PFS Employee Benefits Planning — 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.

Question 8: What is the maximum annual elective deferral an employee can contribute to a 401(k) plan in 2024 (excluding catch-up contributions)?

$20,500
$22,500
$23,000 (Correct answer)
$23,500

Correct 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.

Question 9: An employer sponsors a SIMPLE IRA plan. Which of the following employer contribution formulas is required by the IRS?

Profit-sharing contributions up to 25% of employee compensation
Either a matching contribution of up to 3% of compensation or a 2% non-elective contribution (Correct answer)
A flat dollar contribution of $1,000 per eligible employee
Contributions equal to the employee's Social Security payroll tax

Correct 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.

Question 10: What distinguishes a SEP-IRA from a SIMPLE IRA regarding who is permitted to make contributions?

SEP-IRAs allow both employer and employee contributions; SIMPLE IRAs allow only employer contributions
SEP-IRAs allow only employer contributions; SIMPLE IRAs allow both employer and employee contributions (Correct answer)
Both plan types allow only employee elective deferrals
Both plan types allow only employer discretionary contributions

Correct 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.

Question 11: 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?

$16,000
$24,000
$32,000
$48,000 (Correct answer)

Correct answer: $48,000

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

Question 12: Which of the following best describes the 'triple tax advantage' of a Health Savings Account (HSA)?

Contributions are pre-tax, growth is tax-deferred, and qualified withdrawals are tax-free (Correct answer)
Contributions are post-tax, growth is tax-free, and all withdrawals are tax-deductible
Contributions are tax-free, all withdrawals are tax-deductible, and gains are untaxed
Employees receive a tax credit, deduction, and exclusion simultaneously on contributions

Correct 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.

Question 13: Under the SECURE 2.0 Act, what is the required minimum distribution (RMD) starting age for individuals born between 1951 and 1959?

70½
72
73 (Correct answer)
75

Correct 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.

Question 14: 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?

The $23,000 limit (2024) applies separately to each plan, allowing up to $46,000 total
A single combined $23,000 limit (2024) applies across both plans in aggregate (Correct answer)
No limit applies when participating in two different employer-sponsored plans simultaneously
The limit is reduced to $11,500 per plan when participating in two plans

Correct 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.

Question 15: A Section 125 cafeteria plan allows employees to choose between which types of benefits?

Only taxable cash compensation components
Taxable benefits and qualified non-taxable benefits funded with pre-tax dollars (Correct answer)
Employer-selected benefits only, with no employee choice
Post-tax benefits exclusively, with no payroll tax advantage

Correct 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.

Question 16: Which of the following benefits generally CANNOT be offered through a Section 125 cafeteria plan?

Group accident and health insurance premiums
Dependent care FSA contributions
Group term life insurance (up to $50,000)
Scholarships and educational tuition reduction programs (Correct answer)

Correct 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.

Question 17: What is a phantom stock plan, and how does it function as an employee benefit?

A plan that grants employees actual ownership shares with full voting rights
A plan giving employees the right to purchase company stock at a fixed strike price
A plan providing employees with cash payments tied to the value of company stock without granting actual equity (Correct answer)
A plan that converts employee bonuses into restricted stock units on a deferred basis

Correct 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.

Question 18: 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?

Duty of loyalty (Correct answer)
Duty of prudence
Duty of diversification
Duty of disclosure

Correct 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.

Question 19: An Employee Stock Ownership Plan (ESOP) is designed to invest primarily in which type of asset?

Diversified mutual funds and ETFs
U.S. government Treasury bonds
The sponsoring employer company's own stock (Correct answer)
Commercial real estate investment trusts (REITs)

Correct 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.

Question 20: How are employer-paid premiums for group health insurance treated for federal income tax purposes from the employee's perspective?

Premiums are included in the employee's gross income as taxable compensation
Premiums are excluded from the employee's gross income under IRC Section 106 (Correct answer)
Premiums are deductible by the employee as a below-the-line itemized deduction
Premiums are subject to payroll taxes (FICA) but exempt from federal income tax

Correct 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.

Question 21: When helping a client maximize their employer benefits package, which strategy should a PFS typically recommend as the highest priority?

Ignore employer matching contributions and focus entirely on maximizing take-home pay
Maximize elective deferrals to capture the full employer match before allocating funds to other investment vehicles (Correct answer)
Always select the lowest-deductible health plan regardless of the client's expected medical expenses
Defer the maximum allowable compensation in all available plans without regard to current liquidity needs

Correct answer: Maximize elective deferrals to capture the full employer match before allocating funds to other investment vehicles

Capturing the full employer match provides an immediate 50–100% return on invested dollars and should typically be the first priority before directing funds to other savings vehicles.

PFS Employee Benefits Planning

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

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