Employee Group Benefits

Question 1

What is a contributory plan?

Answer 1

Employees contribute to a group plan (i.e. group life insurance premiums)

Question 2

What is a non-contributory plan?

Answer 2

Employees do not contribute to a group plan - the employer does

Question 3

What are common formulas for calculating group life insurance coverages?

Answer 3

A percentage or multiplier of earnings

An amount of coverage based on years of service

A coverage limit for different classes of employees

Question 4

What are the 4 requirements for group term life to qualify for section 79 tax benefits?

Answer 4

Coverage must provide a general benefit

Coverage must be provided to a group of employees (>10) without discrimination

The policy must be a master policy or group of individual policies

The amount of insurance to each employee must be consistent

Question 5

What are the two types of Accidental Death and Dismemberment coverages?

Answer 5

Business travel: coverage for employees only while traveling for business

Voluntary accident: coverage for employees at any time on any activity, personal or business

Question 6

How is the term “key employee” defined?

Answer 6

An officer of the employer with annual comp exceeding $185,000
A greater than 5% owner of the employer
A greater than 1% owner and having annual comp exceeding $150,000

Question 7

What is group paid up insurance?

Answer 7

Consists of increasing units of whole life and decreasing units of term life. It is scheduled in such a way that by the time the employee reaches the end of his/her career, the whole life is paid up. If they leave early, they can cash out or leave the paid up portion at no additional cost.

Question 8

What is group ordinary insurance?

Answer 8

A section 79 plan in which the employer pays the term and the employee pays the whole life coverages respectively.

Question 9

What is group universal insurance?

Answer 9

Similar to individual universal insurance, these benefits allow flexible premiums, health benefits and potentially high returns on interest. These and variable universal life are fairly similar to the individual policies.

Question 10

What is Group Survivor Income?

Answer 10

NOT INSURANCE. Only spouse and children can benefit and all payments are taxable.

Question 11

What is supplemental group term life?

Answer 11

Must not be discriminatory, but is an election which means more scrutiny for adverse selection - meaning the insurance company is going to look for insurability.

Question 12

What is Group Carve Out?

Answer 12

A replacement for the $50,000 group term - Enhanced benefits available to a group of employees such as executives for excess coverage above the group term limits. Permanent insurance is often used.

Question 13

If group survivor benefits are not subject to income tax, why would group survivor income potentially be subject to income tax?

Answer 13

IRS rules state that in order for survivor benefits to avoid taxation, there must be a payment regardless of any surviving beneficiaries. Group income benefits are dependent on there being a beneficiary.

Question 14

What is the amount of group term life coverage that remains non-taxable to the employee and deductible by the employer?

Answer 14

$50,000

Question 15

What are the two situations where going above the $50,000 remains tax-free?

Answer 15

Individuals who are disabled or retired under certain conditions

Individuals who designate the employer or charitable organization as the beneficiary

Question 16

What is a retired lives reserve?

Answer 16

Employer pre-funded retirement plan premiums. This account saves for the premiums of a future-dated policy.

Question 17

What are the tax consequences of group permanent insurance?

Answer 17

If the employee has vested rights in the premiums and has designated beneficiaries, then the employee will be taxed on employer contributions. Dividends may be taxable to the employee.

Question 18

What is the calculation for determining the annual employee premium amount when group term exceeds $50,000?

Answer 18

(Face Value - $50,000 / $1,000) x (table I age) x 12 = annual premium

Question 19

What is the exception for use of HSA funds for paying an insurance premium?

Answer 19

HSAs can be used to pay for LTC insurance

Question 20

What IRC section governs the taxation of group life policies?

Answer 20

Section 79

Question 21

What are some benefits to a company self-funding health insurance?

Answer 21

The company is not governed by ERISA and does not have to comply with state regulations

The employer can save on insurance company risk fees and state tax, possibly freeing up funding towards other health plan benefits.

Question 22

What is the aggregate stop loss?

Answer 22

Applies to the entire group. Calculated at the end of the year. If the total claims exceeded the aggregate stop loss, the carrier will reimburse the company

Question 23

What is a minimum premium plan?

Answer 23

Allows for the calculation and carrier reimbursement for claims over a predetermined level for the month (vice at the end of the year with aggravated stop loss)

Question 24

What is a section 125 plan?

Answer 24

A cafeteria plan in which employers / employees can select which benefits are best for the company to offer or best for the employee to have.

Question 25

What benefits are prohibited from section 125 plans?

Answer 25

LTC insurance
Education benefits
Employee discounts
No cash fringe benefits
Commuter benefits

Question 26

What is the FSA tax savings equation?

Answer 26

(est healthcare cost) / (1 - [tax bracket] - .0565 FICA) = healthcare cost + taxes

Question 27

What are the tax rules for HSAs?

Answer 27

Contributions to an HSA are tax deductible, earnings grow tax deferred, and distributions are tax free when used to pay for qualified expenses.

Question 28

What are eligibility rules for HSAs?

