Retirement Planning and Employee Benefits - Employee Benefit Plans
Of the disability definitions described below, which is most commonly used in short-term disability plans and individual disability policies?
- "Own Occupation" definition
What is open panel?
- Is an IPA giving HMO subscribers a service of medical care.
Under ERISA, what are the two types of employee benefit plans?
- Pension plan - Welfare plan
What are the characteristics of De minimis fringe?
- Section 132 provision where property or services are not taxable to an employee if their value is so small it makes accounting for them unreasonable.
Which of the following are excluded from FSA benefits?
- Self-employed - Partners - Sole proprietors
COBRA provides for continued coverage to all except?
- Self-employed individuals - Independent contractors - Directors Self-employed individuals, independent contractors, and directors are not counted and exempted from COBRA.
What is a staff model?
- This type directly employs doctors to provide services to subscribers.
What is Individual Practice Association (IPA)?
- When individual doctors or medical group form an HMO and provide services to subscribers.
What features must a long-term disability insurance plan have?
- eligibility criteria - definition of disability - benefit formulas
The Moore family has a comprehensive health insurance plan that pays 80% of out-of expenses up to $3,000 a year after a deductible of $250 per person. This scenario applies to each family member. Three family members have doctor and prescription drug expenses of $980, $1,340, and $220, respectively. How much will the Moores and the insurance company each pay respectively?
$1,084 and $1,456
Anne has take-home pay of $3,600 per month and an employer-sponsored disability insurance policy that replaces 60% of earnings after a 90-day (3-month) waiting period. Anne was involved in an auto accident and is out of work for 4 months. How much income does Anne need to replace and how much would be replaced by her disability policy?
$12,240 and $2,160 Anne would lose $14,400 of after-tax earnings ($3,600 x 4 months) with a 3-month elimination period. She would need to absorb $10,800 ($3,600 x 3 months) of income lost during the period. Disability insurance payments would start at the beginning of the fourth month and she would receive $2,160 (60% of $3,600). Thus during the entire period of Anne's disability, she needs to replace $12,240 ($14,400 - $2,160) of income.
Mr. Higgins would like to estimate the waiting period for long-term disability plans. What is the typical waiting period for long-term disability plans?
- Less than or equal to a year Most long-term disability plans require a waiting period of three months to a year before an eligible employee becomes covered.
Which of the following benefits is NOT available under a cafeteria plan?
- Split-dollar life insurance Split-dollar life insurance is not a benefit that may be offered in a cafeteria plan.
Payments made directly to employees under a sick pay or short-term disability plan are deductible by the employer as compensation. State True or False.
- True An employer can deduct payments made directly to employees under a sick pay or short-term disability plan as compensation to employees.
Which of the following services is allowed from qualified retirement planning services?
- general advice regarding retirement planning Services may include general advice regarding the employee's and the spouse's overall plan for retirement, of which the employer's qualified plan is only a part.
What are the taxation rates used to measure the value of group-term life insurance in excess of $50,000 generally referred to as?
- the Table I rates The cost of the first $50,000 of group-term insurance is tax-free to the employees. However, for coverage above $50,000, the amount taxable to the employees, or rather the value of the group-term life insurance needs to be calculated on a monthly basis. This is done by multiplying by the Table I rates
Smith files an FSA election with his employer to reduce his salary by $1,500, which was placed into his FSA benefit book account. At the end of the year, $550 remains in his account. What can Smith do with the amount?
- will forfeit the full $550 if he has not used it by the end of the year At the end of the year, if expenses are less than predicted, it is forfeited. It cannot be carried over to the next year. The amount forfeited reverts to the employer as it means that the compensation is not to be paid.
Mary pays 35% of her disability insurance premiums and her company pays 65% of the premiums. Mary is disabled and receives $10,000 per month. What is the amount of the benefit that is taxable?
$6,500 Benefit payments under an employer plan are fully taxable to the employee that are subject to the credit if the plan was fully paid for by the employer. If the employer paid part of the cost, only a corresponding part of the benefit is taxable, again subject to the credit. For example, if the employer paid 65% of the disability insurance premiums and the employee paid the remaining 35%, only 65% of the disability benefit received by the employee is taxable.
Of the disability definitions described below, which is the strictest one or the least preferred by employees?
- "total and permanent" definition The strictest definition of disability is the total and permanent definition that states the disability condition under which an employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. Because of the nature of the defining disability, it is least favorable to the employees.
What percentage of employees must be covered if a company's plan is nondiscriminatory?
- 70% of all employees - 85% of non-key employees
What is a group or medical group?
