CEBS CEBS Tax & Legal Considerations for Benefits 1 — Questions and Answers
Question 1: Under IRC Section 125, what is the primary tax advantage of a cafeteria plan for employees?
- Employees can receive benefits on a pre-tax basis, reducing taxable income (Correct answer)
- Employers receive a tax credit equal to 50% of benefit costs
- Benefits are exempt from state but not federal taxes
- Employees can defer unlimited amounts into retirement accounts
Correct answer: Employees can receive benefits on a pre-tax basis, reducing taxable income
IRC Section 125 cafeteria plans allow employees to pay for eligible benefits with pre-tax dollars, reducing their federal income and FICA tax liability.
Question 2: Which federal law sets minimum standards for most voluntarily established retirement and health plans in private industry?
- COBRA
- HIPAA
- ERISA (Correct answer)
- ACA
Correct answer: ERISA
ERISA (Employee Retirement Income Security Act of 1974) establishes minimum standards for pension and health plans in private industry to protect plan participants.
Question 3: What is the tax treatment of employer-provided group term life insurance coverage exceeding $50,000?
- Entirely tax-free to the employee
- Taxed as ordinary income on the cost above $50,000 using IRS Table I rates (Correct answer)
- Subject to capital gains tax
- Deductible by the employee as a business expense
Correct answer: Taxed as ordinary income on the cost above $50,000 using IRS Table I rates
The imputed income on employer-paid group term life insurance above $50,000 must be included in the employee's taxable wages using IRS Table I cost factors.
Question 4: Under COBRA, how long must continuation coverage generally be offered to a covered employee who is terminated (for reasons other than gross misconduct)?
- 12 months
- 18 months (Correct answer)
- 24 months
- 36 months
Correct answer: 18 months
COBRA requires that employers with 20 or more employees offer 18 months of continuation coverage to employees who lose coverage due to termination or reduction in hours.
Question 5: Which IRS code section governs Health Savings Accounts (HSAs) and sets contribution limits?
- Section 401(k)
- Section 105
- Section 223 (Correct answer)
- Section 129
Correct answer: Section 223
IRC Section 223 established HSAs and governs eligibility requirements, contribution limits, and the tax treatment of contributions and distributions.
Question 6: What is the primary purpose of a Summary Plan Description (SPD) required under ERISA?
- To file annual returns with the IRS
- To inform plan participants of their rights, benefits, and plan rules in plain language (Correct answer)
- To authorize investment decisions by the plan trustee
- To document employer contributions for audit purposes
Correct answer: To inform plan participants of their rights, benefits, and plan rules in plain language
ERISA requires plan administrators to provide participants with an SPD written in plain language that explains the plan's benefits, eligibility rules, and participant rights.
CEBS CEBS Tax & Legal Considerations for Benefits 1
Under IRC Section 125, what is the primary tax advantage of a cafeteria plan for employees?