Retire Ch 14 Employee Benefits: Group Benefits

Question 1

PPOs typically have a wider network of healthcare providers, from which to choose, than HMOs.

a. True b. False

Answer 1

True

Question 2

The emergence of managed care plans was born from a desire to decrease competition amongst healthcare providers.

a. True b. False

Answer 2

False

Question 3

The value of health benefits
provided to all employees or owners can be excluded from the employee or owner’s income.

a. True b. False

Answer 3

False

Question 4

COBRA premiums paid by the employer on behalf of a former employee can be excluded from the employee’s taxable income.

a. True b. False

Answer 4

True

Question 5

Cafeteria plans allow an employee to exclude from income the value of the nontaxable fringe benefits selected.

a. True b. False

Answer 5

true

Question 6

An employee should consider carefully whether to use a Flexible Spending Account for child care expenses as the FSA is usually more beneficial than the child and dependent care credit.

a. True b. False

Answer 6

True

Question 7

A VEBA allows an employer to take a current deduction for future benefits that will be provided to employees.

a. True b. False

Answer 7

True

Question 8

A salary continuation plan allows employees to shift income to future years.

a. True b. False

Answer 8

True

Question 9

Long-term care plans are frequently a benefit option of a cafeteria or FSA plan.

a. True b. False

Answer 9

False

Question 10

MO Inc. is paying the premium for long-term care policies for their 250 employees. How are these payments treated for federal income tax purposes?

Payments for group premiums for long-term care are tax deductible to the employer and not taxable income to the employee.

Payments for group premiums for long-term care are tax deductible to the employer but are taxable income to the employee based on the coverage schedule.

Payments for the group premiums for long-term care are not tax deductible to the employer and not taxable income to the employee.

Payments for the group premiums for long-term care are not tax deductible to the employer but are taxable income to the employee based on the coverage schedule.

Answer 10

Payments for group premiums for long-term care are tax deductible to the employer and not taxable income to the employee.

Rationale

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

Question 11

Which of the following is/are advantages of cafeteria plans?

1. Cafeteria plans help to give employees an appreciation of the value of their benefit package.
2. The flexibility of a cafeteria benefit package helps to meet varied employee needs.
3. Cafeteria plans can help control employer costs for the benefit package because the cost of benefits that employees do not need is minimized.
4. Cafeteria plans are less complex and less expensive to design and administer than general group benefit plans.

2 only.
1 and 2.
1, 2, and 3.
1, 2, 3, and 4.

Answer 11

1, 2, and 3.
Rationale

Cafeteria plans are more complex and expensive to design and administer. All of the other statements are true.

Question 12

he beneficiary of key person life insurance is usually:

The spouse of the employee.

The employee’s spouse and dependents.

The business.

The estate of the employee.

Answer 12

The business.
Rationale

The beneficiary is usually the business because the business has suffered the loss.

Question 13

Dani is covered by a $90,000 group-term life insurance policy; her daughter is the sole beneficiary. Dani’s employer pays the entire premium for the policy; the uniform annual premium is $0.60 per $1,000 per month of coverage.

How much, if any, is W-2 taxable income to Dani resulting from the insurance?

$0.
$24.
$288.
$648.

Answer 13

$288.
Rationale

$50,000 of group-term life insurance is nontaxable.
$90,000 - 50,000 = 40,000 x $0.60 per thousand x 12 = $288 taxable

Question 14

A business valued at $3,000,000 has three partners. Each of the three partners buys a $500,000 life insurance policy for purposes of a buy-sell agreement on each of the other partners. Which of the following is/are true?

1. This is an example of an entity purchase plan.
2. This is an example of a cross-purchase plan.
3. The buy-sell agreement is underfunded.

1 only.
2 only.
1 and 3.
2 and 3.

Answer 14

2 only.

Rationale

This is a cross-purchase life insurance plan. Each person has a one-third interest. Therefore, when the first partner dies, the other two partners will each need to pay $500,000 for a total of $1,000,000 (1/3 of $3,000,000). Thus, the buy-sell agreement is not underfunded.

Question 15

Employer-sponsored life insurance is usually referred to as group life insurance. Which type of life insurance (offered as group life) is beneficial to both the employer and the employee from a tax standpoint?

Term life insurance.
Ordinary life insurance.
Universal life.
Single premium whole life insurance.

Answer 15

Term life insurance.
Rationale

Group-term life insurance premiums are deductible by the employer and excludable from income by the employee (up to $50,000 of death benefit). Group-term life insurance provided by an employer in excess of $50,000 causes W-2 inclusion to the employee utilizing the Section 79 Schedule

Question 16

NOTCM partnership has five partners who have entered into a binding buy-sell agreement that requires the partnership to purchase the partnership interest of any partner to die (an entity approach to funding the arrangement).

