CFP insurance Module 5: Employee Group Health Benefits
Which of the following statements regarding flexible spending plans (FSAs) in 2022 is CORRECT? A plan may offer either the rolling over of up to $570 of expenses to the next year, or allowing expenses to be claimed for the first 2½ months of the following year. Flexible spending plans are exempt from federal, state, and FICA taxes. Any amount remaining in the plan at the "lose-it-or-lose-it" date, other than the rollover, is forfeited to the employer.
All of these statements are correct.
All of these are key differences between an HRA and FSA, except A) an HRA allows for the carryover of unused funds, whereas FSAs contain a "use-it-or-lose-it" provision. B) HRAs are generally not funded until the employee draws on their account, whereas FSAs are funded on a continuous basis through salary reduction contributions. C) an HRA is funded through salary reductions, whereas an FSA is solely employer funded. D) HRA reimbursements are limited by contributions into the HRA, whereas FSA reimbursements are not. PREVSKIP
An HRA is funded solely through employer contributions; no employee contributions are allowed. FSAs, however, are funded through employee salary reduction contributions. All other statements are true.
Which of the following types of group life insurance offers tax advantages to both the employer and employee?
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.
If Bonita, age 52, pays for her group disability income with pretax dollars, how would the benefit payments she receives be taxed?
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.
Which of the following statements regarding flexible spending accounts (FSAs) is CORRECT? The maximum salary reduction election for the dependent care FSA for married couples in 2022 is $5,000. 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 $2,850 in 2022. In 2022, an employee can elect to participate in both the dependent care FSA and the health FSA for a total of $7,850 of elected salary reductions annually. An employee can only elect to participate in either the health FSA or the dependent care FSA in a particular plan year.
In 2022, an employee can elect to participate in both FSAs for a total of $7,850 in annual elected salary reductions: $5,000 for the dependent care FSA and $2,850 for the health FSA.
Which of the following benefits may NOT be included in a Section 125 cafeteria plan? Scholarships and fellowships Educational assistance Employee discounts Nonqualified plan benefits
None of the benefits listed may be included in a Section 125 plan.
Which of the following statements regarding voluntary employees' beneficiary associations (VEBAs) is CORRECT? The income cannot be used to provide employee vacation benefits. The income from VEBAs may be tax exempt. They permit an acceleration of the employer's tax deduction in funding future benefits
The answer II and III. VEBAs can be used to provide vacation benefits, as well as severance benefits. 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 5.2.2
Donna's employer maintains a group term life insurance plan that discriminates in favor of key employees. Donna, 50, is a key employee and is provided with $500,000 in coverage under the plan. The cost of $1,000 of protection per month for someone in Donna's age bracket is $0.23, and Donna does not contribute toward the cost of her coverage. What amount is included in Donna's annual gross income as a result of her group term life insurance coverage?
The answer is $1,380. Donna must include the cost of the entire $500,000 in coverage in her gross income because the plan is discriminatory and she is a key employee. The annual cost of her coverage is $1,380 (500 × $0.23 × 12). The entire $1,380 is included in her gross income because she does not contribute toward the cost of the coverage.
Robert's employer provides him with $150,000 of group term life insurance. Robert is 43 and not a key employee. The cost of $1,000 of protection per month for someone in Robert's age bracket is $0.10. Robert's employer also provides him with health care coverage at an annual cost of $10,000. Robert does not contribute toward the cost of either plan. What amount is included in Robert's annual gross income as a result of his health insurance and group term life insurance coverage?
The answer is $120. Robert must include the cost of his excess group term life insurance in his gross income. His excess coverage is $100,000 ($150,000 − $50,000). The monthly cost of his excess coverage is $10.00 (100 × $0.10), and the annual cost is $120 ($10 × 12 = $120). He must include the entire $120 in gross income because he does not contribute toward the cost of the coverage. Employer-paid premiums for health insurance are excluded from the employee's gross income.
Catalina is covered by a $180,000 group term life insurance policy for which her daughter is the named beneficiary. Catalina's employer pays the entire cost of the policy. The cost of $1,000 of protection per month from Table I for Catalina's age is $0.08. What is the amount of annual premium that is taxable as compensation (W-2) income to Catalina?
The answer is $125. The cost of the first $50,000 of coverage under group term life insurance is nontaxable to Catalina. The remainder of the cost of coverage ($130,000) is taxable as compensation (W-2) income. Therefore, [($130,000 × $0.08) ÷ 1,000] × 12 = $124.80 is taxable.
