Risk Management

Question 1

HSAs

Answer 1

Nonqualified distributions: 20% penalty
- exceptions: death, disability, age 65

Not available for SE individuals

Question 2

COBRA

Possible Things to Memorize for CFP® Certification Examination

Answer 2

Coverage Periods/Qualifying Events
18 months:
- reduction in hours (EE/dependents)
- normal termination (EE/dependents)
29 months:
- meets SS disability (EE/qualified beneficiary)
36 months:
- divorce (loss of coverage for spouse/dependent)
- Medicare eligibility (from date of event)
- death
- child at age of ineligibility

Applies to:
- ERs w/ 20+ EEs
- Loss of coverage for covered EE, spous, dependent
- ER sponsored medical plan (ex. LI and disability)

Cost: 102% of normal group rate

Question 3

HO Coinsurance Formula

Possible Things to Memorize for CFP® Certification Examination

Question 4

Exceptions to Transfer-for-Value Rule

Possible Things to Memorize for CFP® Certification Examination

Answer 4

• Sale of existing policy for valuable consideration
• DB loses tax free status
• insurance proceeds > purchase price + additional premiums = gross income to buyer
• taxes to seller:
  1) OI = surrender value - basis (ie. investment in contract - dividends received)
  2) LTCG = gain at sale (ie. sale proceeds - basis) - amount taxed at OI

Exceptions for transfers to:
-insured
-partner of insured
-partnership/corporation if insured is partner/shareholder or officer
-tax-free exchange/gift (carryover basis)

Question 5

Taxation of LI Transactions

ADD TO

Answer 5

Ordinary Income:
- dividends > premium
- surrender value/maturity w/ interest only option > $ invested
- installment pmt non-ROP portion
- interest pmt on bene proceeds

Withdrawals:
- MEC = LIFO
- non-MEC = FIFO

Question 6

MEC

Answer 6

• LIFO
• w/d and loans taxable on growth portion
• additional 10% penalty on w/d and loan growth if < 59.5
• once a MEC, always a MEC

Question 7

Annuity Tax Treatment

ADD TO

Answer 7

Exclusion Ratio:
Fixed = investment in contract/expected return
Variable = investment in contract/annuitant’s life

Question 8

Major Medical Payment Order

Question 9

Medicare

ADD TO

Answer 9

A: Hospital
- max 90 days/benefit period (period ends at 60 days out of hospital)
- lifetime reserve of extra 60 days after 90 max is up
- skilled nursing/rehab if hospital required w/in past 30 days (min 3 days in hospital care); 20 = days full coverage, 21-100 = coinsurance; 100+ = none

B: Physician, home health, outpatient

C: Advantage Plans

D: Prescription drugs

Question 10

LTC

ADD TO

Question 11

Calculate LI Needs

Capital Retention Method

Answer 11

• Principal remains at end of income term (ie. in pertetuity)
• does not account for inflation

Calculation:
1) annual income need - SS/other income sources = net annual need
2) net annual need ÷ investment ROR = total insurance amount

Question 12

Calculate LI Needs

Human Life Value Method

ADD TO

Answer 12

• Replace individuals income over work-life expectancy (including raises)

Calculation:
N = years to retirement
I/Y = discount rate

Question 13

Calculate LI Needs

Financial Needs Analysis

ADD TO

Answer 13

Lifestyle needs (inflate all at CPI)
Family needs
-final expenses
-readjustment (~2 years)
-dependent care
-mortgage repayment
-education
-life income for surviving spouse

Annuity Method: pay just enough through dependent life expectancy (assets depleted)

Purchasing Power Preservation Method: only part of income produced is spent and remainder reinvested; DB not consumed

Question 14

Deferred Comp

NQSO & ISO

Answer 14

NQSO
ER can grant on any terms

*Tax at exercise: *
- FMV - exercise $ = OI (W2 + paroll tax)
- adjusted basis = exercise $ + OI recognized

Tax at sale:
- Short/long CG or CL (holding period begins at exercise)

ISO
ER written plan, approved by shareholders
Expiration w/in 10 years of grant
Max exercise in a year is 100k
Favorable tax treatment if held > 2 yrs from grant and 1 year from exercise

Tax at exercise:
- no regular income tax
- FMV - exercise $ = AMT adjustment
- adjusted basis = exercise $ for regular AND FMV at exercise for AMT

Tax at sale:
- Qualified sale (holding period met): FMV at sale - exercise $ = LTCG (no deduction for ER)
- Disqualified Disposition:
1. FMV at exercise - exercise $ = OI ex. payroll tax (ER gets deduction)
2. FMV at sale - (exercise $ + OI recognized) = CG (no cap losses, but possible reduced income if sale FMV < exercise FMV)

Question 15

ISO & NSO

ADD TO

Answer 15

ISO Holding Period: 1 yr from exercise, 2 yr from grant
Max Option Term: 10 yrs from grant
Max annual exercise value: 100k (valued at grant)

Disqualifying disposition
- ER deduction allowed
- holding period not met (EE gets W2 income ex. payroll on FMV at exercise - exercise price)
- OI asses to basis for CG