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Insurance and Employee Benefits
(Know the answers to these questions to pass!)


1. Usually, the taxable value of group term insurance in excess of the $50,000 exclusion amount is determined from tables provided by the IRS. The exclusion is not allowed unless the insurance meets the requirements of “group term life insurance.” If the insurance provided does not meet the definition of group term life insurance,

A. then the employer’s premium cost is included in the employee’s income.
B. then the IRS allows a contingency improvement to $100,000.
C. the policy is issued but the agent receives no commission.
D. then the employer's cost is included in the employer's income.

2. In respect to Employee Taxation on Nonqualified Annuity or Nonexempt Trust— Annuity payments are taxable to the employee where

A. the employee’s investment in the contract, for purposes of calculating the exclusion ratio, consists of all amounts attributable to employer contributions that were taxed to the employee and premiums paid by the employee (if any).
B. the employer's investment in the contract is less than that of the investment of the employee after calculating the exclusion ratio.
C. the spouse or other dependent are listed as secondary beneficiaries.
D. the proceeds are paid monthly and do not exceed $1,000 per month.

3. When a defined benefit plan is established by an employer, the employer must contribute the necessary funds to pay the benefits as promised to the employee,

A. in any fashion that maintains the financial integrity of the employer.
B. and to contribute these funds on a regular, ongoing basis.
C. and to notify the IRS and Department of Labor, of the method and amount he will pay into the plan.
D. within a period of five years when payments are due.

4. If the group life insurance policy provides for a permanent benefit, it may be treated as group term life insurance only if the policy or the employer

A. posts a performance bond in the amount of the benefit.
B. so notifies the Department of Insurance.
C. identifies in writing the part of the death benefit that is provided to each employee that is group term life insurance.
D. has a face value (death benefit) of more than $50,000.

5. There are two kinds of stock options, each with different rules and tax consequences,

A. the “qualified” stock options—also known as “incentive stock options” (ISOs) or “statutory stock options.”
B. common or deferred.
C. stock option (ESOP) or "phantom" stock options.
D. accrued or earned.

6. Typically, the Short-term Disability Income plans places a maximum dollar amount on the benefits that will be paid in case of disability, regardless of the earnings of the insured. Some Short-term plans and the majority of Long-term plans

A. generally use a $10-20,000 maximum annual benefit.
B. apply benefits as a percentage of the total earnings of the insured excluding bonuses and overtime.
C. use a monthly maximum of $2,500.
D. have no limits of any kind.

7. If an employer voluntarily pays a death benefit to an employee’s surviving spouse,

A. the IRS considers such voluntary death benefit as compensation and it is taxable income
B. there is no taxation on the amount to the spouse and it is tax exempt as a business expense for the employer.
C. and any such payment is considered as a mutual payments, taxable 50% to both the employer and the employee's spouse.
D. there will be FICA taxes paid on the distribution, otherwise it is a total tax-free transaction.

8. In the case of "Distress Terminations," a single-employer plan that is not eligible for a standard termination because of insufficient assets, may terminate under a “distress termination” in certain situations, however

A. both distress termination and standard termination are not available if the termination would violate the terms of a collective bargaining agreement.
B. the SEC must approve any such termination.
C. the Department of Insurance must appoint a receiver for the company.
D. the net worth of the employer must not exceed 10% of the plan's debt.

9. A “regular” Employee Stock Option Plan (ESOP) is formed by the employer either contributing stock, or contributing money used by the ESOP to purchase stock, on a yearly basis in amounts that meets current contribution requirements. With a “leveraged” ESOP

A. it is formed collectively among employees, usually through a union intervention.
B. on the other hand, the leveraged ESOP borrows the money to pay for a large block of employer securities and these shares are allocated to participant's accounts as the loan is repaid.
C. the employer contributes stocks of outside organizations.
D. the employer guarantees a minimum stock value increase.