Luke is covered by a $190,000 group term life insurance policy. His employer pays the entire cost of the policy, and he is not a key employee. The cost of $1,000 of protection per month from Table I for his age is $0.15. What is the amount of the annual premium that is taxable to Luke as W-2 compensation income?
The answer is $252. The cost of the first $50,000 of coverage under group term life insurance is nontaxable to Luke. The remainder of the cost of coverage ($140,000) is taxable as compensation (W-2) income. Therefore, $252 is taxable ($140,000 × $0.15 ÷ 1,000 × 12 = $252).
Jolene is insured through her employer in a group major medical health insurance plan. Her annual deductible is $250, after which she must pay 30% of all additional charges, to a maximum out of pocket of $10,000. In her first claim of the year, Jolene has $6,000 of covered medical expenses. How much will the insurance company pay toward the claim?
The answer is $4,025. Subtract the $250 deductible from the $6,000 of covered expenses, then multiply the remaining $5,750 by 70%, which represents the insurer's share because Jolene's share is 30%. ($6,000 - $250) × 70% = $4,025.
Rudolph's employer maintains a group term life insurance plan for its employees. He is 55 and receives $200,000 in coverage under the plan. He is not a key employee. The cost of $1,000 of protection per month for someone in Rudolph's age bracket is $0.43, and Rudolph contributes $240 annually toward the cost of the coverage. What amount is included in Rudolph's annual gross income as a result of his group term life insurance coverage?
The answer is $534. Rudolph's excess coverage is $150,000 ($200,000 − $50,000 = $150,000). The monthly cost of his excess coverage is $64.50 (150 × $0.43 = $64.50), and the annual cost is $774 ($64.50 × 12 = $774). The annual cost of the excess coverage, less Rudolph's contribution, is $534 ($774 − $240 = $534).
Randall's employer pays the entire premium for his group disability coverage. If Randall became disabled, how much of his benefits from this coverage would be subject to tax?
The answer is 100%. Because Randall's company can deduct the premiums, all of Randall's benefits are taxable.
What is the length of the coverage period for a terminated employee under COBRA?
The answer is 18 months. Terminated employees qualify under COBRA, and the required coverage period is 18 months. If an employee meets the definition of Social Security disability, the required period of coverage under COBRA is 29 months.
Until what age do applicable 2010 Patient Protection and Affordable Care Act plans provide protection for dependent adult children?
The answer is 26. Plans covering dependents must allow coverage for adult children until age 26. The legislation also prohibits lifetime coverage limits for essential health benefits and requires plans to provide preventive services without charging deductibles, copayments, or coinsurance.
Which of the following are the common benefits afforded to employees in a Voluntary Employees' Beneficiary Association (VEBA)? Severance pay Vacation benefits Sabbatical benefits
The answer is Both I and II. Both of these benefits are typically available within a VEBA.
Emmitt works for XYZ Co., which has a self-funded health insurance plan. XYZ Co. has a total of 20 employees, of which, only 15 are covered by the health plan. Emmitt is a covered employee. If he is involuntarily terminated (fired, not due to gross misconduct) by XYZ Co., which of the following correctly describes his COBRA rights?
The answer is Emmitt may elect to continue health insurance coverage for 18 months at up to 102% of the employer premium. As long as an employer has at least 20 employees, COBRA continuation coverage must be provided (the number of covered employees is irrelevant). In addition, COBRA rights must be accorded to involuntarily terminated employees. The only exception to this rule is for employees who are fired as a result of gross misconduct (as defined by the courts). Finally, employers who self-fund their insurance programs are also subject to COBRA.
Greg, 61, is covered by a health savings account (HSA) provided by his employer. His marginal federal income tax rate is 24%. This year, he takes a $5,000 distribution from the HSA but fails to apply it to qualified medical expenses. Which of the following statements regarding the income tax consequences of this distribution is CORRECT
The answer is Greg owes tax of $1,200 and a penalty of $1,000. A distribution from an HSA that is not used for qualified medical expenses is taxable and, if made before age 65, is subject to an additional 20% penalty.
Which of the following statements about a health maintenance organization (HMO) are CORRECT?
The answer is HMOs operate on a prepaid plan approach. PPOs operate on a fee-for-service basis. Subscribers to the HMO pay their fees in advance. HMOs control the overutilization of their services with a gatekeeper.
