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
Life Insurance Plans
Chapter 41: Group-Term Life Insurance
True/False
41.1
Group term life insurance must cover all employees.
41.2
Group term life insurance is a ‘welfare benefit plan’ subject to ERISA requirements.
41.3
Insurance providing a permanent benefit can be used in a group-term life insurance plan.
Answers:
41.1 False [p. 319]
41.2 True [p. 321]
41.3 True [p. 322]
Multiple Choice
41.4
To obtain the $50,000 exclusion, a group term life insurance plan must have which of the
following characteristics?
a. the insurance policy premiums must be paid by the employee
b. insurance amounts must be determined in a manner that precludes individual selection
c. the insurance must be offered to a group of employees, but ‘group’ can be defined to
include only highly compensated employees
d. a and b
e. b and c
Answer: E [p. 320]
41.5
Advantages of a group life insurance carve-out for executives include:
a. carving the executive group out of a group covered by group term life insurance to form
two life insurance contracts can reduce the possibility that either contract will be
discriminatory
b. executives can have more coverage under a carve-out plan than under a group term
plan
c. premiums paid for life insurance coverage above $50,000 for executives are not
considered taxable income if under a group life insurance carve-out
d. a and b
e. b and c
Answer: D [p. 320]
41.6
Benefit rules of group term life insurance state that:
a.
b.
c.
d.
e.
benefits must be nondiscriminatory
benefits available to key employees must be available to all employees
there is a strict dollar limit on the amount of life insurance coverage one receives
a and b
a and c
Answer: D [p. 319]
Application
41.7
I. M. Riche earns $250,000 per year at MoneyMaker, Inc. One of Riche’s employee
benefits is a group term life policy equal to his annual salary. Which of the following is
(are) true regarding this policy?
a.
b.
c.
d.
Riche must include the entire premium cost in his taxable income
MoneyMaker does not get a tax deduction for premiums paid
Riche must count premium dollars for $200,000 coverage as part of taxable income
if all other employees earn less than $100,000 per year, MoneyMaker cannot take tax
deduction because the plan is discriminatory
e. none of the above
Answer: C [p. 319]
41.8
Trim Lawn, Inc. has two owners, three highly compensated key employees, and 32 rank
and file employees. Ten of the rank and file employees were hired one or two years ago.
In addition, Trim Lawn hires 10 additional workers in the summer to meet the demand for
seasonal lawn care needs. Trim Lawn plans to begin group-term life insurance as an
employee benefit. To meet nondiscrimination requirements, Trim Lawn must include
_____ employees.
a.
b.
c.
d.
e.
22
27
32
37
47
Answer: B [p. 319 – Trim Lawn can exclude the 10 rank and file employees that have not
completed 3 years of service as well as the seasonal employees; 2 owners + 3 key employees +
22 rank and file = 27 employees that must be included]
41.9
Bonafied Corporation has a group-life insurance carve-out for its executives. The carveout:
a. lets Bonafied provide its executives with more life insurance than the rank and file
employees receive
b. can provide executives with ‘portable’ cash growth that an executive can retain after
retirement from Bonafied
c. can save an otherwise discriminatory plan
d. all of the above
e. only a and c
Answer: D [p. 320]
41.10 Cedar Woodwork, Inc. has group-term life coverage of $200,000 on the life of company
executives in a non-discriminatory plan:
a. premiums used to purchase the life insurance are tax-free income to the executives
b. premiums used to purchase $100,000 of life insurance must be treated as ordinary
income and taxed accordingly
c. executives must count the entire premium used to purchase the life insurance as
ordinary income and be taxed accordingly
d. premiums used to purchase $150,000 of life insurance must be treated as ordinary
income and taxed accordingly
e. premiums used to purchase $50,000 of life insurance must be treated as ordinary
income and taxed accordingly
Answer: D [p. 321]