Assignment 6 - Flexible Benefits II Flashcards Preview

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Flashcards in Assignment 6 - Flexible Benefits II Deck (30):

 Qualified benefits that can be offered in a cafeteria plan include the following:

  •  A 401(k) plan or purchase of retiree group term life insuranceEmployer-provided accident or health coverage 

  •  Individually owned accident or health insurance policies, provided employer requires an accounting to ensure that the health insurance is being paid by the employees

  •  Employer-provided group term life insurance coverage

  •  Employer-provided dependent care assistance

  •  Employer-provided adoption assistance

  •  Contributions to a health savings account (HSA)


 Some benefits paid through a cafeteria plan are taxable benefits (3)

  • cash
  • paid time-off days
  • group term life insurance in excess of $50,000


 Which types of legal entities are eligible to sponsor cafeteria plans?

 Basically, any employer with employees who are subject to taxation under U.S. tax law is eligible to sponsor a cafeteria plan.


 Under an employer-sponsored cafeteria plan, eligible employees are defined to include:

present or former employees


 Can Self-employed individuals participate in a cafeteria plan?



An agreement made between an employee and an employer allowing the employee to defer salary and thus avoid constructive receipt of the compensation. In lieu of paying the compensation to the employee, the employer contributes the amount agreed upon toward the cost of certain benefits.

 A salary reduction agreement


employers provide for automatic enrollment of their employees in certain benefits under a cafeteria plan.  No positive action is required on the part of the employee to effect enrollment in the benefit plan.

negative election


A participant makes a one-time election. Once made, the election stays in force from plan year to plan year unless the participant elects to make a change during the applicable election period that would most often be the plan’s annual open enrollment period.  These types of election are seldom used for reimbursement accounts, particularly for dependent care assistance, since expenditures in these types of accounts tend to change annually depending upon family circumstances.

evergreen election


 In order for a negative election to be valid, employees must receive reasonable notice of the ________ and have the option to decline coverage each plan year.

automatic deferral


Can a participant revoke a benefit election during a coverage period?



 According to IRC Section 125 regulations, an election change is considered to be _______ if that change is on account of and corresponds with a change-in-status event that affects eligibility for coverage



permits plan sponsors to allow an employee called to active duty for a certain duration to receive a distribution of the unused balance of his or her health care FSA.



Must be allowed by the cafeteria plan sponsor to revoke an existing election for all health plan coverage for the remainder of the coverage period notwithstanding any contrary rules stated in the cafeteria plan document

 A participant who takes unpaid FMLA leave


 A participant who takes leave of absence under ______ may elect to continue participation in the plan during the period of leave. Amounts previously deferred that would otherwise continue to be deferred under this section, if the participant were still employed, may be paid to the plan as a single lump sum at the beginning of each year or at the beginning of the expected leave-of-absence period, or in the form of monthly payments



is a plan that meets the qualification requirements under IRC Section 105. If the plan is maintained as part of a cafeteria plan, additional requirements set forth in the regulations also must be satisfied.

A health care FSA


 To qualify as an accident or health plan, a health care FSA must exhibit the _____ and ______ characteristics of medical insurance

  • risk shifting
  • risk distribution


 What alternatives does an employer have regarding the use of forfeited funds in health care FSAs (5)?

  • keep it
  • pay plan expenses
  • charity 
  • divide among employees
  • CANNOT  be refunded to the employees who incurred the forfeitures


Under the regulations issued on August 6, 2007, money forfeited by employees under the use-it-or-lose-it provision is called an 

“experience gain.”


A plan that meets the qualification requirements set forth under IRC Section 129.  Defined as the payment for or provision of services which, if paid for by the participant, would be considered employment-related expenses. To claim benefits, the participant’s spouse also must be employed, a full-time student or physically or mentally incapable of self-care

  •  dependent care assistance plan 


defined as those expenses that enable the participant and the participant’s spouse to work or look for work

 Eligible reimbursement expenses


 A cafeteria plan that offers paid time-off must make a distinction  between an ____ and _____ paid time off option.

elective and a nonelective


those expenses that are reasonable and necessary adoption fees, including attorney fees, travel expense and other expenses that are directly related to a legal adoption

 Qualifying adoption expenses


Two conditions must be met in order for a payment to be considered cash within a cafeteria plan. 

  • First, the benefit must be one that is not specifically prohibited by IRC Section 125.
  • Second, the benefit must be provided on a taxable basis. This can be accomplished in one of two ways:
    • either the participant can pay for the benefit on an after-tax basis or
    • the employer can pay for the benefit and report the cost of the benefit as taxable income to the employee.


 In terms of the overall test that applies generally to a cafeteria plan as a whole, there are three general tests. The three tests are:


  • (1) An eligibility test
  • (2) A contributions and benefits test
  • (3) The key employee concentration test.


 The purpose of the test is to measure whether or not a cafeteria plan discriminates in favor of highly compensated individuals or their dependents with regard to their ability to participate in the plan. 

 Eligibility test.


 This test involves mathematical testing as well as general nondiscrimination with respect to benefits. This test uses the same definition of highly compensated as applied for qualified plan purposes

 Contributions and benefits test


This test requires that nontaxable benefits provided to key employees do not exceed 25% of the aggregate benefits provided to all employees. For this purpose, the term key employee is that used for qualified plan purposes with respect to the top-heavy determination

 Key employee concentration test.


 In addition to the three general tests for cafeteria plans discussed in Question 20, there are specific nondiscrimination tests that apply to the underlying benefits funded through a cafeteria plan. These tests include:

  •  Health care FSA
  •  Dependent care assistance
  •  Group term life insurance.


These special plans can be established by employers that qualify as an eligible small employer. In addition, the plan must be designed with specific eligibility and contribution requirements. In exchange, the plan is exempt from otherwise-applicable nondiscrimination testing that applies to cafeteria plans. These plans are subject to more stringent plan eligibility requirements and have specific contribution requirements that include employer contributions.

“simple cafeteria plans.”


 Funds in a health care FSA that are unused during the plan year are forfeited by plan participants and then become the property of the ________