with after-tax dollars, any benefits are included in gross income.
A)
Neither I nor II
B)
I only
C)
Both I and II
D)
II only

Answer 43

The answer is I only. Statement II is incorrect because benefits are income tax free if the employee pays the entire premium with after-tax dollars.

Question 44

Your client is concerned about the tax implications of his limited personal use of a company-provided car. Which of the following statements would CORRECTLY advise him about such use?

A)
Such use is considered de minimis by the Internal Revenue Service, so its value is excludible from his income.
B)
Such personal use is not taxable since it is exempted under Code Section 401.
C)
His personal use of the company car is taxable at an annually specified amount per mile.
D)
He will have to include in income the value of his personal use based on an Internal Revenue Service formula.

Answer 44

The answer is he will have to include in income the value of his personal use based on an Internal Revenue Service formula. Personal use of a company-provided car is taxable but not on a per-mile basis. Instead, the IRS formula is used.

Question 45

In which of the following circumstances would an employee’s medical expense reimbursements from a group medical insurance policy be taxable?

Medical expense reimbursements are taxable to the employee if the employer paid the premiums for coverage.
Medical expense reimbursements are taxable to the employee, to the extent they equal the expenses incurred.
A)
Neither I nor II
B)
I only
C)
II only
D)
Both I and II

Answer 45

The answer is neither I nor II. Medical expense reimbursements are not taxable to the employee if the employer paid the premiums for coverage. Medical expense reimbursements are taxable to the employee, to the extent they exceed the expenses incurred.

Question 45

The answer is 0%. If the employee pays her own premiums, the benefit is tax-free, and the premiums are not deductible by the employer.

LO 5.3.1If Wanda paid her entire premium for her group disability coverage, how much of her benefits from this coverage would be subject to tax?

A)
100%
B)
50%
C)
0%
D)
Depends on her tax bracket

Answer 45

The answer is 0%. If the employee pays her own premiums, the benefit is tax-free, and the premiums are not deductible by the employer.

Question 46

The premiums paid by a company for group medical for its employees are

A)
tax deductible by the company and considered taxable income to the employees.
B)
not tax deductible to either the company or the business.
C)
tax deductible to the employees and the company.
D)
tax deductible by the company and not considered taxable income to the employees.

Answer 46

The answer is tax deductible by the company and not considered taxable income to the employees. The premiums paid by a company for group medical for its employees are tax deductible by the company and not considered taxable income to the employees.

Question 46

Which of the following is a principle of the workers’ compensation laws?

The costs for workers’ compensation benefits are funded through insurance premiums paid for by the employer.
The injured employee is not required to prove negligence on the part of the employer.
A)
II only
B)
Both I and II
C)
Neither I nor II
D)
I only

Answer 46

The answer is both I and II. The costs for workers’ compensation benefits are funded through insurance premiums paid for by the employer, and the injured employee is not required to prove negligence on the part of the employer.

LO 5.4.1

Question 47

Which of the following statements regarding flexible spending accounts (FSAs) is CORRECT?

The maximum salary reduction election for the dependent care FSA for married couples in 2022 is $5,000.
The maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year cannot exceed $2,850 in 2022.
In 2022, an employee can elect to participate in both the dependent care FSA and the health FSA for a total of $7,850 of elected salary reductions annually.
An employee can only elect to participate in either the health FSA or the dependent care FSA in a particular plan year.
A)
I only
B)
II and III
C)
I, II, and III
D)
I, II, and IV

Answer 47

In 2022, an employee can elect to participate in both FSAs for a total of $7,850 in annual elected salary reductions: $5,000 for the dependent care FSA and $2,850 for the health FSA.

LO 5.2.2

Question 48

Catalina is covered by a $180,000 group term life insurance policy for which her daughter is the named beneficiary. Catalina’s employer pays the entire cost of the policy. The cost of $1,000 of protection per month from Table I for Catalina’s age is $0.08. What is the amount of annual premium that is taxable as compensation (W-2) income to Catalina?

A)
$173
B)
$0
C)
$125
D)
$48

Answer 48

The answer is $125. The cost of the first $50,000 of coverage under group term life insurance is nontaxable to Catalina. The remainder of the cost of coverage ($130,000) is taxable as compensation (W-2) income. Therefore, [($130,000 × $0.08) ÷ 1,000] × 12 = $124.80 is taxable.

