Employee Group Benefits
Characteristics of Group Term Life
Annual renewable term Face amount paid to beneficiary Coverage based on compensation, position, service, or flat amount Low cost & tax advantaged Simple administration No medical exam Premium waiver
Section 79 Plan requirements for Group Life Insurance
At least 70% of employees must benefit At least 85% of participants are not key employees Plan benefits a nondiscriminatory class of employees Plan complies with IRC 125 requirements if part of a cafeteria plan
Requirements to be eligible for an HSA An individual must:
Be covered by a high deductible health plan Not be covered by any other non-HDHP Not be covered by Medicare Not be claimed as a dependent on another person's tax filing, and Not have any other health coverage
Group Paid Up
Consists of increasing units of whole life and decreasing units of group term
The main difference between traditional health insurance arrangements and health maintenance organizations (HMOs) is that
HMOs provide both the health care service and the health care financing, but traditional health care insurance companies provide only the financing.
Group Carve Out Plans
Higher paid executives Nondiscrimination does not apply Can help group term life plan come into compliance Tax consequences to employee
Characteristics of Group Universal
Individual universal life contracts Usually employee-paid premium Death benefit options Potentially higher returns
Group Universal
Individual universal life contracts Usually employee-paid premiums Flexible premiums Death benefit options Potentially higher returns
Short Term Disability
Less than 2 years
Which of the following statements regarding group long-term care (LTC) insurance is CORRECT? I. If an employer pays for LTC insurance, the premiums are tax deductible to the employer and are taxable income to the employee. II. Group LTC insurance offers lower rates and employees can get coverage by providing evidence of insurability.
The answer is neither I nor II. If an employer pays for LTC insurance, the premiums are tax deductible to the employer and are nontaxable income to the employee. Group LTC insurance offers lower rates and employees can get coverage without providing evidence of insurability. LO 6.2.1
Key Employees defined under IRC Section 416(i)
-An officer of the employer with annual compensation from the employer exceeding $180K in 2019 -A greater than 5% owner of the employer -A greater than 1% owner of the employer, having annual compensation from the employer in excess of $150K
Formulas used to determine Group Term Life Insurance coverage
-Percentage or multiple of earnings -An amount of coverage based on years of service -A coverage limit for different classes of employees
Section 125 requires a Cafeteria Plan to offer
A cash benefit that generally is taxable to the employee as compensation, and One or more qualified benefits that are not taxable to the employee
Long-Term Disability
Begins after scheduled waiting period of 30, 60, or 90 days Benefits are typically 50-70% of pay
Workers' Compensation Benefits/Taxation
Benefits: Medical expenses Disability -Temporary total -Temporary partial -Permanent total -Permanent partial Death benefits Rehabilitation Taxes Benefits are not taxed
John is a key employee. He receives group term life insurance for four times his base salary of $225,000 from the company, while rank-and-file employees receive only the amount of their base salary. What portion of the premiums on his group term life coverage must he include in his taxable compensation income for the year? A. The premiums on $50,000 B. The premiums on $225,000 C. The premiums on $450,000 D. The premiums on $900,000
D The answer is the premiums on $900,000. John is a key employee, and the group term life insurance plan discriminates on his behalf. Therefore, he must include the entire amount of the group term life insurance premium paid by the company as taxable compensation
Benefits of Group Term Life Insurance
For the Employer: -Easy to administer -Low in cost -Tax advantaged For the Employee: -Absence of a medical exam requirement -tax-free nature of the first $50k in coverage
Unemployment Insurance
Funded by employer Federal and state taxes Eligibility requirements -Covered employment -Minimum income earned -Continued attachment -Involuntary unemployment Typically 26 weeks
Short-Term Disability
Funded by employer Provided through company insurance plan Payment begins after sick pay is exhausted Often a dollar limit is stated in policy Up to 2 years coverage
Taxation of workers' compensation benefits
Not taxed to employee
If Bonita pays for her group disability income with pretax dollars, how would benefit payments she receives be taxed?
The answer is they would be subject to income tax. If disability premiums are paid with pretax dollars, any benefits received would be subject to income tax, and the employer would be required to match the FICA portion of payroll taxes. LO 6.3.1
All of the following statements regarding a group disability policy are correct EXCEPT A. group disability plans often provide long-term disability only. B. benefits are often less in group policies, which accounts for the lower cost. C. a group disability policy is less expensive than an individual policy because the risk is spread over more participants. D. group plans often state the benefit amount as a percentage of the employee's compensation, while individual plans pay a specific dollar amount.
A The answer is group disability plans often provide long-term disability only. Group disability plans often provide two different types of coverage based on the benefit period: short-term disability (STD) and long-term disability (LTD).
David is covered by a $210,000 group term life insurance policy. His employer pays the entire cost of the policy. The cost of $1,000 of protection per month from Table I for David's age is $0.06. What amount of the annual premium is taxable to David as compensation (W-2) income? A. $0 B. $48 C. $115.20 D. $151.20
C The answer is $115.20. The cost of the first $50,000 of coverage under a group term life policy is nontaxable to David. The remainder of the cost of coverage ($160,000) is taxable as compensation (W-2) income. Therefore, [($160,000 × $0.06) ÷ 1,000] × 12 = $115.20 is taxable income.