10. Payments from deferred compensation plans are taxed as

A. ordinary income to the recipient when they are actually or constructively received.
B. an unnecessary business expense to the employer who must pay capital gains on the payments therefore.
C. capital gains to the recipient when they are actually received.
D. tax-exempt annuity payments.

11. The key to the success of Cafeteria Plans is

A. the employee is able to purchase very cheap health & life insurance.
B. that the agent receives higher commissions than with individual sales.
C. that participating employees may redirect a portion of their salaries for the purchase of qualified benefits by pre-tax salary deduction(s) instead of after-tax payroll deduction(s).
D. that employers can force employees to purchase plans, thereby alleviating the employer of having to provide any benefits whatsoever.

12. The Internal Revenue Section 125(d)(1) described a Cafeteria Plan (or flexible benefit plan) is a written plan in which all participants are employees

A. and all premiums are paid by the employer.
B. that are either part-time, full-time or seasonal employees.
C. who have shown a stability of employment by being employed at the same location for a minimum of five years.
D. who may choose among two or more benefits consisting of cash and “qualified benefits.”

13. Under a Cafeteria Plan, medical expenses reimbursement may be provided

A. but it may not reimburse for premiums paid for other health plan coverage.
B. including premium reimbursement for health and accident coverage.
C. if such reimbursement is to a Blue Cross/Blue Shield insurer.
D. up to a maximum reimbursement of $500 per annum.

14. ERISA states that an employee is always fully vested in benefits derived from his own contributions, and a vesting schedule under which benefits go from full forfeitability to full nonforfeitability is called

A. "jumping vesting schedules."
B. “cliff vesting.”
C. "concurrent vesting."
D. "irregular vesting."

15. While employee benefits, per se, can be divided into several different types, ERISA divides employee benefits into

A. pension and salary reduction plans.
B. wage-related and non-wage related.
C. pension (benefit) plans and welfare (benefit) plans.
D. employer provided and employee participant plans.

16. On a deferred compensation plan, the IRS provides for substantial penalties for failing to meet the statutory requirements when deferring compensation. Any violation of these regulations results in retroactive constructive receipt, with the deferred compensation being taxable to the participant as of the time of the intended deferral. In addition to the normal income tax on the compensation,

A. the participant must also pay capital gains taxes on compensation when received.
B. the employer must pay an administrative penalty of 10% of the employer contributions.
C. the participant must pay an additional 20%, as well as interest at a rate 1% higher than the normal underpayment.
D. a penalty tax of 2% per payment for a period of 10 years must be paid by the participant.

17. In determining whether a plan is discriminatory, the minimum coverage standards established by regulations limit the discrimination in favor of the highly compensated employees. Basically, a highly compensated employee is that for a given year (called “the determination year”) if the employee was a 5-percent owner in that year or the preceding year—or—

A. in the preceding year he received compensation from the employer in excess of a specific sum (which is indexed for inflation and was, for instance, $90,000 in (2003), and, further, if the employer elects, he was in the top-paid group of employees for that year.
B. he received compensation in any form that was not provided or available to other employees—such as a country club membership, company car, etc.
C. he has private investments from which his total income from all sources, exceeds 150% of the average of the most highly paid five employees in that firm.
D. his income from the employer was more than 200% more than a comparable executive in a similar-type of firm with comparable service, authority and responsibilities.

18. An employee stock ownership plan (ESOP) may be either a qualified stock bonus plan, or a combination bonus and money purchase plan, either of which must be designed

A. with prior approval of the SEC.
B. exactly as set forth in IRS Code Section 73(b).
C. to invest primarily in qualifying employer securities.
D. so as to allow investing in any type of stock, bonds or other securities.

19. Section 105 - "Unreimbursed Medical Expense" of a Cafeteria Plan, allows employees to set aside funds to be used to reimburse themselves for certain and specified medical expenses that

A. can be reimbursed by any other medical plan
B. are less than $1500.
C. are not reimbursed from any other source (basically, insurance plans) or claimed as deductions on their income tax.
D. may be considered as experimental or trivial.