Which of the following regarding cafeteria plans is CORRECT? The plan may not include a cash option. Each employee has a certain number of dollars or credits that can be spent on a variety of benefits. A flexible spending account is a cafeteria plan consisting of various tax-free benefits that are funded through salary reductions elected by employees each year
The answer is I and II. Cafeteria plans must include a cash option.
Which of the following statements regarding individual medical expense insurance is CORRECT? The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires that group health plans allow employees and certain beneficiaries to elect to have their current health insurance coverage extended at group rates for up to 36 months following a qualifying event that results in the loss of coverage for a qualified beneficiary. COBRA applies to all employers that maintain group health plans.
The answer is I only. COBRA applies only to employers with 20 or more employees. A part-time employee counts as half an employee for purposes of the 20-employee rule.
Which of the following statements concerning employer-provided disability income insurance is CORRECT? To determine whether the benefits under the plan are taxable income, it is necessary to look at whether the employer or the employee pays the premiums. If the entire cost is paid by the employee, benefits are included in gross income
The answer is I only. Disability income insurance benefits are income tax free if the employee pays the entire premium.
Which of the following statements describe circumstances that result in an employee's medical expense reimbursements from a group medical insurance policy being taxable income to the employee? Medical expense reimbursements are taxable to the employee, to the extent they exceed the expenses incurred. Medical expense reimbursements are taxable to the employee if the employer paid the premiums for coverage.
The answer is I only. Medical expense reimbursements are not taxable to the employee if the employer paid the premiums for coverage. LO 5.2.3
Which of the following are classes of benefits payable under workers' compensation laws? Rehabilitation benefits Disability benefits Survivors death benefits Medical expenses
The answer is I, II, III, and IV. All of these statements are true of benefits payable under workers' compensation laws
Which of the following are benefits of prepaid legal services? Legal services for divorce Adoption assistance Bankruptcy Estate planning document preparation
The answer is I, II, III, and IV. Legal services for divorces, bankruptcy, adoption assistance, and estate planning document preparation are commonly included within prepaid legal coverage.
Which of the following statements regarding group disability income plans are CORRECT? Short-term group disability provides coverage for up to six months. A group disability income plan is sometimes broader than an individual plan and is usually less expensive. Long-term group disability plans provide coverage for a specified term longer than two years, until an employee's normal retirement age (usually age 65), or until death, if sooner
The answer is II and III. Short-term disability income plans provide coverage for up to 52 weeks..
Which of the following statement(s) regarding group life insurance is CORRECT? Employers may provide up to $50,000 of group whole life insurance on an income tax free basis to employees. Group term life insurance typically includes a provision for conversion to individual permanent life insurance upon the employee's separation from servic
The answer is II only. Group term life insurance—not group whole life insurance—up to $50,000 is income tax free to employees.
Which of the following statements regarding group carve-out plans are CORRECT? A group carve-out plan is subject to nondiscrimination requirements. Split-dollar life insurance is one method of implementing the individual coverage in a group carve-out plan.
The answer is II only. Statement I is incorrect. A group carve-out plan is not subject to any nondiscrimination requirements.
Which of the following benefits may be included in a prepaid legal services plan? IRS audit representation fees Preparation of wills Bankruptcy assistance Divorce services
The answer is II, III and IV. All of these services are commonly offered in prepaid legal plans. IRS audit services are a highly specialized area that may or may not be offered by a prepaid legal service.
Rollie voluntarily resigns from International Shipping Co. to go on an extended missionary trip. The International Shipping Co. group health plan is subject to the COBRA continuation requirements. Which of the following statements regarding Rollie's COBRA rights under the health plan is CORRECT?
The answer is Rollie is eligible for continuation coverage for up to 18 months. Termination of employment is a qualifying event under COBRA, regardless of whether it is voluntary or involuntary. The maximum period of continuation coverage following a termination of employment is 18 months for the employee and covered dependents. LO 5.2.3
Which of the following is true of PPO plans regarding their benefit structure?
The answer is a PPO gives participants incentives to see network providers. Under a PPO, a participant who sees a network physician may have a copayment of $10, while a participant who sees a provider outside of the network may have to pay a deductible and 20% of the cost.
Which of the following is the definition of copayments in a group health insurance policy?
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.
The elimination period in a group disability income policy may be thought of as
The answer is a time deductible. The elimination period is the time period before the benefits will pay after a disability occurs.
