Module 5 Regulatory and Tax Issues for Welfare Benefits Flashcards
Regarding Tax and Regulatory Terms Define the following Terms:
Imputed Income
Federal Insurance Contributions Act (FICA)
Federal Unemployment Tax ACT (FUTA)
■ Imputed income — Theoretical income that a company pays on behalf of an employee, but the individual does not actually receive. This theoretical income must be added to the employee’s
gross wages.
■ Federal Insurance Contributions Act (FICA) — The source of Social Security contribution/ withholding requirements, known commonly as the FICA deduction. It is a tax paid by both the employee and the employer.
■ Federal Unemployment Tax Act (FUTA) — Provides for payments of unemployment
compensation to workers who have lost their jobs. Most employers pay both a federal and a state
unemployment tax.
Under the IRC Section 79 what exclusion does it provide?
provides an exclusion from employees’ income for the first $50,000 of group term life insurance coverage provided by the employer, provided the plan is nondiscriminatory.
Under IRC Section 104 what exclusions are provided?
provides exclusion from income of benefits payments from insurance policies.
Under IRC Section 105 what exclusions are provided?
provides exclusion from income of employees for benefits payments from self-insured health plans.
Under IRC Section 106 what exclusions are provided?
provides an exclusion from income for value of employer-provided coverage for both employees and former employees.
What are general tax advantages provided by the IRC for the following benefits:
Employer Contributions
Employee Contributions
Tax-Free Benefits
■ Employer contributions
* Tax deductible to the employer
* Exempt from taxation for employees up to certain limits
■ Employee contributions
* May be pretax for some programs under cafeteria plans
* Whether pretax or post-tax determines taxation on long-term disability (LTD) benefits
■ Tax-free benefits
* Benefits, or the value of the services rendered, received by employees are tax-free, including:
– Medical, dental, vision, hearing and drug programs
– Group term life insurance up to $50,000
– LTD if employee pays the premium with post-tax dollars
Health and Welfare Plans - Timing for non-discrimination testing
- Generally conducted annually, at year end — If on a calendar year, final W-2 wages and deductions will be available then.
- Mid-year, to determine if there are any issues, especially if there has been trouble passing the tests in the past
What components of self insured health plans require Nondiscrimination testing?
- Medical
- Dental
- Vision
- Hearing
- FSAs and HRAs
what components of fully-insured health plans require nondiscrimination testing?
Only Medical Benefits
-unless other components are bundled together in terms of their plan design.
Why are some disability benefit plans not subject to nondiscrimination testing?
because they do not reimburse medical expenses.
* Disability income benefits
* Accidental death and dismemberment (AD&D)
How does tax treatment of Group Term Life Insurance impact an employer?
Premiums paid by the employer are deductible if they are an ordinary and reasonable business expense.
How does tax treatment of Group Term Life Insurance impact the employee?
- Premiums paid by employer for up to $50,000
- Pay out benefit value is not taxable to employee
- Premiums paid by employer for over $50,000 value affect imputed income
- Pretax employee-paid coverage in cafeteria plans
- Accelerated death benefits are not taxable
- Lump-sum proceeds are generally not subject to federal income tax, but life insurance proceeds paid in installments
are taxable
Under IRC Section 79 - What is required to satisfy the eligibility test?
- Must benefit 70% or more of all employees, OR
- 85% or more of participants must not be key employees, OR
- Passes a nondiscriminatory classification of employees — The employees who benefit under the plan must qualify under a classification set up by the employer and found by the Treasury not to discriminate in favor of key employees.
■ Modern approach — Avoid using different formulas for life insurance with different employees. Keep it simple. For example, a specific dollar amount for all or 1 x salary for all.
What is the formula for Group Term Life Insurance Eligibility testing?
Total employees (500)
Total Participants (550) -including key emp
500/550 = 91% (passes the 70% test)
EEs with >5 Years total employees 112 (including Key employees)
100 participating non-key employees 100
100/112 = 89% (passes the 85% are non-key)
Regarding Disability Income Benefits does sick time have to expire before taking advantage of STD or LTD?
no
- Can be used to offset any elimination period (unpaid time) before benefit payments start
- STD elimination period is the time period from the first date of disability until benefit
payments begin - Length of time determined by plan design
Disability Income benefits what is tax treatment for EMPLOYER?
- Employer allowed deduction for ordinary and reasonable expense (IRC Section 62).
Disability Income Benefits, what is the tax treatment for EMPLOYEE?
- Value of employer-provided coverage excluded from income of employee under IRC Section 104.