20. A Section 125 Cafeteria Plan may offer reimbursement for specified dependent care expenses for participant’s eligible children &/or other dependents. For these expenses to be reimbursed,

A. the participant must use only certain care facilities as designated by the plan.
B. the participant must have provided at least 75% of the claimed amount.
C. services must have been rendered by a licensed Registered Nurse.
D. they must be incurred so as to allow an employee and spouse to work, unless the spouse is a full-time student or incapable of self-care.

21. Under a Section 105 (Cafeteria Plan) Unreimbursed Medical Expense Program, ineligible reimbursement account expenses include

A. Counseling, if for medical care** (e.g., psychological, psychotherapy, family counseling for patient only, etc.)
B. Dental care, if for medical care (e.g., examinations, cleanings, fillings, crowns, bridges, etc.)
C. Diabetic supplies (e.g., blood sugar monitor, syringes, test stripes, etc.)
D. Drugs, prescribed and over-the-counter, that are primarily for personal, cosmetic, and/or for the benefit of the individual’s general health.

22. A SIMPLE 401(k) plan must meet three statutory requirements one of which is

A. that contributions to the plan be vested immediately.
B. that all contributions to the plan must exceed $1,000 per year per employee.
C. that all contributions to the plan must vest within a 5 year period.
D. that the plan have prior approval by the SEC.

23. In the discussion of the taxation of distributions, the need for accrual of benefits rules

A. results in increased taxation.
B. stem from the possibility of “backloading”—an arrangement where the level of the benefit for the participant grows much faster in later years.
C. helps to facilitate ERISA rules.
D. eliminates any commissions on any insurance products that are involved.

24. In a Cafeteria Plan, The next step after the acceptance of the proposal by the employer

A. the payment of commissions.
B. is the filing of the plan with the Department of Insurance.
C. is the formal posting of the performance bond.
D. is the enrollment of the employees.

25. For the taxation of benefits, amounts are treated as annuities and are therefore subject to

A. capital gains taxes.
B. the exclusion ratio.
C. the backing of annuity insurance companies.
D. extra commission.

26. With a Cafeteria Plan, all eligible employees must be enrolled prior to the plan effective date &

A. all insurance policies must be effective on the effective date of the plan.
B. all insurance policies must be effective on the date of issue of the policies.
C. there must be at least 75% of the total employees accepting the plan.
D. all insurance policies must be effective on the first of the month of the annual anniversary of the employee.

27. With a Long Term Disability plan, frequently the “own-occupation” definition defines one as being totally disabled if they cannot perform the major duties of their regular occupation, or

A. are receiving daily medical or rehabilitation care.
B. are not at work in any other occupation.
C. are working at another job at lower pay than he received prior to disability.
D. the employer certifies that the employee cannot do anything in relation to their position for which they are being paid and for which they are trained.

28. An HSA (Health Savings Account) may receive contributions from an eligible individual

A. or a present employer only.
B. from any other person except for a family member under any circumstances.
C. including his insurance agent.
D. or any other person, including an employer or a family member, on behalf of an eligible individual.

29. Some group insurers do not use agents or brokers and only approach prospective policyholders through their salaried employees, such companies are known as

A. mutual companies.
B. stock companies.
C. direct writers.
D. property and casualty companies.

30. With the timing of the distribution, if the present value of a participant’s vested benefit is more than $5,000, before any part of it can be distributed

A. the participant must consent to the distribution, in writing, before he has arrived at either the retirement age or age 62, whichever is later
B. the Department of Insurance and the IRS must agree as to amount and time of distribution, otherwise there could be unnecessary taxation to the participant.
C. it must be audited by an independent auditing firm who attests that it is as contracted.
D. the employer must be released from their performance bond.

31. An employee stock option plan gives an employee the right to buy a certain number of shares in the employer’s corporation at a fixed price within a specified period of time. The price for which the employee pays for the option is called the

A. asking price.
B. vested amount.
C. “grant” price, which is usually at or below the stock’s current market value.
D. "qualified option" price.

