Assignment 8 - Taxation of Group Plan Benefits Flashcards Preview

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Flashcards in Assignment 8 - Taxation of Group Plan Benefits Deck (24):

 Employee-pay-all group term life insurance plans are not subject to IRC Section 79 nondiscrimination requirements if the employee contribution rates, at all ages, are either less or more than the _______ published by the Internal Revenue Service, and there is no significant employer involvement.

imputed income rates


requires that a group life insurance plan not discriminate in favor of key employees as to eligibility to participate and the type and amount of benefits available.

 IRC Section 79


 Some employees may be excluded from consideration when IRC Section 79 is applied to ascertain if a group term life insurance plan meets the eligibility test. These are employees who 

  • (a) have not completed three years  of service,
  • (b) are part-time or seasonal or
  • (c) are covered by a collective bargaining  agreement.


 A key employee is:


  • (a) An officer with compensation in excess of an indexed amount ($160,000 for 2011)
  • (b) A 5% owner
  • (c) A 1% owner with annual compensation greater than $150,000.


 Which health benefit plans are subject to Section 105(h)? 

group health plans that do not qualify for grandfathered status



The types of self-funded health and nongrandfathered insured plans that are subject to IRC Section 105(h) nondiscrimination rules include (4)

  • medical
  • dental
  • vision plans
  • health care spending accounts.


 For purposes of meeting the benefits test of IRC Section 105(h), a health benefit plan may be integrated with the benefits paid under ____  or other federal and____  programs.

  • Medicare
  • state


 IRC Section 105(h) regulations provide an important exception from discrimination testing for reimbursements paid under a plan for _______ for employees

“medical diagnostic procedures”


 In order for a VEBA to retain its tax exemption under Section 501(c)(9), any plan (that is not maintained as part of a collective bargaining agreement) of which the VEBA is a part must comply with the nondiscrimination provisions of _____

IRC Section 505.


 The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires that health care continuation coverage be available to employees and their dependents under employer-sponsored plans when there is a 

“qualifying event.”


 A “qualifying event” is defined as any of the following (7):


  1. •  Death of the employee
  2. •  Employee’s termination (unless for gross misconduct)
  3. •  Reduction in employee’s work hours
  4. •  Divorce or legal separation of the employee
  5. •  Eligibility for Medicare
  6. •  Cessation of a child’s eligibility as a dependent
  7. •  Reduction, loss or subsequent elimination of retiree medical coverage one year beforeor after the beginning of an employer’s bankruptcy proceeding.


 Coverage must be available for__ months if the employee was terminated or his or her hours were reduced, unless at the time of termination or reduction in hours the individual was determined by Social Security to be disabled, in which case the coverage period increases to 29 months. The period is extended to __ months for the other “qualifying events.” The beneficiary may be charged up to ___ of the cost of coverage or 150% for certain disabled individuals in months 19 through 29.

  • 18
  • 36
  • 102%


 Describe the federal income taxation to employees of employer contributions for the following types of welfare plans:


  • medical plans
  • Accidental death and dismemberment (AD&D) and disability income plans
  • Group term life insurance

  • Employer contributions toward medical plans are not taxable income for the covered employees

  • not taxable to employees

  • income tax-free for the participants up to a $50,000 limit.


 When a group term life insurance plan is discriminatory, all ___ employees lose the $50,000 exclusion, and they have imputed income for all employer-provided coverage. The amount of the imputed income is determined using _____ rates published by IRS. Non-key employees, however, are not affected if a group life insurance plan is discriminatory.

  • key
  • IRC Section 79


 Describe how benefits paid under

  • group term life insurance,
  • medical and
  • disability income plans

are treated under the federal income tax laws


  • Group term life insurance benefits that are paid in a lump sum are income tax-free
  • tax free
  • taxable as income to the employee


 When a health plan does not meet the IRC Section 105(h) eligibility test, the amount included in the income of a highly compensated employee is determined by _____

the law.


 How is the investment income on reserves held by a welfare benefit plan taxed?

  • if within the prescribed safe harbor limits, generally is free from federal income tax to the employer or trust.
  • If reserves exceed these amounts, the investment income is taxable as unrelated business income


 Additional amounts of reserves may be held for life insurance and health benefits for retirees if the specific requirements concerning such retiree benefits are met. These requirements provide that ______ must be maintained for key employees and that their benefits must be paid from such accounts. Furthermore, no amounts may be reserved in these accounts for ______ or for group life insurance in excess of $50,000, and funding of these accounts must be on a level basis with no assumptions as to future increases in the cost of health care

  • separate  accounts
  • discriminatory  benefits


 Are employer contributions for welfare plans deductible business expenses for the contributing firm?

 generally are deductible provided they do not result in the payment of unreasonable compensation.


 Unlike Section 401(k) plan contributions, employee contributions made on a before-tax basis to ____  benefit plans are not subject to Federal Insurance Contributions Act (FICA) taxes by the employee.



 A 100% excise tax may be imposed on an employer in conjunction with a welfare benefit plan for:

  •  (a) The value of medical or life insurance benefits paid to a retired key employee unless paid from a separate account as required by law
  • (b) The value of medical or life insurance benefits paid under a discriminatory plan funded through a welfare benefit fund such as a tax-exempt trust under IRC Section 501(c)(9) 
  • (c) Amounts reverting to an employer from a welfare benefit fund.


 PPACA imposed the following additional taxes on group health and welfare plans:

  •  Employer “Free-Rider” Penalties
  •  penalty is imposed on large employers when certain employees choose not to enroll in the employer-sponsored plan and receive a federal subsidy to enroll in certain other insurance coverage


Effective in 2014, employers with at least 50 employees that do not offer minimum essential health coverage must pay a penalty in any month during which a full-time employee receives coverage through a state insurance exchange.

 Employer “Free-Rider” Penalties



 The act also provides a tax credit, effective in 2014, to small businesses and small taxexempt organizations that pay employee health insurance premiums. The credit is designed to encourage employers with __ or fewer full-time workers to offer health insurance coverage for the first time or maintain coverage they already have.