How many insurance policies are required to satisfy this arrangement?

1.
5.
10.
20.

Answer 16

5.
Rationale

The entity approach requires one insurance policy for each of the five partners.

Question 17

What is the maximum number of employees that a company with a health plan can have and not be subject to the COBRA rules?

10.
15.
19.
20.

Answer 17

19.
Rationale

A company with less than 20 employees is not subject to COBRA even if they have a health plan.

Question 18

Which of the following premiums for health insurance provided by an employer is/are excludable from income tax by the employee?

1. Premiums for the employee if currently employed.
2. Premiums for the employee’s spouse.
3. Premiums for the employee’s dependents other than a spouse.
4. Premiums for the employee if retired.

1 only.
1 and 2.
1, 2, and 3.
1, 2, 3, and 4.

Answer 18

1, 2, 3, and 4.
Rationale

All premiums (Statements 1-4) are excludable.

Question 19

Wallace and Associates is considering implementing a buy-sell agreement where each partner purchases a life insurance policy on each of the other partners. Which one of the following statements is correct given this information?

The partners are entering into an entity redemption agreement.

Upon the death of an owner, the life insurance proceeds will be used to buy out the decedent’s share of the partnership. Those life insurance proceeds are taxable as ordinary income.

The amount of insurance per policy will equal the value of the partnership.

The partners are entering into a cross-purchase agreement.

Answer 19

The partners are entering into a cross-purchase agreement.
Rationale

Statement a is incorrect because the entity approach occurs when the business entity purchases life insurance policies on each owner. Statement b is incorrect because the life insurance proceeds are tax-exempt. Statement c is incorrect because each policy will be for the deceased partner’s share.

Question 20

Life insurance used to fund a three-person partnership buy-sell agreement using a cross-purchase technique:

Will have the same number of policies as an entity plan.

Will be paid for with tax-deductible dollars.

Will require three policies.

Will require six policies.

Answer 20

Will require six policies.
Rationale

3 x 2 = 6

Question 21

Which of the following statements regarding the tax treatment of an entity purchase buy-sell agreement is correct?

For an employer to receive tax-free death benefits, the employee notice and consent requirements of Section 101(j) must be met.

A partnership can deduct, as an ordinary and necessary business expense, the premiums paid on life insurance to fund the buy-sell agreement.

The death benefit from a life insurance policy purchased to fund a stock redemption agreement will be payable to the surviving shareholders.

Upon the death of one owner, the surviving owners receive a step-up in basis when an entity agreement is in place.

Answer 21

or an employer to receive tax-free death benefits, the employee notice and consent requirements of Section 101(j) must be met.
Rationale

Section 101(j) of the tax code sets forth rules regarding employee notice and consent when a business entity wishes to purchase a life insurance policy in which the employee will be the insured and the business will be the owner and beneficiary. In order to retain the income tax-free nature of the death benefit, the business is required, before the contract is issued, to:

Notify the employee in writing that the business (policyholder) intends to insure the employee’s life, and include notice of the maximum face amount for which the employee could be insured at the time the contract is issued; and

Obtain from the employee written consent to being insured under the contract and to continued coverage after the insured terminates employment; and Inform the employee, in writing, that the business (policyholder) will be a beneficiary of any proceeds payable upon the death of the employee.

Option b is incorrect because the premiums paid are not deductible. Option c is incorrect because a stock redemption agreement is an entity purchase agreement; therefore, the death benefit will be paid to the business entity. Option d is incorrect because the surviving owners are not involved in an entity purchase agreement. Each owner is in contract only with the business entity, not with the other owners.

Question 22

Which of the following circumstances suggest the use of a cafeteria plan?

1.A cafeteria plan is appropriate when the employee mix is comprised only of older employees with families who need maximum medical and life insurance benefits.

2. A cafeteria plan is appropriate when employers want to choose the benefit package most suited to their employee’s individual needs.
3. A cafeteria plan is appropriate when an employer seeks to maximize employee satisfaction with the benefit package, thereby maximizing the employer’s benefit from its compensation expenditures.
4. A cafeteria plan is appropriate for a small employer who does not have much money to spend on benefits.

3 only.
4 only.
1, 2, and 4.
1, 2, 3, and 4

Answer 22

3 only.

Rationale

A cafeteria plan is appropriate when the employee mix includes young, unmarried people with minimal life insurance and medical benefits needs, as well as older employees with families who need maximum medical and life insurance benefits. A cafeteria plan is appropriate when employees want to choose the benefit package most suited to their individual needs. A cafeteria plan is also appropriate when the employer is large enough to afford the expense of such a plan.

