TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th Edition
College Course Materials
Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®
Associate Professor
CFP® Program Director
Personal Financial Planning Department
University of Missouri-Columbia
Please Note: Correct answers for each question are indicated in bold type. After each question,
the number of the page containing information relevant to answering the question is given. When
a calculation is necessary or the reasoning behind a given answer may be unclear, a brief
rationale for the correct answer is also given.
Part B: Employee Benefit Planning
Cafeteria Plans
Chapter 40: Flexible Spending Account
True/False
40.1
A flexible spending account is a type of cafeteria plan funded with salary reductions that an
employee elects annually
40.2
A flexible spending plan can reduce employment taxes paid by an employer.
40.3
A flexible spending account can be used to pay health insurance premiums.
Answers:
40.1 True [p. 309]
40.2 True [p. 309]
40.3 False [p. 309]
Multiple Choice
40.4
A flexible spending plan is beneficial when
a.
b.
c.
d.
e.
employees need benefits that are difficult to provide on a group basis
employees have co-insurance and deductibles to meet for health insurance
employer wants to provide relatively more benefits to highly compensated employees
a and b
a and c
Answer: D [p. 309]
40.5
Disadvantages of a flexible spending account include all but which of the following
a.
b.
c.
d.
e.
a flexible spending account must meet complex nondiscrimination requirements
flexible spending accounts are not practical for businesses with a few employees
employer must contribute to employee flexible spending accounts
flexible spending accounts must be used within a calendar year or forfeited
administration of a flexible spending account plan is relatively more expensive for an
employer than a standard benefit package
Answer: C [p. 310]
40.6
Which of the following benefits are not allowed in a flexible spending account?
a.
b.
c.
d.
e.
dental care
long term care
dependent care reimbursement
purchase of eyeglasses
purchase of dental care
Answer: B [p. 310]
Application
40.7
The Aglow Candle Shoppe has 5 full-time and 2 part-time employees. The two part-time
employees and one full time employee are college students. A flexible spending plan
would be an appropriate employee benefit for this business.
a. true
b. false
Answer: B [p. 309]
40.8
Bill Martin had $5000 in his flexible spending account this year to cover dental, medical,
and dependent care expenses. During this year, his qualified expenses under the plan
were $1,000 in dental expenses, $1,500 in medical expenses and $2,000 in dependent
care expenses. He anticipates $500 in dental, $2,000 in medical and $3,000 in dependent
care expenses for next year.
a. Bill can roll his unused dollars to the next plan year
b. Bill forfeits $500
c. Bill’s dental and medical expenses are paid in full, but only part of the dependent care
expenses are covered since $2000 exceeds one-third of his contribution for the three
types of expenses
d. If Bill has an emergency related to a covered expense over $500, he can contribute
more to his plan before the close of the plan year to cover the additional expenses
e. Bill can withdraw unspent funds at year end, add them to his ordinary income, and pay
taxes accordingly
Answer: B [p. 310]
40.9
In November of last year, Alice Cramer directed her employer to deposit $400 per month
via salary reduction into a flexible spending account (FSA) to cover dependent care
expenses for her 2 year old daughter, Shasta. The FSA year runs from January to
December. Her husband lost his job in August of this year. Alice and her husband decide
they can save money if he takes care of Shasta during the day and gets a part-time job in
the evening.
a. Alice must wait until November of this year to make any changes in her FSA
b. Alice’s situation is not a qualifying event. Income tax on all prior salary reductions for
the year will be charged if Alice changes her FSA salary reduction during the benefit
year.
c. Alice’s situation is not a qualifying event. She must treat the funds that formerly went
to the salary reduction FSA as ordinary income and pay taxes accordingly
d. Alice’s situation is a qualifying event. She will be assessed a penalty of 10% of her
salary reduction if she changes her FSA salary reduction during the benefit year.
e. Alice’s situation is a qualifying event; she can make a change in her FSA salary
reduction without penalty
Answer: E [p. 312]
40.10 Erin Lauder elected in December of last year to have $300 a month redirected from her
salary to her flexible spending account with her employer, Barron Corporation. In January
of this year, Erin was in a car accident. Her medical expenses that were covered by her
FSA plan amounted to $900, but she had only deposited $300 into her FSA so far this
year.
a.
b.
c.
d.
Erin can only get $300 reimbursement from her FSA in January
Erin can get $900 from her FSA, but $600 will be taxed as ordinary income
Erin can get $900, but must be willing to accept $300 per month for 3 months
Erin can get $900, but her employer is at risk of loss if Erin leaves the Corporation
before she has deposited an amount equivalent to her withdrawal
e. Erin can get $900, but must wait until the beginning of April when she has $900
deposited into her account
Answer: D [p. 312]