Insurance: Chapter 10

Question 1

What are section 125 cafeteria plans?

Answer 1

They permit employees (within limits) to choose the form of employee benefits they want from a “cafeteria” of benefits provided by their employer. They must include an option to receive cash in lieu of non-cash benefits of equal value (cash option).

Question 2

What are some examples of choices a cafeteria plan must include?

Answer 2

1. Term life equal to 2 times salary
2. Medical insurance for employee
3. Short or long-term disability insurance

• A 401(k) plan can be offered under a cafeteria plan

Question 3

What are the two types of flexible spending accounts most cafeteria plans offer?

Answer 3

One for qualified medical expenses and one for dependent care

Question 4

What are the rules for elections, contributions and reductions of salary for an FSA of an employee?

Answer 4

Before the end of the prior calendar year, employees must file a written election with their employer to have their salaries reduced by the amount they choose to allocate to their FSA. The dollar limit must by made before compensation is earned and the reductions are not subject to income tax. May be used for medical, dental and vision expenses.

Question 5

What is the 2022 contribution limit for a health FSA plan?

Answer 5

$2,850, but this limit only applies to salary reduction contributions. And does not apply to employer non-elective contributions used to pay for an employees share of health coverage premiums.

Question 6

What restrictions or limits may any employer put on a health FSA plan?

Answer 6

1. They may adopt retroactive amendments to impose the $2,850 limit before 12/31/22
2. They may allow a 12 month grace period for employees to spend unused salary
   reduction contributions, carried over amount will not count against next years
   contribution limit
3. May allow employees to carry over unused money up to full annual amount from
   plan year 2021 to 2022
4. May allow health FSA participants to maintain a $570 (2022) balance in their FSA
   accounts indefinitely

*Employers may offer either a grace period or rolling balance but not both

Question 7

What reimbursement limit and rules of a dependent care FSA?

Answer 7

The maximum tax free reimbursement limit is $5k, any tax free reimbursement reduces the expense eligible for the dependent care credit. If married both spouses must earn income for dependent FSA to be available unless the spouse is disable or a student. If spouse makes less than $5k per year then the benefit =’s what that spouse makes.

Question 8

What are the main qualification for eligible expenses for dependent care FSA?

Answer 8

Participant’s dependent children must be under 13, or any person the participant claims as a dependent must be mentally or physically incapable of caring for themselves (must live with you at least 8 hours per day). Expenses can be reimbursed only after they occurred

Question 9

What expenses are not eligible for reimbursement for dependent care FSA?

Answer 9

1. Tuition and fees
2. Expenses for children 13 and over
3. Late payment fees
4. Overnight camps
5. Payment for services not yet provided (advance payments)
6. Field trips, clothing and food
7. Transportation to and from the dependent care provider

Question 10

When does an FSA coverage period end?

Answer 10

Either at the time the “plan year” ends for your plan or at the time when an employee’s coverage under that plan ends (ie separation from employer)

Question 11

What are the advantages of an FSA?

Answer 11

Participating employee’s entire annual contribution is available at the beginning of the plan year, if the employee is terminated they do not continue to contribute to the plan after termination

Question 12

What are the disadvantages of an FSA?

Answer 12

Any money that is left unspent at the end of the coverage period is forfeited and can be applied to future plan admin costs. Under most plans the coverage period ceases upon termination.

Question 13

What fringe benefits are deemed to be tax free under the Tax Relief Act of 2001?

Answer 13

1. Premiums the employer pays to a health plan for the employee, spouse or dependent
2. Insurance premiums paid by the employer on a group life policy
3. Value of qualifying day care services provided by the employer
4. Company car for only business purposes
5. Commuter highway vehicle and transit passes ($280 per month cap)
6. Employer provided parking slots or subsidized parking ($280/month cap)
7. Occasional overtime meal money, cab fare, theater or sporting event tickets
8. Value of discounts on company products if it does not exceed company gross profit %
9. Discounts on services limited to 20% of the selling price charged customers

Question 14

What fringe benefits are deemed to be taxable under the Tax Relief Act of 2001?

Answer 14

1. Health insurance premiums paid for self-employed individuals, partners and more
   than 2% owners of an S corp. Although 100% deductible as adjustment to gross
   income on front of the 1040.
2. Employer paid premiums on a group life policy in excess of $50k of death benefit if
   plan is non-discriminatory

Question 15

What benefits can be included on a voluntary employee beneficiary association (VEBA)?

Answer 15

1. Death benefits
2. Medical expense benefits
3. Disability benefits
4. Legal expense benefits
5. Unemployment benefits
6. Child care benefits
7. Severance benefits
8. Education benefits

Question 16

What is a legal service plan?

Answer 16

Employer funded plan that makes legal services available to employees, the expense of the plan is deductible to the employer. Benefits are generally taxable to the employee as compensation.

Question 17

Is group long term care insurance a qualified benefit under a cafeteria plan?

Answer 17

No, however long term care insurance premiums may be paid through an HSA included in a cafeteria plan

Question 18

What is included on an employees gross compensation for employer paid long-term care benefits under code section [106(c)]?

Answer 18

Gross income of an employee shall include employer provided coverage for all qualified long term care services to the extent that such coverage is provided through FSA or similar arrangement.

Question 19

Explain the structure of a group dental insurance plan?

Answer 19

Most dental coverage is written on a group basis deductible to the employer. The benefits are tax free to the employee. Plans can range from basic to a wide range of dental services.

Question 20

How are vision premiums and benefits taxed to employer and employee?

Answer 20

Premiums are deductible to the employer and benefits are generally taxable as compensation.