- A contract between HMO and a medical group to provide services to subscribers.
What are the characteristics of VEBA?
- A prefunded welfare benefit plan.
Which of the following statements are true about VEBAs?
- A reversion of assets to the employer is effectively prohibited. - Smaller employers will find these plans feasible only if they use a vendor of packaged plans provided to groups of employers. Installing and administering a WBT or VEBA is complex and costly. A reversion of assets to the employer is effectively prohibited. Smaller employers will find these plans feasible only if they use a vendor of packaged plans provided to groups of employers. While the funding of such plans through a Section 419A(f)(6) plan is theoretically sound, there is a possibility of an IRS attack or changes in the Code affecting these programs.
What are the characteristics of a health reimbursement arrangement?
- A self-employed individual is not eligible to contribute.
What are the characteristics of a medical savings account?
- A self-employed individual may contribute if they maintain a high-deductible health plan.
What are the characteristics of Section 119?
- All meals provided to employees on business premises are excluded from income if more than half of the employees are provided with meals.
A cafeteria plan must have which of the following in order to be nondiscriminatory?
- Be made available to a group of employees that does not discriminate in favor of highly compensated employees. The plan must not discriminate in favor of highly compensated employees as to contributions and benefits.
Many plans continue health insurance coverage for employees and their dependents for a period of time after termination of employment. If the employer had 20 or more employees on a typical business day in the preceding year, what are the plans that cover its employees after retirement?
- COBRA The COBRA continuation coverage provisions apply for a given year if the employer had 20 or more employees on a typical business day in the preceding year. The COBRA plan usually includes a health plan coverage for a period of 36 months after the retirement, death or divorce of employee.
The taxation of all of the following fringe benefits is covered under Code Section 132 EXCEPT?
- Company-paid sick days The taxation of company-paid sick days is not covered under Code Section 132.
Which funding method is used by a corporation to pay for a retiree health plan and involves the use of "tax-free" cash buildup to pay the after tax cost of the health insurance premiums?
- Corporate-owned life insurance· With corporate-owned life insurance, the tax-free cash buildup of the policy is used to pay the after-tax cost of health insurance premiums for retired employees.
Which of the following benefits is NOT provided in a legal services plan?
- Cost of an action against the employer or labor union that is sponsoring the legal services plan. A legal services plan will not cover the cost of an action against the employer or labor union that is sponsoring the legal services plan.
Which of the following benefits can VEBAs NOT provide?
- Deferred compensation benefits The following are considered permitted VEBA benefits: life insurance before and after retirement, other survivor benefits, sick and accident benefits, vacation and recreation benefits, severance benefits, unemployment and job training benefits, and disaster benefits.
Which of the following statements is true regarding Health Reimbursement Arrangements (HRA)?
- Employees do not have to be covered under any other healthcare plan to participate. Employees do NOT have to be covered under any other healthcare plan to participate in a HRA, but self-employed persons are not eligible for this type of health savings account. The qualified medical expenses from an HRA cannot be taken as an itemized deduction on Schedule A.
What are the characteristics of a health savings account?
- Employer contributions are fully deductible and any contributions made on behalf of the employee are fully vested and non-forfeitable.
Why may it be a benefit to executives to be "carved-out" of a group plan and given a separate individual policy provided by the employer?
- Executives can be provided with more insurance than would be available under a group-term plan. The plan provides cash growth that is a "portable" benefit for the executive.
An employer may not provide group term life insurance in excess of $50,000. State True or False.
- False At levels above $50,000, group term plans may be a cost effective way to provide a life insurance benefit, for both employer and employee.
Blue Cross plans are used for doctors' bills, and Blue Shield plans used for hospital bills. State True or False.
- False Blue Cross plans are used for hospital bills, and Blue Shield plans used for doctors' bills.
Most legal services plans are not designed to cover catastrophic legal expenses, such as a criminal trial. State True or False.
- False Legal expenses such as the cost of a criminal trial can be the kind of catastrophic expense that is best provided through an insurance-type or group benefit program such as a legal services plan.
The nondiscrimination requirements of Section 79 prescribe against what?
- Favoritism for key employees
Which of the following are alternatives to a cafeteria plan?
- Flexible Spending Account (FSA) - Fixed Benefit Program - Cash Compensation
Participants may not be excluded or required to pay an extra premium on the basis of which of the following?
- Health status - Medical history - Genetic information Participants may not be excluded or required to pay an extra premium on the basis of the following: health status, medical condition (physical and mental), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability.