Question 49

Andrea was in an accident this year and is now disabled. She is receiving disability benefits from a disability policy that was paid for by her employer. Which of the following statements regarding the disability benefits is CORRECT?

A)
The benefits received from her employer’s policy will reduce the amount of Social Security disability benefits that she is eligible to receive.
B)
The entire benefit will be taxable.
C)
The entire benefit will be tax free.
D)
Only the benefit received over $50,000 will be taxable.

Answer 49

The answer is the entire benefit will be taxable. Because the employer paid the premiums, the entire amount of disability benefits received will be taxable. Social Security disability benefits will not be reduced by other disability benefits. However, if Andrea is eligible to receive Social Security benefits, the disability benefits from her employer disability policy may be reduced.

Question 49

Which of the following statements regarding group disability income plans is CORRECT?

A group disability policy is less expensive than an individual policy because the risk is spread over more participants.
Group plans often state the benefit amount as a percentage of the employee’s compensation, while individual plans pay a specific dollar amount.
A)
Neither I nor II
B)
II only
C)
I only
D)
Both I and II

Answer 49

The answer is both I and II. Both statements I and II are correct.

Question 49

Which of the following statements regarding group permanent life insurance is CORRECT?

Group permanent life insurance carries a higher chance of adverse selection than individual permanent life insurance.
Most group permanent policies have simplified underwriting requirements.
A)
I only
B)
Both I and II
C)
Neither I nor II
D)
II only

Answer 49

The answer is both I and II. Both statements I and II are correct. Group permanent life insurance often has simplified underwriting requirements, which increases the chances of adverse selection over individual permanent life insurance, which requires more stringent underwriting.

LO 5.1.1

Question 49

Settings
Randall’s employer pays the entire premium for his group disability coverage. If Randall became disabled, how much of his benefits from this coverage would be subject to tax?

A)
0%
B)
50%
C)
100%
D)
Depends on his tax bracket

Answer 49

The answer is 100%. Because Randall’s company can deduct the premiums, all of Randall’s benefits are taxable.

LO 5.3.1

Question 50

Rod, an employee of Johnson Automated, Inc., is covered under the company-paid nondiscriminatory accident and health plan. The plan provides medical expense reimbursement coverage and wage continuation payments in the event an employee becomes disabled. Several months ago, Rod was seriously injured in a skiing accident. Since then, he has received both medical reimbursement and wage continuation payments.

Which of the following statements discusses the income tax implications of the payments to Rod?

A)
The medical expense reimbursements and wage continuation payments are not includible in gross income.
B)
The medical expense reimbursements are excludible from gross income, but the wage continuation payments are includible in gross income.
C)
The medical expense reimbursements are includible in gross income, but the wage continuation payments are excludible from gross income.
D)
The medical expense reimbursements and wage continuation payments are includible in gross income.

Answer 50

The answer is the medical expense reimbursements are excludible from gross income, but the wage continuation payments are includible in gross income.

LO 5.2.3

Question 51

All of the following statements regarding the essential health benefit of coverage of children to age 26 are correct except

A)
grandchildren may be covered if the grandparent is the legal guardian of the child to be insured.
B)
there is a requirement to cover the child of a dependent.
C)
grandchildren may be covered if the grandparent is the adoptive parent of the child to be insured.
D)
a child can join or remain on the parent’s plan even if the child is married.

Answer 51

The answer is there is a requirement to cover the child of a dependent. There is no requirement to cover the spouse or child of a dependent child.

Question 52

Which of the following is true of PPO plans regarding their benefit structure?

A)
A PPO provides the same benefits payments to network and non-network providers.
B)
A PPO gives participants incentives to see network providers.
C)
A PPO uses the prepaid approach of health care to restrain the increasing cost of health care.
D)
Employees must choose doctors or other health care providers from members of the PPO network; these providers often are salaried employees of the PPO.

Answer 52

The answer is a PPO gives participants incentives to see network providers. Under a PPO, a participant who sees a network physician may have a copayment of $10, while a participant who sees a provider outside of the network may have to pay a deductible and 20% of the cost.

Question 53

Under the workers’ compensation laws, an insured worker and/or his dependents are entitled to which of the following classes of payable benefits?