Question 23

Medical Trials Inc. has a cafeteria plan. Full-time employees are permitted to select any combination of the benefits listed below, but the total value received by each employee must be $6,500 a year or less.

1. Group medical and hospitalization insurance for employee only, $3,600 a year.
2. Group medical and hospitalization insurance for employee’s spouse and dependents, $1,200 additional a year.
3. Child-care payments, actual cost not to exceed $5,000.
4. Cash required to bring the total of benefits and cash to $6,500.
5. Universal variable life insurance $1,000.

Which of the following statements is true? (All employees are full time.)

Chadwick chooses to receive $6,500 cash because his wife’s employer provides medical benefits for him. Chadwick has $2,900 of taxable income ($6,500 - $3,600).

Erik chooses 1, 2, 5, and $700 cash. He must include $700 in taxable income.

River chooses 1 and 2 and $1,700 in child care. He must include the $1,700 in gross income.’

Suri chooses 1 and 2 and $1,700 cash. Suri must include $1,700 in taxable income.

Answer 23

Suri chooses 1 and 2 and $1,700 cash. Suri must include $1,700 in taxable income.

Rationale

Option d is correct because cash must be included in income. Option a is incorrect because the entire cash distribution will be taxable. Option b is incorrect because the universal variable life insurance premiums of $1,000 cannot be excluded from Erik’s gross income. Option c is incorrect because child care payments are excludable benefits.

Question 24

Endorsement split-dollar life insurance is:

An insurance arrangement in which the employee pays the cost of the premium and the employee names the employer as the beneficiary.

An insurance arrangement in which the employer and the employee share the cost of the life insurance on the employee and the portion of the premium that is paid by the employer is the value of the term life portion of the policy.

An insurance arrangement in which the employee pays the majority of the premium while the employer names the beneficiary.

An insurance arrangement in which the employer is the owner of the policy and is also the beneficiary to the extent of the premiums paid by the employer.

Answer 24

An insurance arrangement in which the employer is the owner of the policy and is also the beneficiary to the extent of the premiums paid by the employer.
Rationale

The employer is the owner of an endorsement split-dollar policy and will be repaid the total of the premiums it has paid for the insurance.

Question 25

Which of the following circumstances suggest the use of a cafeteria plan?

1. A cafeteria plan is appropriate when the employee mix is comprised only of older employees with families who need maximum medical and life insurance benefits.
2. A cafeteria plan is appropriate when employers want to choose the benefit package most suited to their employee’s individual needs.
3. A cafeteria plan is appropriate when an employer seeks to maximize employee satisfaction with the benefit package, thereby maximizing the employer’s benefit from its compensation expenditures.
4. A cafeteria plan is appropriate for a small employer who does not have much money to spend on benefits.

a. 3 only.
b. 4 only.
c. 1, 2, and 4.
d. 1, 2, 3, and 4.

Answer 25

The correct answer is a.

A cafeteria plan is appropriate when the employee mix includes young, unmarried people with minimal life insurance and medical benefits needs, as well as older employees with families who need maximum
medical and life insurance benefits.

A cafeteria plan is appropriate when employees want to choose the benefit package most suited to their individual needs.

A cafeteria plan is also appropriate when the employer is large enough to afford the expense of such a plan

Question 26

Which of the following is/are advantages of cafeteria plans?

1. Cafeteria plans help to give employees an appreciation of the value of their benefit package.
2. The flexibility of a cafeteria benefit package helps to meet varied employee needs.
3. Cafeteria plans can help control employer costs for the benefit package because the cost of benefits that employees do not need is minimized.
4. Cafeteria plans are less complex and less expensive to design and administer than general group benefit plans.

a. 2 only.
b. 1 and 2.
c. 1, 2, and 3.
d. 1, 2, 3, and 4.

Answer 26

The correct answer is c.

Cafeteria plans are more complex and expensive to design and administer. All of the other statements are true

Question 27

HMO Inc. is paying the premium for long-term care policies for their 250 employees. How are these payments treated for federal income tax purposes?

Payments for group premiums for long-term care are tax deductible to the employer and not taxable income to the employee.

Payments for group premiums for long-term care are tax deductible to the employer but are taxable income to the employee based on the coverage schedule.

Payments for the group premiums for long-term care are not tax deductible to the employer and not taxable income to the employee.

Payments for the group premiums for long-term care are not tax deductible to the employer but are taxable income to the employee based on the coverage schedule.

Answer 27

Payments for group premiums for long-term care are tax deductible to the employer and not taxable income to the employee.

Rationale

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