CPP CPP Quality & Compliance 5 — Questions and Answers
Question 1: Under IRS regulations, what is the de minimis fringe benefit threshold consideration when determining whether a small-value employer-provided item must be included in an employee's taxable wages?
- Any item worth more than $25 must be included in wages
- Items so small in value that accounting for them is administratively impractical are excluded from wages (Correct answer)
- Only items exceeding $600 in value per occurrence are taxable
- Cash equivalents under $50 are always excluded as de minimis
Correct answer: Items so small in value that accounting for them is administratively impractical are excluded from wages
A de minimis fringe benefit is one so small in value that accounting for it would be administratively impractical or unreasonable, making it excludable from an employee's gross income.
Question 2: An employer sponsors a nonqualified deferred compensation plan. Under IRC Section 409A, what event triggers taxation of the deferred amounts?
- When the employee contributes to the plan
- When the amounts are no longer subject to a substantial risk of forfeiture
- Only when the employee receives a distribution under a permissible event (Correct answer)
- When the plan first exceeds $1 million in total assets
Correct answer: Only when the employee receives a distribution under a permissible event
Section 409A requires that deferred compensation be taxed only upon a permissible distribution event (e.g., separation from service, death, disability), or it may be subject to an additional 20% tax plus interest.
Question 3: A payroll professional needs to verify that federal tax deposits were applied correctly. Which resource allows direct confirmation of IRS account deposit credits?
- The employer's bank statement only
- The Electronic Federal Tax Payment System (EFTPS) payment history (Correct answer)
- Form 4868 filed with the IRS
- The employer's payroll software deposit log
Correct answer: The Electronic Federal Tax Payment System (EFTPS) payment history
EFTPS provides employers access to their own tax payment history, allowing verification that payments were applied correctly to their IRS account.
Question 4: Which scenario would create a payroll compliance risk related to the 'netting' of wages?
- Paying an employee's net pay via direct deposit
- Reducing an employee's paycheck by a prior overpayment in a manner that brings net pay below minimum wage (Correct answer)
- Withholding federal income tax from gross wages
- Processing a wage garnishment deduction
Correct answer: Reducing an employee's paycheck by a prior overpayment in a manner that brings net pay below minimum wage
The FLSA prohibits deductions from wages that bring an employee's pay below the required minimum wage, even if the deduction is for a legitimate overpayment recovery.
Question 5: An employer provides employees with employer-paid group term life insurance coverage of $75,000. What is the tax treatment of the coverage amount that exceeds $50,000?
- The entire $75,000 benefit is tax-free as a fringe benefit
- The cost of coverage over $50,000, calculated using IRS Uniform Premium Table I rates, is included in the employee's wages (Correct answer)
- The excess is taxed only when the employee files their personal tax return
- Only the actual premium paid by the employer is included in wages
Correct answer: The cost of coverage over $50,000, calculated using IRS Uniform Premium Table I rates, is included in the employee's wages
IRC Section 79 allows the first $50,000 of employer-paid group term life to be excluded from wages; the cost of coverage above $50,000 is calculated using IRS Table I rates and included in taxable wages.
Question 6: A payroll manager implements a policy requiring two employees to approve any payroll adjustments exceeding $500. This control is BEST described as:
- A system access control
- Dual control or dual authorization (Correct answer)
- A compensating control
- A corrective control
Correct answer: Dual control or dual authorization
Requiring two employees to approve transactions above a threshold is dual control (dual authorization), a preventive internal control designed to reduce the risk of unauthorized payments.
Question 7: Under the Uniform Interstate Family Support Act (UIFSA), when an employer receives an income withholding order from another state, the employer must generally:
- Refuse to honor out-of-state orders until a local court confirms them
- Honor the order immediately and withhold according to the issuing state's order terms (Correct answer)
- Notify the employee and wait 30 days before withholding
- Apply the employer's home state withholding limits only
Correct answer: Honor the order immediately and withhold according to the issuing state's order terms
UIFSA requires employers to honor out-of-state income withholding orders for child support immediately upon receipt, without requiring a local court's confirmation.
CPP CPP Quality & Compliance 5
Under IRS regulations, what is the de minimis fringe benefit threshold consideration when determining whether a small-value employer-provided item must be included in an employee's taxable wages?