Which of the following best describes a VEBA?
- It is a nontaxable trust - Funds into which employers make deposits that will be used to provide specified employee benefits in the future. - It is similar to a prefunded welfare benefit plan. A VEBA is a kind of organization, either a trust or a corporation, which is set up by an employer, or through collective bargaining, to hold funds used to pay benefits under an employee benefit plan. Income of the VEBA is exempt from regular income tax if the VEBA meets the requirements of Code Section 501(c)(9).
The tax treatment of a "qualified long-term care insurance contract" provided by an employer includes which of the following?
- It is treated the same as an accident and health insurance contract. - The employer's premiums are tax deductible under Section 162. - Benefits under the plan, within limits, are not taxable to the employee or beneficiary.
Which type of employer typically uses legal services plans?
- Large employers Legal services plans are used primarily by larger employers for employees in collective bargaining units.
Lori is covered under a coinsurance provision and is responsible for 20% of covered expenses. She has a deductible of $250. Lori incurs expenses of $2,000 during the year. How much will she have to pay and how much will the company pay?
- Lori will pay $600 and the company will pay $1,400. Lori will pay $600 ($2,000 - $250 = $1,750 x 20% = $350 ($250 + $350 = $600)) and the company will pay $1,400 ($2,000 - $600).
In a Health Savings Account (HSA), family coverage must be greater than or equal to:
- Minimum $2,400 with a maximum out of pocket of $12,100. To be able to participate in a HSA, an individual must be covered under a high-deductible health plan. To qualify for family coverage in 2012, the deductible must be greater than or equal to $2,400, with a maximum out of pocket of $12,100. (For single coverage, these qualifying thresholds are $1,200 and $6,050, respectively.)
Section 79 regulations for group-term insurance require which of the following?
- Must provide a general death benefit - Must provide compensation for services to a group of employees - Must determine insurance amounts for employees
Which type of PPO plan allows patients to self-refer themselves to specialists within the network?
- Open Panel In an Open Panel plan, the patient can see different primary care providers and refer himself or herself to a specialist within the network.
What are the main differences between PPOs and HMOs?
- PPOs provide benefits on a fee-for-service basis as their services are used. - PPO participants have financial incentives to use the preferred provider network. PPOs typically differ from HMOs in two aspects: First, they provide benefits on a fee-for-service basis as their services are used. Fees are usually subject to a schedule that is the same for all participants in the PPO. Second, plan participants have financial incentives to use the preferred provider network. The primary care physician does not control a participant's access to specialists, as is the case in most HMO plans.
Who sponsors the long-term disability program to provide disability income to employees who are disabled beyond a specified period?
- Provide disability income to employees who are disabled beyond a specified period
What are the characteristics of highly compensated?
- Receives compensation from the employer in excess of $110,000.
Under a Section 125 plan (a cafeteria plan), "qualified benefits" - include all of the following except?
- Scholarships and fellowships - Retirement benefits (not including 401(k) plans) Under Code Section 125 and its regulations, only certain qualified benefits can be made available. Cash and most tax-free benefits such as medical expenses and disability income insurance are part of the basic benefit package, but the plan excludes scholarships and fellowships under Section 117 and retirement benefits such as qualified or nonqualified deferred compensations.
Which of the following types of benefits may NOT be offered in a flexible spending account?
- Scholarships under Code Section 117 The Internal Revenue Code specifically prohibits the following benefits from being offered under an FSA: health insurance premiums, medical saving account contributions, scholarships and fellowships under Code Section 117, education assistance provided under Code Section 127, employee discounts, deferred compensation other than under a 401(k) and long-term care insurance.
Joe and Samantha wish to exclude from their income the value of certain retirement planning services provided by their employer for this year. The employer is currently maintaining their qualified retirement plan. Choose the correct options regarding qualified retirement planning services from the given options.
- Services like tax preparation are included in income - Accounting services are included in income - Legal services are included in income - Brokerage services are included in income
Which type of benefit provides the most tax advantages to executives in prefunded welfare benefit plans?
- Severance benefit - Death benefit Prefunded welfare benefit plans designed primarily for executives generally provide severance pay benefits, death benefits, or a combination of the two, since these are the benefits that tend to provide the most tax advantages.
According to Section 119 the amount paid by the employee in meals is not ___.
- Taxed The amount paid by the employee in meals is not taxed. If an employer furnishes meals for employees, the value of the meals is excluded from the employee's income if the meals are for the convenience of the employer, and the meals are furnished on the business premises of the employer.
Which of the following are characteristics of HMO plans?
