Employee Benefits Planning Flashcards

What is a key feature that distinguishes a Health Savings Account (HSA) from a Flexible Spending Account (FSA)?

Answer: HSA balances roll over year-to-year without forfeiture

Unlike FSAs, HSA funds roll over year-to-year and accumulate without forfeiture, allowing account holders to invest and grow balances over time.

To be eligible to contribute to an HSA, an individual must be enrolled in which type of health plan?

Answer: High-Deductible Health Plan (HDHP)

HSA eligibility requires enrollment in a High-Deductible Health Plan (HDHP), as defined by IRS minimum deductible and out-of-pocket maximum thresholds.

Which of the following is a primary advantage of a 401(k) plan over a traditional defined benefit pension plan from an employee's perspective?

Answer: The employee retains the vested account balance if they change employers

401(k) plans are defined contribution plans where vested balances are portable, allowing employees to roll funds over to an IRA or new employer plan when changing jobs.

What is the primary tax advantage of a Dependent Care Flexible Spending Account (DCFSA)?

Answer: Contributions are made with pre-tax dollars, reducing the employee's taxable income

DCFSA contributions are made with pre-tax dollars through payroll reduction, reducing the employee's taxable income for qualifying dependent care expenses such as childcare.

Under a graded vesting schedule, an employee is 20% vested after year 2, 40% after year 3, 60% after year 4, 80% after year 5, and 100% after year 6. If an employee leaves after 4 years with $20,000 in employer 401(k) match contributions, how much can the employee keep?

Answer: $12,000

At 4 years of service the employee is 60% vested, so 60% × $20,000 = $12,000 of employer contributions are retained.

Which type of employer-sponsored group life insurance benefit is excludable from an employee's gross income up to $50,000 under IRC Section 79?

Answer: Group Term Life Insurance

Under IRC Section 79, employer-provided Group Term Life Insurance coverage up to $50,000 is excludable from an employee's gross income, with coverage above that amount creating imputed income.

What is a key risk associated with a non-qualified deferred compensation (NQDC) plan that distinguishes it from a qualified retirement plan?

Answer: Plan assets remain general assets of the employer, exposing participants to insolvency risk

NQDC plan assets remain as general assets of the employer, so participants face the risk of losing deferred amounts if the employer becomes insolvent or bankrupt.

What is the maximum annual elective deferral an employee can contribute to a 401(k) plan in 2024 (excluding catch-up contributions)?

Answer: $23,000

For 2024, the IRS elective deferral limit for 401(k) plans is $23,000, up from $22,500 in 2023, allowing contributions on a pre-tax or Roth basis.

An employer sponsors a SIMPLE IRA plan. Which of the following employer contribution formulas is required by the IRS?

Answer: Either a matching contribution of up to 3% of compensation or a 2% non-elective contribution

SIMPLE IRA employers must contribute either a match of up to 3% of compensation (reducible to 1% in 2 of 5 years) or a 2% non-elective contribution for all eligible employees.

What distinguishes a SEP-IRA from a SIMPLE IRA regarding who is permitted to make contributions?

Answer: SEP-IRAs allow only employer contributions; SIMPLE IRAs allow both employer and employee contributions

In a SEP-IRA only the employer contributes; in a SIMPLE IRA both the employer (mandatory) and employees (via elective deferrals) can contribute.

A defined benefit pension plan credits employees with 2% of final salary per year of service. An employee retires after 30 years with a final salary of $80,000. What is the annual pension benefit?

Answer: $48,000

The annual benefit equals 2% × 30 years × $80,000 = 60% × $80,000 = $48,000.

Which of the following best describes the 'triple tax advantage' of a Health Savings Account (HSA)?

Answer: Contributions are pre-tax, growth is tax-deferred, and qualified withdrawals are tax-free

HSAs offer tax-deductible (or pre-tax payroll) contributions, tax-deferred investment growth, and tax-free withdrawals for qualified medical expenses.

Under the SECURE 2.0 Act, what is the required minimum distribution (RMD) starting age for individuals born between 1951 and 1959?

Answer: 73

SECURE 2.0 (enacted December 2022) raised the RMD starting age to 73 for individuals born between 1951 and 1959, with a further increase to 75 for those born in 1960 or later.

An employee participates in both a 401(k) plan and a 403(b) plan in the same year. How does the IRS annual elective deferral limit apply?

Answer: A single combined $23,000 limit (2024) applies across both plans in aggregate

The IRS elective deferral limit applies on an aggregate basis across 401(k) and 403(b) plans, so total combined contributions cannot exceed $23,000 in 2024.

A Section 125 cafeteria plan allows employees to choose between which types of benefits?

Answer: Taxable benefits and qualified non-taxable benefits funded with pre-tax dollars

Section 125 cafeteria plans allow employees to choose between taxable cash and qualified non-taxable benefits (such as health insurance premiums and FSAs), with employee pre-tax contributions reducing taxable wages.

Which of the following benefits generally CANNOT be offered through a Section 125 cafeteria plan?

Answer: Scholarships and educational tuition reduction programs

Scholarships and tuition reduction programs do not qualify as benefits under Section 125; qualified cafeteria plan benefits are limited to accident/health coverage, FSAs, group term life, and similar items listed in the code.

What is a phantom stock plan, and how does it function as an employee benefit?

Answer: A plan providing employees with cash payments tied to the value of company stock without granting actual equity

A phantom stock plan provides cash payments equal to the appreciation or full value of company stock without issuing actual shares, giving employees an economic interest in company performance.

Under ERISA fiduciary standards, which duty specifically requires a plan fiduciary to act solely in the interest of plan participants and beneficiaries, not the employer?

Answer: Duty of loyalty

The duty of loyalty under ERISA requires fiduciaries to act solely in the interest of plan participants and beneficiaries for the exclusive purpose of providing benefits and defraying plan expenses.

An Employee Stock Ownership Plan (ESOP) is designed to invest primarily in which type of asset?

Answer: The sponsoring employer company's own stock

An ESOP is a qualified retirement plan specifically designed to invest primarily in the employer company's own stock, aligning employee wealth with company performance.

How are employer-paid premiums for group health insurance treated for federal income tax purposes from the employee's perspective?

Answer: Premiums are excluded from the employee's gross income under IRC Section 106

Under IRC Section 106, employer-paid group health insurance premiums are excluded from the employee's gross income, making employer-sponsored health coverage one of the most tax-efficient benefits available.