ChFC Employee Benefits Planning Practice Questions
Question 1
Both spouses work full time and participate in an employer dependent care flexible spending account. Which expense is eligible for tax-free reimbursement?
- A. Day-camp fees for their 10-year-old child while both parents work
- B. Overnight-camp fees for their 10-year-old child during the summer
- C. Tuition for their 5-year-old's kindergarten program
- D. After-school care for a healthy 14-year-old child
Show answer and explanation
Correct answer: A. Day-camp fees for their 10-year-old child while both parents work
A dependent care account reimburses work-related care for a child under 13 (or a dependent unable to care for himself or herself). Day camp qualifies as care, while overnight camp and kindergarten-level or higher education are not treated as care expenses.
- A. Day camp for a child under 13 is work-related care and qualifies.
- B. Overnight camp is specifically excluded from eligible dependent care expenses.
- C. Education at kindergarten level or above is not a care expense, even if it incidentally supervises the child.
- D. A healthy child age 13 or older is not a qualifying person for this program.
Question 2
A Section 79 group term life plan is found to discriminate in favor of key employees. How is a key employee taxed on the employer-paid coverage?
- A. The $50,000 exclusion still applies, and the excess coverage is taxed using Table I rates
- B. Coverage above $50,000 is taxed at the plan's actual premium cost
- C. A negligible amount is included in the key employee's income, because the discrimination penalty falls on the employer, which loses its deduction
- D. The $50,000 exclusion is lost, and the key employee includes the greater of actual cost or Table I cost for all coverage
Show answer and explanation
Correct answer: D. The $50,000 exclusion is lost, and the key employee includes the greater of actual cost or Table I cost for all coverage
Under IRC Section 79(d), if a group term plan discriminates in favor of key employees, those key employees lose the $50,000 exclusion. They include in income the greater of the actual cost or the Table I cost of all their coverage.
- A. Keeping the $50,000 exclusion is the nondiscriminatory result; discrimination removes it for key employees.
- B. Actual cost applies only if it is greater than Table I cost, and the exclusion is lost, so all coverage is counted.
- C. The penalty for a discriminatory plan is borne by the key employees, who lose the exclusion and include the greater of actual or Table I cost; it does not shift to the employer's deduction.
- D. This is the specific Section 79(d) result for key employees under a discriminatory plan.
Question 3
An employer provides $150,000 of group term life insurance to an employee under a nondiscriminatory Section 79 plan. What is the general tax treatment of this benefit to the employee?
- A. The entire $150,000 of coverage is tax-free to the employee because the plan satisfies the Section 79 nondiscrimination requirements, so no amount is imputed as income
- B. None of the coverage is taxable to the employee because the employer owns the master policy and pays the premiums, with imputed income arising for key employees in discriminatory plans, and the exclusion has no dollar cap
- C. The employee must include the employer's full premium cost for all $150,000 of coverage as taxable income each year, reported as wages subject to withholding
- D. The cost of the first $50,000 of coverage is excludable from income; the cost of coverage above $50,000, less any amount the employee pays, is imputed as taxable income using IRS Table I rates
Show answer and explanation
Correct answer: D. The cost of the first $50,000 of coverage is excludable from income; the cost of coverage above $50,000, less any amount the employee pays, is imputed as taxable income using IRS Table I rates
Section 79 excludes from an employee's income the cost of the first $50,000 of employer-provided group term life coverage. The cost attributable to coverage in excess of $50,000, computed under IRS Table I rates and reduced by any amount the employee contributes, is imputed as taxable income.
- A. Ignores the $50,000 statutory exclusion cap under Section 79; satisfying nondiscrimination rules does not exempt coverage above $50,000 from imputed income.
- B. Employer ownership of the master policy doesn't exempt the employee from imputed income on coverage above $50,000; the exclusion is capped at $50,000, not unlimited.
- C. Overstates the taxable amount; the cost of the first $50,000 remains excludable, and the excess is taxed using Table I rates rather than the employer's full premium cost.
- D. Correct — matches the $50,000 exclusion plus imputed income on the excess under Table I.
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Employees are permitted to make additional "catch-up" elective deferral contributions to a 401(k) plan, above the standard annual deferral limit, beginning in the calendar year they reach what age?
- A. 21
- B. 59½
- C. 55
- D. 50
Show answer and explanation
Correct answer: D. 50
Under IRC Section 414(v), participants who attain age 50 by the end of the plan year may make additional catch-up contributions to a 401(k) plan beyond the standard elective deferral limit.
- A. Age 21 relates to statutory minimum age requirements for plan eligibility, not catch-up contributions.
- B. Age 59½ is the general penalty-free distribution age, unrelated to catch-up contribution eligibility.
- C. Age 55 relates to the separate 'age 55 exception' to the 10% early-withdrawal penalty for separated employees, not catch-up eligibility.
- D. Correct — age 50 is the threshold for 401(k) catch-up contributions.