- The HMO provides for routine physician visits. - The HMO usually wants the participants to use the doctors in their network. - The HMO has an incentive to hold down the cost of health care.
Which of the following statements concerning the income tax consequences of a flexible spending account is accurate?
- The amount of the employer's payroll that is subject to the various payroll taxes will be reduced if a flexible spending account type of plan is adopted. If an employer adopts a flexible spending account type plan, the employer's payroll taxes will be reduced.
An employer's deduction for contributions to a welfare benefit fund that is not part of a 10-or-more employer plan is generally limited to which of the following?
- The fund's qualified cost for the tax year If a VEBA is not part of the 10-or-more-employer plan and does not qualify under Code Section 419 A(f)(6), then deductible contributions are severely limited. But the VEBA income is set aside in excess of the Code Section 419A limits. So if the contributions are deductible under provisions of the Code in absence of 419 and 419A, they are done under the deduction acceleration limits of the Code Sections 419 and 419A. Thus the employer's deduction for the taxable year is limited to the qualified cost of the funds.
Which of the following statements concerning group-term life insurance and group carve-out arrangements is true?
- The group-term plan must meet the nondiscrimination requirements of Section 79 but the group carve-out plan is not subject to nondiscrimination requirements. When comparing these two arrangements for nondiscrimination requirements, group-term must comply with Section 79 coverage requirements. If not met, key employees lose the $50,000 exemption. Carve-out benefit has no nondiscrimination requirement, as coverage can vary from executive to executive.
Under Code Section 132, which of the following may an employer NOT offer employee discounts to?
- The officer of a company that supplies raw materials to the employer Employee discounts can be offered to active employees, retired and disabled employees, a widow or widower of an employee of the business, and a spouse or dependent child of an employee.
The definition of disability for purposes of social security is the most restrictive. In order for Dorothy to be considered total disabled for social security, which definition below would need to be met?
- Total and permanent Total and permanent disability is defined as a condition under which the individual is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
Employee discounts on merchandise are an advantage to the employer because they can still make a profit on the items sold or at least recover its cost, but does not have to bear the full cost of marketing and selling the items to the public. State True or False.
- True Discounts on merchandise are almost as valuable as cash to employees, but are very inexpensive for the employer because the employer can still make a profit on the items sold or at least recover its cost, but does not have to bear the full cost of marketing and selling the items to the public.
Amounts left in an employee's account at the end of the year are forfeited in a flexible spending account. State True or False.
- True At the end of the year, if anything is left in the employee's benefit account, it is forfeited. It cannot be carried over to the next year. This feature requires careful planning by the employee.
Which of the following employer-provided employee benefit plans does NOT provide a death benefit or capital accumulation?
- a dependent care assistance plan - short-term disability plan Qualified plans such as profit sharing, group-term life insurance, and nonqualified deferred compensation all provide some form of death benefits or capital accumulations in their plan. But dependent care assistance or short-term disability plans do not provide for death benefits, as they are provided only for a small period of time and do not consider benefit provision in lieu of death.
A short-term disability plan, often an insured plan, goes into effect when sick pay benefits cease, and will typically extend until?
- a six-month benefit period has been satisfied and Social Security benefits or the employer's long-term plan goes into effect A short-term disability plan fills the gap between sick pay and the employee's long-term disability plans. It goes into effect when the employee's sick pay benefits run out and extends until the six-month limit has been reached, when the employer's long-term disability plan, if any, and Social Security disability go into effect.
Managed health care/prepaid care plans differ from fee-for-service or traditional indemnity plans in what ways?
- covers all medical expenses - requires subscribers to see only specified group of doctors, hospitals, and clinics Managed health care/prepaid care plans like HMOs differ from the traditional fee-for-service health insurance because they typically cover more health care services than traditional health insurance, with fewer deductibles and lower co-payments. But they also have a disadvantage, as the HMO subscriber generally must receive care from a doctor or other service provider who is part of the HMO.
Which of these employee groups can never be excluded from group-term life insurance that an employer maintains?
- employees with five years of service The design feature of group-term life insurance includes the exclusion criteria. When calculating the percent of employees to be covered under the group-term insurance, employees with less than three years of service, part-time/seasonal employees, and employees of the collective bargaining unit can be excluded. Employees with greater than three years service are included in the plan.
Which type of HMO plan involves medical groups but does not directly employ individual doctors and other providers?
- group practice HMOs are basically organized in one of three ways - staff model, group practice or medical group model, and individual practice association. In the group practice model, a contract is signed between the HMO and the medical group or groups that would provide the services to subscribers. However, while the HMO does not directly employ the individual doctors and other providers, subscribers must use only the services of those employed by the HMO under the contract.