Which of the following statements regarding group vs. individual disability plans is CORRECT? Benefits are often less in group policies, which accounts for the lower cost. A group disability policy is less expensive because the risk is spread over more participants.
The answer is both I and II. Both of these statements are correct.
Which of the following statements regarding Flexible Savings Accounts (FSAs) is correct? Employee deferrals into an FSA are free of payroll (Social Security) taxes. The employee commits to allocating a dollar amount of salary reduction for the coming year.
The answer is both I and II. Both of these statements represent characteristics of FSA
Which of the following statements regarding group disability income plans is CORRECT? A group disability policy is less expensive than an individual policy because the risk is spread over more participants. Group plans often state the benefit amount as a percentage of the employee's compensation, while individual plans pay a specific dollar amount.
The answer is both I and II. Both statements I and II are correct.
Which of the following statements regarding group permanent life insurance is CORRECT? Group permanent life insurance carries a higher chance of adverse selection than individual permanent life insurance. Most group permanent policies have simplified underwriting requirements.
The answer is both I and II. Both statements I and II are correct. Group permanent life insurance often has simplified underwriting requirements, which increases the chances of adverse selection over individual permanent life insurance, which requires more stringent underwriting.
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. 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 employ
Which of the following statements concerning disability income insurance is CORRECT? Employer contributions for an employee's disability income insurance are fully deductible by the employer as an ordinary and necessary business expense. Contributions by an individual employee are considered payments for personal disability income insurance and are not tax deductible.
The answer is both I and II. Premiums paid toward a group disability contract for an employee are deductible as an ordinary and necessary business expense by the employer. Any disability benefit received by the employee under this arrangement is fully taxable. Employee contributions on split premium disability income insurance policies are not tax deductible to the employee, and benefits received are not taxable.
Which of the following is a principle of the workers' compensation laws? The costs for workers' compensation benefits are funded through insurance premiums paid for by the employer. 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 insurance premiums paid for by the employer, and the injured employee is not required to prove negligence on the part of the employer.
Qualified group long-term care coverage premiums that are paid for by the employer are
The answer is deductible by the company but not the employee. Benefits are tax free to the employee.
Employer-paid group medical and dental health insurance benefits are tax free, and the premiums are
The answer is deductible to the employer. If the employer pays the premiums, they are entitled to the deduction.
ABC, Inc., has recently started paying for the long-term care policies for its 19 employees. Which of the following federal income tax treatment of the payments is CORRECT?
The answer is employer payments for group long-term care policies are tax deductible for the employer and nontaxable to the employee.
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 5.2.3
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 the group premiums are tax deductible to the employer and not taxable income to the employee.
Your client is covered under his employer's long-term disability insurance plan. Benefits under this coverage are usually
The answer is equal to 50%-70% of base pay. For the first 12-24 months, the definition of disability is own occupation. Benefits are generally payable to age 65, with graded benefits often being paid until age 70.
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?
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.
Which of the followings statements describing a Voluntary Employees' Beneficiary Association (VEBA) is CORRECT?
The answer is if structured property, a VEBA permits an acceleration of the employer's tax deduction in funding future benefits. If structured properly, a VEBA permits for a prefunding of employee benefits and accelerates the employer's tax deduction for the same. A VEBA is a useful vehicle for non-retirement benefits.
Which of the following is NOT a class of benefits payable under workers' compensation coverage? A) Legal expenses B) Partial temporary disability C) Partial permanent disability D) Total temporary disability
The answer is legal expenses. Legal expenses are not included under benefits paid under workers' compensation
Which of the following describes a characteristic of a self-funded plan?
The answer is life and long-term disability insurance are less common in self-funded plans. It is uncommon for life or long-term disability plans to be self-funded plans. An insurance company assumes the risk and administrative burden in a traditional plan. Employers pay the premium in a traditional plan. Self-funded plans are normally medical or short-term disability coverage because of their relative predictability.
Generally, employer-paid premiums for a $50,000 group term life policy
The answer is may be tax deductible by the employer and are not taxable to the employee. The payments are deductible to the employer if the plan meets certain nondiscrimination requirements. The employee can exclude the cost of up to $50,000 of coverage from gross income.
Which of the following statements regarding group dental expense insurance is CORRECT? Coverage is generally provided for routine dental care such as cleanings, fillings, crowns, root canals, and braces. Many dental expense plans are offered through PPOs that have contracted with select dentists to provide services for prearranged fees.