- Benefits taxation depends on who pays premium.
- If employer pays premiums, employee taxed on benefits received under the plan.
- If employee pays premiums on before-tax basis, benefit is considered to be employer-provided and disability payments are taxable to employee.
- If employee pays premiums on after-tax basis, disability benefit payments are not taxable.
- If employees and the employer share in the costs of the program, employees are not taxed on that portion of disability payments attributable to their own after-tax contributions (using average of last three years).
What are the nondiscrimination testing requirements associated with Disability Income Benefits?
Typically, there are no nondiscrimination requirements for disability income plans.
What i s the tax treatment for EMPLOYERS for Long Term Care Plans
- Long-term care (LTC) benefits are considered medical expense benefits deductible under IRC Section 213(d).
- Employer may deduct premiums if ordinary and necessary for “qualified” long-term care contracts.
- Still cannot fund through a cafeteria plan
- Not subject to COBRA
What is the tax treatment for EMPLOYEES for Long Term are Plans?
- Favorable legislation should cause more widespread acceptance and proliferation of
these policies. - Employer contributions excludable, subject to limitations
- Employees not taxed on distributions under the policy, even in excess of taxpayer’s basis
- Policies fully portable
In regard to tax withholding, is payment under self-insured health plans subject to FICA or FUTA?
Payments under self-insured health plans not subject to FICA or FUTA.
* Penalties — If a company fails to withhold and to report, it is subject to a per employee penalty. The outcome for the employee is that they end up with
unreported income upon which
they will have to pay penalties.
How is the employer required to report aggregate cost of employer-sponsored coverage under the ACA?
Aggregate cost of employee coverage is reported on the W-2
Define the Financial Accounting Standards Board (FASB).
An organization (not a government agency) that establishes the “generally accepted accounting principles” (GAAP) that govern accounting for publicly held U.S. companies. The accounting standards are identified in the Accounting Standards Codification (ASC). For benefits, it is of particular importance in determining the rules connected with accounting for pensions and other post-retirement programs.
Financial Accounting Statements under the ASC report on accrual of retirement benefits - Define the following
ASC 715
ASC 712
ASC 740
- ASC 715 — Requires that an expense for retiree health care and insurance benefits be fully accrued by an employee’s earliest retirement date
- ASC 712 — Requires that an expense for inactive and former employees’ (but not qualified for retiree benefits) be accrued
- ASC 740 — Requires that the expected preferential tax treatment related to expenses covered by ASC 715 and ASC 712 be reported when accrued
- An employer’s contributions for welfare benefit plans are generally tax deductible when which one of the following conditions is met?
A. Payments are an ordinary and necessary business expense.
B. Premiums are prepaid.
C. Paid and claims incurred but not reported (IBNR) are included.
D. DOL per-employee annual dollar averages are met.
A. Payments are an ordinary and necessary business expense.
Which of the following best explains the general nondiscrimination requirements for health plan?
A. Highly compensated individuals cannot be taxed on excess reimbursement.
B. A plan cannot discriminate against nonhighly compensated individuals with regard to eligibility for benefits.
C. All benefits provided to HCIs must be provided on the same basis to all participants.
B. A plan cannot discriminate against nonhighly compensated individuals with regard to eligibility for benefits.
What is the minimum percentage of non-key employees that must participate in a group term life insurance program for the program to meet nondiscrimination requirements?
A. 90%
B. 85%
C. 80%
D. 75%
B. 85%
- How can employees avoid imputed income for group term life insurance premiums?
A. Elect to pay premiums on a pretax basis through a cafeteria plan
B. Elect to increase the amount of employer-provided coverage to more than $50,000
C. Elect to reduce the amount of employer-provided coverage to $50,000
C. Elect to reduce the amount of employer-provided coverage to $50,000
There are no nondiscrimination requirements for disability income benefits unless they are funded through which of the following?
A. VEBA
B. Simple taxable trust
C. Grantor
D. Insurance arrangement
A. VEBA
What is the penalty for the employer if they fail to withhold and report taxes?
A. An additional withholding tax besides the unreported amount
B. A per employee penalty
C. Payment for each employee’s imposed penalty on the unreported income
D. Nondiscrimination litigation
B. A per employee penalty
Which statement best describes the generally accepted accounting principles (GAAP) established by the Financial Accounting Standards Board (FASB)?
A. They govern accounting principles used throughout Canada.
B. They will become the standard accounting principles for the U.S. beginning in 2015.
C. They govern accounting for publicly held U.S. companies.
C. They govern accounting for publicly held U.S. companies