32. If disability (or “salary continuance”) insurance is sold with a pre-tax premium, the benefits will be payable at time of claim. In such a situation,

A. the employee will be subject to income taxes on the benefits yet to be received.
B. the employee will not pay taxes on the benefits, nor will the employer.B
C. the employee will be subject to income taxes on the benefits received for the duration of the disability
D. the employer will be subject to income taxes on the benefits paid to the employee.

33. With a Cafeteria Plan, the tax rules are rather stringent as to an employee changing a benefit election. Generally, an employee may be permitted to revoke an election for coverage under a group health plan and make a new election as allowed by the tax code which pertains to situations

A. where the plan consists of 100 or more participants.
B. where persons lose other group health plan coverage and dependent beneficiaries
C. where there has been defining legal action taken and the court allows such change.
D. where the participant is purchasing a new house or paying off a college loan.

34. Under a Cafeteria Plan, the rule that states that an election change cannot be made for accident or health coverage or group term life insurance, unless it is on account of or corresponds with a change in status that affects eligibility for coverage under the plan

A. is the "consistency rule."
B. is the "determination rule."
C. is called the "status-exception rule."
D. is considered as illegal in most states.

35. Under a Disability Income policy, when “accidental means” is used regarding a bodily injury, there are two requirements that must be met if the loss is to be covered: Both the cause of the injury and the result (the injury) must be unexpected and unforeseen. In addition,

A. the cause must be provable and the result must be of medical importance only.
B. the insured is automatically considered as an "outsider" and is divorced from any investigation of the accident.
C. the event that results in the bodily injury must not be under the control of the insured.
D. it is immaterial as to whom is responsible for the injury.

36. (Employer’s Noninsured Accident & Health Plans) In order for employer’s noninsured accident and health plan to be excludable from the employee’s income, uninsured benefits must be received under an accident and health plan for employees. For there to be uninsured payments, first,

A. there must be a plan for uninsured payments.
B. any such plan must be approved by the SEC before implementation.
C. there are very strict requirements as to how the plan would be constructed.
D. the employer must agree to contribute a minimum of $1,000 per employee to the plan each year.

37. ERISA uses certain terms and definitions to describe the role that the individual may have in ERISA plans. The person that the ERISA rules protect, and who is defined as “any employee or formerly employee …, or any member of an employee organization who is or may become eligible to receive a benefit” from a plan, or “whose beneficiaries may be eligible to receive any such benefit” is the

A. specified employee.
B. participant.
C. receiver.
D. trustee.

38. If in a health insurance plan, for example, the eligible members have the option of having coverage and paying premiums, or declining the coverage, the members who elect for coverage are more likely to become ill than those that decline coverage because those that accept coverage are older and/or in poorer physical condition than the average employee in the group—this is called.

A. underwriting conundrum.
B. poor persistency.
C. adverse selection.
D. forecasting.

39. As an Employee Stock Option, Restricted stock should be discussed as it is regarded as an employee benefit, and it is popular among the higher-paid employees. Actually, it is

A. stock that has a better-than-average investment record and is listed on NASDAQ,
B. stock that is sold to an employee at a price higher than its present value.
C. simply an outright grant of shares of stock by a company to an individual (usually an employee) without any payment by the recipient—or in some case, only a nominal payment.
D. stock of a foreign entity that is otherwise not available to employees.

40. One way for a CODA to meet the requirement of Section 401(k) is for it to be created as a SIMPLE 401(k) plan which must meet three statutory requirements, one of which states that an employee may elect to defer a percentage of compensation up to a statutory amount adjusted for inflation ($8,000 in 2003), the employer must match these contributions up to 3% of salary, and, further,

A. there may not be any other contributions.
B. the employer may, at his discretion, increase the 3% contribution to up to 10%.
C. an equal contributions may be made on behalf of a spouse or other dependant.
D. other family members may make contributions on behalf of the employee.