Medical expenses
Temporary disability expenses
Permanent disability expenses
Survivors’ death benefits
A)
III and IV
B)
I and II
C)
I only
D)
I, II, III, and IV

Answer 53

The answer is I, II, III, and IV. All of these statements are true of benefits under workers’ compensation laws.

LO 5.4.1

Question 53

Which of the following is the definition of copayments in a group health insurance policy?

A)
A flat amount that is paid per service, such as for doctor visits or emergency room visits
B)
The most the insured will have to pay in any given year before the insurance company pays 100% of claims
C)
The percentage of medical expenses that are paid by the insurance company once the deductible has been met
D)
The premium paid in order to obtain coverage

Answer 53

The answer is a flat amount that is paid per service, such as for doctor visits or emergency room visits. Copayments are a flat amount that is paid per service, such as for doctor visits or emergency room visits. Copayments are not premiums. Coinsurance is a percentage of the expenses that are paid by the insurance company once the deductible has been met for covered services.

Question 54

Qualified group long-term care coverage premiums that are paid for by the employer are

A)
deductible by the employee but not the company.
B)
not deductible by the company or the employee.
C)
deductible by the company but not the employee.
D)
deductible by both the company and the employee.

Answer 54

The answer is deductible by the company but not the employee. Benefits are tax free to the employee.

LO 5.2.1

Question 54

Demitri’s employer provides group life insurance equal to three times his salary of $30,000. The policy is a group term plan, and the employer pays 100% of the premium. Which of the following statements best describes the tax implications of Demitri’s coverage?

A)
Since it is group term, Demitri is not subject to any federal income tax on this benefit.
B)
Demitri’s employer would not be able to deduct the cost of coverage in excess of the $50,000 face amount.
C)
Demetri will have additional taxable income of $40,000.
D)
The cost of employer-provided coverage in excess of the $50,000 face amount is taxable to the employee.

Answer 54

The answer is the cost of employer-provided coverage in excess of the $50,000 face amount is taxable to the employee. The cost of employer-provided coverage in excess of the $50,000 face amount is taxable to the employee, based upon what is referred to as “Table I” cost per $1,000 of coverage each month.

Question 54

Which of the following statements regarding group vs. individual disability plans is CORRECT?

Benefits are often less in group policies, which accounts for the lower cost.
A group disability policy is less expensive because the risk is spread over more participants.
A)
I only
B)
Both I and II
C)
Neither I nor II
D)
II only

Answer 54

The answer is both I and II. Both of these statements are correct.

Question 55

Which of the following statements regarding group disability income plans are CORRECT?

Short-term group disability provides coverage for up to six months.
A group disability income plan is sometimes broader than an individual plan and is usually less expensive.
Long-term group disability plans provide coverage for a specified term longer than two years, until an employee’s normal retirement age (usually age 65), or until death, if sooner
A)
II and III
B)
I, II, and III
C)
I and III
D)
II only

Answer 55

The answer is II and III. Short-term disability income plans provide coverage for up to 52 weeks..

Question 56

Amare is an employee of ABC Company, where he earns a salary of $100,000. The company provides Amare with disability income insurance that will replace 60% of his income upon disability. ABC Company pays the premiums on the policy. Assuming Amare is in the 24% income tax bracket, and ignoring Social Security disability benefits, how much will he receive each month on an after-tax basis from the policy, assuming he meets the definition of disability?

A)
$3,800
B)
$1,400
C)
$5,000
D)
$1,200

Answer 56

The answer is $3,800. Because the employer paid the premiums, the disability benefit received by Amare will be taxable at the ordinary income tax rates.

Annual salary $100,000
Disability replacement ratio (60%) × 0.60
Annual disability benefit $60,000
÷ 12

Monthly benefit $5,000
After-tax rate (1%–24%) × 0.76
Monthly after-tax benefit $3,800
LO 5.3.1

Question 57

Which of the following statements regarding Flexible Savings Accounts (FSAs) is correct?

Employee deferrals into an FSA are free of payroll (Social Security) taxes.
The employee commits to allocating a dollar amount of salary reduction for the coming year.
A)
Neither I nor II
B)
Both I and II
C)
I only
D)
II only

Answer 57

The answer is both I and II. Both of these statements represent characteristics of FSAs.