Answer 28

Must be enrolled in a HDHP
Not covered by a non-HDHP
Not covered by Medicare
Not claimed on another's taxes
Not have any other health care

Question 29

What is a health reimbursement arrangement (HRA)?

Answer 29

An employer-only funded account for reimbursement of substantiated medical expenses. Distributions to the employee for qualified expenses are exempt from taxes.

Question 30

What is a Voluntary Employee’s Benefits Association (VEBA) trust?

Answer 30

A trust established by one or 10 or more employers in which they can fund non-retirement benefits and take the deduction immediately. VEBAs are expensive to start and maintain, but do provide security for employers who want to offer benefits above qualified plan limits.

As long as the VEBA trust complies with 501(c)(9) non-discrimination and 505(b)(7), the earnings are tax exempt.

Question 31

What is a welfare benefit trust?

Answer 31

Modeled after a VEBA trust, differences are that earnings are fully taxable to the employer. They do have fewer IRS requirements than VEBAs, but must still be compliant with ERISA.

Question 32

What are the benefits of VEBA?

Answer 32

Out of IRC 501(c)(9): “provide life, sickness, accident, and other benefits”. Other benefits can include vacation, child care, facilities, legal services, severance pay, education and job training, and supplemental unemployment compensation.

Question 33

What is a cafeteria plan?

Answer 33

Allows participants to pick and choose the benefits that are most useful to them. Section 125 requires that a cafeteria plan offer:

• a cash benefit that is generally taxable to the employee
• one or more qualified benefits that are not taxable to the employee

Question 34

What are the general differences in group disability plans vs individual?

Answer 34

Usually less expensive, but also fewer benefits. Group coverage also usually comes with both short and long term disability.

Question 35

What is a sick-pay plan?

Answer 35

Usually a continuation of compensation. Unless the compensation comes from VEBA, it is usually taxable to the employee

Question 36

When does short term disability kick in?

Answer 36

Usually after sick-benefits are exhausted… around a one week waiting period. Benefit period can be 13, 26, or 52 weeks

Question 37

When does long term disability kick in?

Answer 37

The waiting period can be 60, 90, 180 days. The first two years of the benefit period is based on the same eligibility for STD. After two years, the liability definition is in line with either anyocc or ownocc depending on the coverage.

Question 38

What are the tax implications for group disability to the employee and employer?

Answer 38

If the employer pays the premiums and the benefit is not to the employer, that employer can deduct the premiums as a business expense

The benefits are includable in the employees taxable income although there may be a tax credit for being disabled.

Question 39

What are the three categories of fringe benefits not includable in compensation?

Answer 39

No-additional cost services: benefits offered to employees in the same business of paying customers (offering flights to airline employees)

Qualified employee discounts: not to exceed 20% and offered to all employees in the same line of work as a paying customer (discount on food at a restaurant)

De Minimus fringe benefits: benefits so small that accounting would be impractical or unreasonable.

Question 40

What are the seven classes of benefits of workers comp for employees?

Answer 40

Medical expenses
Total temporary disability
Partial temporary disability
Total permanent disability
Partial permanent disability
Survivors death benefit
Rehabilitation benefits

Question 41

What is the tax implication for using a company car for personal use?

Answer 41

In the employee’s income, [s]he will have to include the value of the use via an IRS formula.

Question 42

What is the tax implication of regular personal use of a company car?

Answer 42

The fair market value is taxable to the employee based on the cost of leasing the same or a comparable vehicle from an unrelated third party under the same or comparable lease terms

Question 43

What are the tax implications for employer-paid LTC insurance?

Answer 43

Employer payments for group long-term care policies are tax deductible for the company and nontaxable income to the employee.

Question 44

What are the tax implications for group LTC insurance for employer-paid or employee-split premium payments?

Answer 44

If ER-paid, premiums are tax deductible by the ER and the payout is fully taxable to the EE

If EE-split premiums, that amount is not tax deductible by the EE, but that portion of the benefit is then not taxable to the EE

Question 45

How long is company disability insurance provided for?

Answer 45

A group long-term group disability income plan is sometimes broader than an individual plan and is usually less expensive.

It provides coverage for a specified term longer than two years, until an employee’s normal retirement age (usually age 65), or until death, if sooner

Question 46

What is the penalty for using an HSA for non-qualified medical expenses?

Answer 46

20% of the money used

Question 47

Which of the following statements regarding Voluntary Employees’ Beneficiary Associations (VEBAs) are CORRECT?

VEBAs permit an acceleration of the employer’s tax deduction in funding future benefits (meaning they can deduct in the year of funding)

Income from VEBAs may be tax exempt to the employer.

Answer 47

Both statements are correct

Question 48

Which of the following are classes of benefits payable under workers’ compensation laws?

1. Rehabilitation benefits
2. Disability benefits
3. Survivors death benefits
4. Medical expenses

Answer 48

All of them

Question 49

Can a client contribute to a FSA and HSA in the same year?

Answer 49

Yes