Generally, which of the following is true for the premiums on group term life insurance paid by an employer? A. Premiums are tax deductible by the employer and the employee. B. Premiums are tax deductible by the employer and represent a tax liability to the employee. C. Premiums may be tax deductible by the employer and not taxable to the employee. D. Premiums are not tax deductible by either the employee or the employer
C The answer is premiums may be tax deductible by the employer and not taxable to the employee. The payments are deductible by the employer if the plan is nondiscriminatory (does not discriminate in favor of key employees). In addition, the employee can exclude the cost of up to $50,000 of coverage from compensation (W-2) income.
Group Ordinary
Combination of term and permanent Section 79 Plan Ordinary whole life insurance funded by employee and employer contributions Employees benefit from employer paid term life insurance portion of coverage even if they choose to not participate
Income Tax Implications of Group Term Life Insurance
Cost of Coverage up to $50K -Deductible by employer (nonbeneficiary) - Nontaxable income to employee Cost of Coverage over $50K -Deductible by employer (nonbeneficiary) -Taxable income to employee Employee contributions toward coverage are deductible from cost of employer-paid coverage over $50K
Maximum benefits under cafeteria or FSA plans are
Dependent care - $5K annually Unreimbursed medical expenses - $2.7K
Health Reimbursement Arrangement
Entirely funded by employer contributions Reimburses for expenses up to the limit of the plan Reimbursements for expenses from the plan are excludible from the employee's income and deductible by the employer
Workers' Compensation
Mandatory Negligence is not a factor Indemnity is partial but final Periodic payments Premiums are a cost of production
Penalty tax for HSA distributions used for
Ordinary income taxes plus an additional 20% tax Excluded if the participant has attained age 65, is disabled, or has died.
Characteristics of Group Paid-Up and Group Ordinary
Paid up: -Accumulating units of single premium whole life, decreasing units of group term -Employee purchases permanent portion Ordinary: -Combination term and permanent -May be contributory Both types provide some permanent coverage
Flexible Spending Arrangements (FSA's)
Pretax (Federal, state, and FICA) A cafeteria plan funded only by employee salary redirections Contributions not used by year end are forfeited -Extension for up to 2.5 months or -Up to $500 can be carried forward Free from income taxes and any payroll taxes Limited to $2,700 in 2019 Does NOT cover OTC drugs
Amare is an employee of ABC Company, where he earns a salary of $100,000. The company provides Amare with disability income insurance that will replace 60% of his income upon disability. ABC Company pays the premiums on the policy. Assuming Amare is in the 24% income tax bracket, and ignoring Social Security disability benefits, how much will he receive each month on an after-tax basis from the policy, assuming he meets the definition of disability?
The answer is $3,800. Because the employer paid the premiums, the disability benefit received by Amare will be taxable at the ordinary income tax rates.
Robin is self-employed and the sole shareholder of an S corporation. She pays herself a salary of $96,000 and has a disability income insurance policy that will pay her 50% of her gross salary. Her corporation pays the entire amount of the policy premium. If Robin is in a combined 30% state and federal marginal income tax bracket, how much, if any, is her net-of-tax monthly disability benefit?
The answer is $4,000. Robin is a shareholder of more than 2% of an S corporation, for whom the corporation paid the disability policy premium. Therefore, the S corporation must add the cost of the policy premium to Robin's W-2, making the entire monthly benefit amount of $4,000 ($96,000 × 0.50 ÷ 12) tax free. If Robin had not been self-employed (e.g., her employer was a C corporation), then the answer would have been $2,800, or, $4,000 × (1 - 0.30). LO 6.3.1
Which of the following are the common benefits afforded to employees in a Voluntary Employees' Beneficiary Association (VEBA)? I. Severance pay II. Vacation benefits III. Sabbatical benefits
The answer is Both I and II. Both of these benefits are typically available within a VEBA. LO 6.2.2
Which of the following statements about a health maintenance organization (HMO) are CORRECT? A) HMO subscribers are not free to choose any subscriber they wish. B) HMOs operate on a fee-for-service plan. C) HMOs control overutilization of their services by physician with the gatekeeper concept. D) HMOs are managed care entities.
The answer is HMOs operate on a fee-for-service plan. HMOs operate on a prepaid basis. Subscribers to the HMO pay their fee in advance. LO 6.2.1
Which of the following benefits may NOT be offered or included in a Section 125 cafeteria plan? I. Scholarships and fellowships II. Educational assistance III. Employee discounts IV. Nonqualified plan benefits
The answer is I, II, III, and IV. All of these benefits are not included in a Section 125 plan. LO 6.4.1
Which of the following expenses is typically payable from a flexible spending account (FSA)? I. Medical II. Dental III. Dependent care IV. Individual life insurance premiums
The answer is I, II, and III. FSAs are usually used only for medical, dental, and dependent care expenses. Individual life insurance premiums are not covered because the IRS does not consider them a qualified benefit. LO 6.2.2
Which of the following statements regarding flexible spending accounts is CORRECT? I. The maximum salary reduction election for the dependent care FSA for married couples in 2019 is $5,000. II. The maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year cannot exceed $2,700 in 2019. III. An employee can elect to participate in both the dependent care FSA and the health FSA for a total of $7,700 of elected salary reductions annually. IV. An employee can only elect to participate in either the health FSA or the dependent care FSA in a particular plan year.