Which plans will provide death benefits or capital accumulation?
- group-term life insurance. - pension, profit sharing and other qualified plans. - nonqualified deferred compensation plans. Employer plans that can provide death benefits or capital accumulation include group-term life insurance, pension, profit sharing and other qualified plans. These plans almost always provide some form of death benefit, even if there is no specific life insurance benefit in the plan. Nonqualified deferred compensation plans should also be analyzed and should be checked as to whether they can provide benefits if the employee dies before or after retirement. Other insurance plans of the employer such as split- dollar, death benefit only, or other similar arrangements can also be added.
Which type of plan or contract is not considered a postpaid-type health plan?
- health maintenance organizations (HMOs) Health insurance plans can be of two types - prepaid or postpaid. The principal form of prepaid plan is the health maintenance organization (HMO), where the health care provider is paid in advance.
Benefits for the following will not be paid even if the definition of disability is met EXCEPT?
- medical expenses incurred for treatment of an injury that caused disability Disability plans usually have specific exclusions under which benefits are not paid even if they meet the definitions of disability. All of the above are excluded from payment even if they comply with disability definition, except for medical expenses incurred for treatment of an injury that caused disability. In this case disability benefits are paid due to injury.
Which of the following methods may NOT be used to finance a group-term carve-out arrangement?
- profit sharing plans Financing a group-term carve-out arrangement requires the implementation of methods such as bonus plans, split-dollar plans, and death benefit plans. In order for carve-out programs to work as intended, they need to be carefully designed to avoid Section 79 status. This can be achieved if the coverage involves either/and the split-dollar, bonus, or death benefit only plans.
Which of the following would be taxable to an employee recipient under Code Section 132?
- season tickets for a major league baseball team - weekend vacation in company apartment Under Code Section 132, benefits that are often referred to as de minimis fringe benefit, states that property or services provided to the employees are not taxable if they are too small to be accountable. IRS regulations have provided guidelines with respect to this so that employees cannot misuse the term "small".
Which of the following is NOT an element in the definition of a "qualified long-term care insurance contract" under Code Section 7702B?
- the COBRA continuation coverage requirements IRC Section 4980B provides that the COBRA coverage requirements do not apply to coverage under qualified long-term care services. Qualified long-term care services means only specified services provided to chronically ill persons as defined in Code Section 7702B. So all of the above are part of the definition of qualified long-term care services except the COBRA continuation coverage requirements.
Which of the following does NOT correctly characterize Blue Cross and Blue Shield plans?
- they began as two separate organizations but now operate as a combined organization Blue Cross and Blue Shield plans were originally designed by organizations of hospitals and physicians in order to facilitate the payment of hospital and doctor bills. Blue Cross and Blue Shield plans generally provide direct payment in full to the participating hospitals and doctors who are under contract for medical benefits provided to covered employees. They still operate as two individual organizations.
Why are cafeteria plans popular among employees and employers?
- they help choose the form of benefits needed - they include cash options in lieu of noncash benefits of same value - they help control cost of the benefit package to the employer Cafeteria plans allow employees to choose the form of employee benefits. These plans must include a cash option, wherein employees have an option to receive cash in lieu of noncash benefits of equal value. Cafeteria plans also help control the cost of the benefit package to the employer, as the benefits that are not taken by the employees reduce the employer's provisionary costs.
Michelle is self-employed. She is eligible for the Section 213 itemized deductions for her qualified long-term care insurance contract. In the year 2012 her overall deduction for health insurance and long-term insurance would be subject to a percentage limitation of:
100% As Michelle is a self-employer person, her overall deduction for health insurance and long term care insurance is 100%. A self-employed person can deduct premiums for a qualified long-term care insurance contract. However, the deductible premiums are first limited to those eligible for the Section 213 itemized deduction.
Under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), an employer must provide an option to continue health insurance coverage for an employee whose termination from employment is due to disability for what period of time?
29 months Many employers provide benefit plans of continuing insurance coverage for employees and their dependents for some time after the termination of employment under the COBRA rule. COBRA requires that if the termination of employment is due to disability, then the coverage should continue for a period of 29 months. If the termination is due to death of the employee, divorce or separation, or bankruptcy, then the continuation period is 36 months, and in all other cases, except misconduct, the time period is 18 months.
Long-term disability benefit amounts are typically based on pre-disability income. What is the typical level of disability income benefits?
50% to 70% of pre-disability income