41. The Pension Benefit Guaranty Corporation (PBGC) was established by ERISA as an enforcement arm and one of the primary objectives is

A. to ensure that insurance companies are able to fulfill their obligations.
B. to avoid the state Departments of Insurance from allowing mergers of pension insurers without prior approval.
C. the guaranty of 401(k) and similar tax-oriented plans.
D. the regulating and enforcement of termination regulations.

42. Unions and part-time employees may not be eligible for a Cafeteria Plan as union’s employees covered by collective bargaining agreements often have their benefits negotiated between the employer and the union. A cafeteria plan, however, may be considered as a negotiable benefit. If there are union employees who are excluded,

A. the entire Cafeteria Plan may collapse.
B. the before-tax tax advantage may be forfeited if union employees are not included.
C. the union must be named in the plan document, particularly if there are other unions active in the company.
D. a registered letter must be sent to each affected union employee so notifying them that they are not eligible for the benefits.

43. Under a Cafeteria Plan, Qualified benefits do NOT include:

A. Accident and Health Insurance (Medical and Disability Income).
B. Dental.
C. Vision.
D. Health Club Membership.

44. In respect to a distribution from a qualified plan: In order to avoid a tax penalty, a recipient who wants to rollover the entire amount of a distribution must

A. contribute the entire amount at any time within the next 60 months.
B. contribute the entire amount to the new plan within 60 days—they may not contribute part this year and the remainder the following year, for example.
C. may contribute part (not more than 50%) of the amount within 60 days, and the remainder 60 days henceforth.
D. use a trustee to accept the rollover amount or face a severe penalty.

45. ERISA prohibits an employer from discharging or disciplining an employee or discriminating against an employee for the purposes of interfering with the "attainment of any right to which such participant might become entitled under the plan." An employee may, therefore,

A. not be discharged for the purpose of preventing vesting or experiencing future accruals on the plan.
B. be subject to discharge provided they are over age 62.
C. be discharged "for cause" if the "cause" is advanced age.
D. request that instead of being discharged, that all his accrued benefits be paid to a family member or other interested person.

46. This category is used for Disability Income and medical expense insurance. It gives the insured a limited right to renew the policy to age 65 (or some later age) by the process of simply paying the correct premium on time. The insurance company may refuse to renew coverage but only for reasons that are stated in the policy. This is

A. guaranteed renewable.
B. non-cancelable.
C. non-cancelable and guaranteed renewable.
D. conditionally renewable.

47. " High-deductible medical expense insurance is purchased, along with the medical savings account, with high deductibles ranging from $1,700 to $2,600 for unmarried individuals, and $3,450 to $5,150 for families and with out-of-pocket maximums of $3,450 for individuals and $6,300 for families (no minimum lifetime benefit is required)"—describes the workings of

A. an MSA.
B. an HSA
C. Cafeteria Plan flexible benefits.
D. a PPO.

48. Contributions to an MSA must be made in cash—no stock or property. If the individual is an employee, the employer may make contributions to the MSA and the holder does not pay tax on these contributions,

A. and the employer may not consider such contributions as business expenses.
B. the employee does not have to pay taxes on these contributions.
C. both the employer and the employee pay taxes on the contributions.
D. and the value of the MSA is decreased by such an amount.

49. The most common and most popular plan type under Section 125 Cafeteria Plans is where the employees pay their share of the cost of health and accident insurance with pre-tax dollars. This is called

A. the Employee Cost Sharing Plan.
B. Dependant Care Plan.
C. the Premium Only Plan.
D. Unreimbursed Medical Plan.

50. A qualified plan must provide that when it is terminated, or partially terminated, the rights of all affected employees to all of their accrued benefits become nonforfeitable to the extent that is funded or credit to their accounts. Even those plans that to which the minimum funding standard do not apply, must provide for vesting of all accrued benefits of all employees upon the complete discontinuation of contributions. The purpose of these requirements is

A. to prevent discrimination.
B. to standardize program specifications.
C. to provide equal benefits among all large companies.
D. to help to preserve persistency, and thereby, commissions.


Insurance and Employee Benefits