The answer is I, II, and III. In 2019 an employee can elect to participate in both FSAs for a total of $7,700 in annual elected salary reductions. LO 6.2.2
Sergei has a traditional IRA with a balance of $26,000 invested in various mutual funds. He is expecting to incur close to $18,000 in medical bills in the next couple of months. Could Sergei simply transfer the $18,000 from his IRA to an HSA and pay for his medical expenses with qualified tax-free distributions from his HSA? A)Yes, Sergei could make a one-time trustee-to-trustee transfer of $18,000 from his traditional IRA to an HSA. B)Sergei could make a one-time trustee-to-trustee transfer from his traditional IRA to his HSA for the maximum allowable HSA annual contribution limit, provided he has not already made his contribution for the year. C)No, this transaction is not allowed by the IRS. D)Sergei could make a one-time trustee-to-trustee transfer of a maximum of $10,000 from his traditional IRA to his HSA.
The answer is Sergei could make a one-time trustee-to-trustee transfer from his traditional IRA to his HSA for the maximum allowable HSA annual contribution limit, provided he has not already made his contribution for the year. An individual can make a one-time trustee-to-trustee transfer from a traditional IRA to an HSA. This transfer is not subject to income tax but is limited to the maximum annual HSA contribution limit. LO 6.2.2
Which of the following is the definition of copayments in a group health insurance policy? A)The percentage of medical expenses that are paid by the insurance company once the deductible has been met B)The premium paid in order to obtain coverage C)The most the insured will have to pay in any given year before the insurance company pays 100% of claims D)A flat amount that is paid per service, such as for doctor visits or emergency room visits
The answer is a flat amount that is paid per service, such as for doctor visits or emergency room visits. Copayments are a flat amount that is paid per service, such as for doctor visits or emergency room visits. Copayments are not premiums. Coinsurance is a percentage of the expenses that are paid by the insurance company once the deductible has been met for covered services. LO 6.2.1
A cafeteria plan consisting of various tax-free benefits that are funded through salary reductions elected by employees each year is called
The answer is a flexible spending account (FSA). An FSA is a cafeteria plan consisting of various tax-free benefits that are funded through salary reductions elected by employees each year. LO 6.2.2
One characteristic of short-term disability coverage used in an employee benefit plan is that it normally provides
The answer is a weekly benefit for up to a maximum of 52 weeks. LO 6.3.1
Which of the following statements regarding Voluntary Employees' Beneficiary Associations (VEBAs) are CORRECT? I. VEBAs permit an acceleration of the employer's tax deduction in funding future benefits. II. Income from VEBAs may be tax exempt to the employer.
The answer is both I and II. If structured properly, a VEBA accelerates the employer's tax deduction for providing these benefits. Income from the VEBA may be tax exempt to the employer. LO 6.2.2
Which of the following is a principle of the workers' compensation laws? I. The costs for workers' compensation benefits are funded through payroll taxes paid for by the employer. II. The injured employee is not required to prove negligence on the part of the employer.
The answer is both I and II. The costs for workers' compensation benefits are funded through payroll taxes paid for by the employer, and the injured employee is not required to prove negligence on the part of the employer. LO 6.4.1
CDE, Inc., has recently started paying for the long-term care policies for its 45 employees. How are the payments treated for federal income tax purposes if the policies are qualified policies?
The answer is employer payments for group premiums are tax deductible to the employer but are not taxable income to the employee. Employer payments for the group insurance premiums are tax deductible to the employer and not taxable income to the employee. LO 6.2.3
Which of the following types of life insurance (offered as group life) is beneficial to both the employer and the employee from a tax standpoint? A)Group term life insurance B)Group universal life insurance C)Group paid-up life insurance D)Group ordinary life insurance
The answer is group term life insurance. Group term life insurance premiums are deductible by the employer and excludable from income by the employee if the face value does not exceed $50,000.
Your client is concerned about the tax implications of his limited personal use of a company-provided car. Which of the following statements would CORRECTLY advise him about such use? A) He will have to include in income the value of his personal use based on an Internal Revenue Service formula. B) Such personal use is not taxable since it is exempted under Code Section 401. C) Such use is considered de minimis by the Internal Revenue Service, so its value is excludible from his income. D) His personal use of the company car is taxable at an annually specified amount per mile.
The answer is he will have to include in income the value of his personal use based on an Internal Revenue Service formula. Personal use of a company-provided car is taxable but not on a per-mile basis. Instead, the IRS formula is used. LO 6.4.1
