Fundamental Payroll Certification Fundamental Payroll Involuntary and Voluntary Deductions 3 — Questions and Answers
Question 1: Employee contributions made through a Section 125 cafeteria plan are exempt from which of the following taxes?
- Federal income tax only
- State income tax only
- Federal income tax, Social Security, and Medicare taxes (Correct answer)
- Social Security and Medicare taxes only
Correct answer: Federal income tax, Social Security, and Medicare taxes
Section 125 cafeteria plan deductions reduce wages subject to federal income tax, OASDI (Social Security), and HI (Medicare) taxes, providing a triple tax benefit.
Question 2: Which of the following voluntary deductions is typically taken on a POST-tax basis?
- Traditional 401(k) contributions
- Section 125 health insurance premiums
- Union dues (Correct answer)
- Dependent care FSA contributions
Correct answer: Union dues
Union dues are generally deducted after federal, state, and FICA taxes are calculated, so they do not reduce the employee's taxable income.
Question 3: An employee's traditional 401(k) contribution is exempt from which specific tax(es)?
- Federal income tax only (Correct answer)
- Social Security and Medicare (FICA) taxes only
- All federal and state taxes
- Federal income tax, Social Security, and Medicare taxes
Correct answer: Federal income tax only
Traditional 401(k) elective deferrals reduce federal (and most state) income taxable wages but remain fully subject to FICA (Social Security and Medicare) taxes.
Question 4: How does a Roth 401(k) contribution differ from a traditional 401(k) contribution?
- Roth contributions are taken pre-tax with tax-free growth
- Roth contributions are taken post-tax with tax-free qualified withdrawals (Correct answer)
- Roth contributions are exempt from FICA taxes
- Roth contributions have lower annual contribution limits than traditional 401(k)
Correct answer: Roth contributions are taken post-tax with tax-free qualified withdrawals
Roth 401(k) contributions are made with after-tax dollars, meaning they do not reduce current taxable income, but qualified distributions in retirement are completely tax-free.
Question 5: Which tax-advantaged account specifically requires the employee to be enrolled in a High Deductible Health Plan (HDHP)?
- Flexible Spending Account (FSA)
- Health Reimbursement Arrangement (HRA)
- Health Savings Account (HSA) (Correct answer)
- Dependent Care Account (DCA)
Correct answer: Health Savings Account (HSA)
An HSA requires HDHP enrollment as a prerequisite; it is triple-tax-advantaged (pre-tax contributions, tax-free growth, and tax-free qualified withdrawals).
Question 6: Which account type is subject to the 'use-it-or-lose-it' rule, potentially forfeiting unused year-end balances?
- Health Savings Account (HSA)
- Traditional 401(k)
- Flexible Spending Account (FSA) (Correct answer)
- SIMPLE IRA
Correct answer: Flexible Spending Account (FSA)
FSAs generally require employees to spend their elected amount by plan year-end or forfeit unused funds, unless the employer offers a limited grace period or carryover.
Question 7: An employee earns $3,000 gross. They contribute $200 to a Section 125 medical plan and $150 to a traditional 401(k). What are their FICA-taxable wages?
- $3,000 (no reductions apply)
- $2,650 (both deductions reduce FICA)
- $2,800 (only Section 125 reduces FICA wages) (Correct answer)
- $2,850 (only 401(k) reduces FICA wages)
Correct answer: $2,800 (only Section 125 reduces FICA wages)
Section 125 contributions reduce FICA-taxable wages ($3,000 - $200 = $2,800), but traditional 401(k) deferrals do not reduce FICA wages.
Fundamental Payroll Certification Fundamental Payroll Involuntary and Voluntary Deductions 3
Employee contributions made through a Section 125 cafeteria plan are exempt from which of the following taxes?