Section 125 Plans Part 1

Question 1

What are the two primary factors that contribute to the popularity of cafeteria plans?

Answer 1

1. Increasing cost of benefits

2. Diverse workforce

Question 2

A __________ plan assures that the employer maximizes the value of its benefit dollars and avoids spending money on duplicated or unneeded benefits.

Answer 2

1. Cafeteria

Question 3

A flexible benefit plan allows employees to contribute toward benefits on a ___ _________ basis.

Answer 3

1. Tax favored

Question 4

Provided a cafeteria plan is designed in accordance with all applicable tax laws, a cafeteria plan participant can avoid taxation and instead receive ___ _____ benefits.

Answer 4

1. Tax free

Question 5

An essential concept in understanding a cafeteria plan is recognition that the cafeteria plan really is an _________ plan under which tax-favored employee benefits are offered.

Answer 5

1. Umbrella

Question 6

Section 125 was added to the IRC by the _________ ____ __ ______

Answer 6

1. Revenue Act of 1978

Question 7

If the requirements of Section 125 are met and the benefits are eligible for inclusion in a cafeteria plan, the:

Answer 7

The benefits are not considered as taxable income to the participant

Question 8

What are some benefits that cannot be offered in a cafeteria plan

Answer 8

Whole life insurance and long term care insurance

Question 9

T/F

Can a health savings account funded through a cafeteria plan fund premiums for long-term care insurance or services.

Answer 9

True

Question 10

What are the primary advantages to an employee in receiving benefits under a cafeteria plan?

Answer 10

1. Preferential tax treatment
2. Contributions to a cafeteria plan are exempt from federal income tax and not subject to FICA/FUCA
3. Most state and local tax laws follow federal treatment

Question 11

What are the primary disadvantages of a cafeteria plan?

Answer 11

1. Benefit elections generally must be made prior to the beginning of the plan year and, with limited exception, the election is irrevocable during the entire period of coverage.
2. An employee may be worse off financially by paying for dependent care expenses through a cafeteria spending account rather than taking the tax credit on his or her personal tax return.
3. May notice reduction in Social Security benefits due to no contributions

Question 12

Unused benefit dollars at the end of the plan year subjected to forfeiture

Answer 12

“Use it or lost it” rule

Question 13

Discuss the advantages to employers in offering their employee benefits through a cafeteria plan

Answer 13

1. Payroll cost savings due to no FICA or FUTA
2. Deferral amounts are not considered wages for purposes of workers’ comp
3. Create greater employee awareness of the overall value of their benefits

Question 14

Disadvantages employers face in sponsoring cafeteria plan?

Answer 14

1. Cost of administration
2. Must adhere to strict federal tax laws
3. Employer incurs cash flow risk if claims exceed employee plan contributions early in the plan year
4. Terminating employees claims can exceed contributions and recoveries

Question 15

Adverse selection becomes a greater risk when employees can opt in and out of various benefit plans. If all the less healthy participants select the most comprehensive insurance coverage and the more healthy participants select minimum or no health coverage, the overall plan costs may __________

Answer 15

1. Increase

Question 16

Cafeteria plans are subject to complex coverage and _________________ testing.

Answer 16

Nondiscrimination

Question 17

This type of plan has no employer contributions and the plan is offered to employees so they may pay for their insurance costs on a tax-favored basis.

Answer 17

Premium conversion plan

Question 18

If the employer is going to allow employees to opt out of employer-paid insurance coverage, this must occur through a ______ _______ within a cafeteria plan.

Answer 18

Cash Option

Question 19

Which types of benefits typically provide a premium conversion feature under a flexible benefit plan?

Answer 19

Medical insurance (including dental, vision, and other types of medical coverage) and group term life insurance

Question 20

T/F

The payment of pretax premiums for individual policies is prohibited.

Answer 20

True

Question 21

What is an FSA

Answer 21

Offer an employee the ability to fund certain qualified benefits on a pretax basis through a salary reduction agreement or a combination of salary reductions and employer contributions

Question 22

FSAs are permitted for:

Answer 22

Health Care Reimbursements
Dependent-Care assistance
Adoption Assistance

Question 23

What is a full flex plan (full choice plan)

Answer 23

Gives participants an opportunity to select among a full range of benefits. The employer determines a dollar value it wishes to earmark for the benefits portion of total comp.

Question 24

What are the pricing matrix factors utilized to value credits

Answer 24

1. The number of credits a participant will be given
2. The acceptable level of employee contribution
3. The number of participants expected to select each benefit offered
4. The number of credits that are expected to be paid as a cash benefit
5. The purchase price of benefit options
6. The hidden employer subsidies
7. The total premium cost

Question 25

Why do employers develop credit values for use in flexible benefit plans rather than use the actual dollar values associated with premium costs?

Answer 25

Such a system can smooth out benefit inequities. This type of pricing makes the benefits more valuable than cash.

Question 26

What is a core benefit within a flexible benefit plan

Answer 26

A minimum level of benefit coverage which a company will not allow an employee to go below

Question 27

What is the affordability test

Answer 27

Large employers must offer lowest cost option that also meets ACA minimum value requirements

Question 28

Cafeteria plans that include welfare plans are subject to what other major laws besides the IRC and ERISA?

Answer 28

COBRA
FMLA
HIPAA
MHPA (Mental Health Parity Act)
NMHPA (Newborns and Mothers Health Act)
WHCRA (Women's Health and Cancer Act)
MMA (Medicare Prescription Drug
WFTRA (Working Families)
HEART
Michelle's Law
MHPAEA
GINA
PPACA

Question 29

What general requirements must a cafeteria plan satisfy in order to be afforded favorable tax treatment

Answer 29

The plan must allow participants to choose between two or more benefits consisting of cash and qualified benefits