The answer is most dental expense coverage is integrated into a comprehensive health plan. Regarding employer group coverage, dental expense coverage may be integrated within a comprehensive health plan or provided as a stand-alone supplement along with a health plan. When integrated into a comprehensive health plan, the dental expense coverage will not have a separate deductible—only the health plan deductible needs to be satisfied. More often, dental expense coverage is offered as a stand-alone supplement with its own deductible and coinsurance requirements.
In which of the following circumstances would an employee's medical expense reimbursements from a group medical insurance policy be taxable? Medical expense reimbursements are taxable to the employee if the employer paid the premiums for coverage. Medical expense reimbursements are taxable to the employee, to the extent they equal the expenses incurred.
The answer is neither I nor II. Medical expense reimbursements are not taxable to the employee if the employer paid the premiums for coverage. Medical expense reimbursements are taxable to the employee, to the extent they exceed the expenses incurred. LO 5.2.3
Today, most dental plans are offered through
The answer is preferred provider organizations (PPOs). Most dental expense plans are offered through PPOs, which have contracted with particular dentists to provide services for agreed-upon fees.
All of the following statements about short-term disability are true except A) short-term disability benefits are normally for 13-52 weeks B) short-term disability policies have long elimination periods. C) short-term disability coverage usually is provided through an insurance company plan D) short-term disability benefit amounts are generally one-half to two-thirds of the employee's compensation.
The answer is short-term disability policies have long elimination periods. Short-term disability policies have short elimination periods—sometimes just a few days or even no elimination period at all. The benefit period is normally 13-52 weeks months. Benefit amounts are generally one-half to two-thirds of the employee's compensation.
The premiums paid by a company for group medical for its employees are
The answer is tax deductible by the company and not considered taxable income to the employees. The premiums paid by a company for group medical for its employees are tax deductible by the company and not considered taxable income to the employees.
Andrea was in an accident this year and is now disabled. She is receiving disability benefits from a disability policy that was paid for by her employer. Which of the following statements regarding the disability benefits is CORRECT?
The answer is the entire benefit will be taxable. Because the employer paid the premiums, the entire amount of disability benefits received will be taxable. Social Security disability benefits will not be reduced by other disability benefits. However, if Andrea is eligible to receive Social Security benefits, the disability benefits from her employer disability policy may be reduced.
Rod, an employee of Johnson Automated, Inc., is covered under the company-paid nondiscriminatory accident and health plan. The plan provides medical expense reimbursement coverage and wage continuation payments in the event an employee becomes disabled. Several months ago, Rod was seriously injured in a skiing accident. Since then, he has received both medical reimbursement and wage continuation payments. Which of the following statements discusses the income tax implications of the payments to Rod?
The answer is the medical expense reimbursements are excludible from gross income, but the wage continuation payments are includible in gross income
All of the following statements regarding the essential health benefit of coverage of children to age 26 are correct except
The answer is there is a requirement to cover the child of a dependent. There is no requirement to cover the spouse or child of a dependent child.
All of the following statements regarding unemployment insurance are correct except A) unemployment compensation is taxable to the recipient. B) typically, unemployment benefits are paid out for 52 weeks. C) the employer pays a tax to fund the unemployment benefit to the out-of-work employee. D) benefits are determined by previous wage levels.
Typically, unemployment benefits are paid out for 26 weeks. The temporary CARES Act extensions of 2020 were extraordinary and unusual.
Which of the following are characteristics of cafeteria plans? Each employee has a certain number of dollars or credits that can be spent on a variety of benefits. One type of cafeteria plan, a flexible spending account (FSA), consists of various tax-free benefits that are funded through salary reductions elected by employees each year. Qualified benefits, which exclude the cash option, are an exception to the constructive receipt rules of income taxation.
Under a cafeteria plan, employees may, within limits, choose the form of employee benefits from options provided by their employer. Such a plan must include a cash option that is taxable as ordinary income. Qualified benefits, which exclude the cash option, are an exception to the constructive receipt rules of income taxation. A cafeteria plan that is funded entirely through employee salary reductions (with no employer contribution) is known as an FSA.
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?
he 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. Annual salary$100,000Disability replacement ratio (60%)× 0.60Annual disability benefit$60,000 ÷ 12 Monthly benefit$5,000After-tax rate (1%-24%)× 0.76Monthly after-tax benefit$3,800 LO 5.3.1
