PFS Employee Benefits Planning 1 — Questions and Answers
Question 1: What is a key feature that distinguishes a Health Savings Account (HSA) from a Flexible Spending Account (FSA)?
- HSA funds must be used within the plan year
- HSA balances roll over year-to-year without forfeiture (Correct answer)
- HSAs are available with any health insurance plan
- HSA contributions are made only by employers
Correct 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.
Question 2: To be eligible to contribute to an HSA, an individual must be enrolled in which type of health plan?
- Preferred Provider Organization (PPO)
- Health Maintenance Organization (HMO)
- High-Deductible Health Plan (HDHP) (Correct answer)
- Exclusive Provider Organization (EPO)
Correct 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.
Question 3: 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?
- The employer bears all investment risk
- Benefits are guaranteed regardless of market performance
- The employee retains the vested account balance if they change employers (Correct answer)
- Contributions are mandatory for all employees
Correct 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.
Question 4: What is the primary tax advantage of a Dependent Care Flexible Spending Account (DCFSA)?
- Contributions grow tax-deferred and withdrawals are always tax-free
- Contributions are made with pre-tax dollars, reducing the employee's taxable income (Correct answer)
- Unused funds roll over to the next plan year without limit
- There is no annual contribution cap for dependent care expenses
Correct 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.
Question 5: 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?
- $4,000
- $8,000
- $12,000 (Correct answer)
- $20,000
Correct answer: $12,000
At 4 years of service the employee is 60% vested, so 60% × $20,000 = $12,000 of employer contributions are retained.
Question 6: 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?
- Universal Life Insurance
- Group Term Life Insurance (Correct answer)
- Whole Life Insurance
- Variable Universal Life Insurance
Correct 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.
Question 7: What is a key risk associated with a non-qualified deferred compensation (NQDC) plan that distinguishes it from a qualified retirement plan?
- Contributions are subject to immediate income taxation
- Plan assets remain general assets of the employer, exposing participants to insolvency risk (Correct answer)
- The plan is funded in a trust protected from employer creditors
- Government regulations guarantee benefit payments to participants
Correct 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.
PFS Employee Benefits Planning 1
What is a key feature that distinguishes a Health Savings Account (HSA) from a Flexible Spending Account (FSA)?