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
Health Coverage
Chapter 48: Health Reimbursement Arrangement (HRA)
True/False
48.1
Under a Health Reimbursement Arrangement (HRA), an employer reimburses covered
employees for heath and accident expenses out of corporate funds.
48.2
A Health Reimbursement Arrangement (HRA) is advantageous for a closely-held business
where family members are the primary or only employees
48.3
COBRA provisions apply to a Health Reimbursement Arrangement (HRA)
Answers:
48.1 True [p. 369]
48.2 True [p. 369]
48.3 True [p. 371]
Multiple Choice
48.4
A Health Reimbursement Arrangement cannot do which of the following?
a.
b.
c.
d.
e.
be a substitute for health insurance
be a supplement to cover medical expenses not covered under a company health plan
pay medical benefits in excess of limits in a company health plan
provide extra benefits exclusively for a business owner and key employees
cover dental expenses
Answer: D [p. 369]
48.5
To establish a health reimbursement account, a company must adopt a plan by corporate
resolution that specified
a.
b.
c.
d.
e.
a group of employees covered
types of medical expenditures reimbursed
limits on conditions covered
limits on payments by the company
all of the above
Answer: E [p. 369]
48.6
Employee benefits under a health reimbursement arrangement are tax free if
a.
b.
c.
d.
e.
they qualify as a medical expense under IRS code
the plan is nondiscriminatory
the plan is fully funded by the employer rather than by an insurance company
a and b
a and c
Answer: D [p. 369]
Application
48.7
The Enchanted Garden, a floral shop, has 20 employees. Of these, four are under age 25,
two were new hires six months ago. Average age of the remaining employees is 34 with
an average tenure of 4 years. In addition, during May through June, usually 2 temporary
workers are hired to cover demand for Mother’s day and the peak wedding season. The
Enchanted Garden has a Health Reimbursement Arrangement (HRA). Under the coverage
tests for a HRA, the minimum number of employees that The Enchanted Garden can cover
is:
a.
b.
c.
d.
e.
20
16
14
18
25
Answer: C [p. 370 – can exclude employees under age 25, employees with less than 3 year of
service, and part-time or seasonal workers so 20 employees – 4 employees under 25 – 2 new
hires = 14 employees who must be covered]
48.8
Biscott Industries has a Health Reimbursement Arrangement. This past tax year, Biscott
paid out $5,735 in benefits to employees. Biscott also paid $400 for plan administration
expenses and $1,000 in premiums for stop loss coverage. Biscott can take a tax deduction
for
a. $5,735
b. $6,235
c. $6,735
d. $7,135
e. $ 0 – no tax deduction is allowed for these expenses
Answer: D [p. 370 – Biscott can deduct 100% of cost of benefits paid to employees ($5,735) plus
plan administrative expenses ($400) plus cost of insured stop loss coverage ($1,000)]
48.9
Grady McGreedy, he owner of High Brow Industries wants to exclude his rank and file
employees from the company’s Health Reimbursement Arrangement. Grady has asked
you, his financial advisor, how he can do this. You tell Grady that he can exclude his rank
and file from the company’s Health Reimbursement Arrangement if:
a. he employs fewer than 25 employees
b. he shifts the risk for payment of health benefits from High Brow to an insurance
company
c. the ratio of the highly compensated employees to the rank and file doe not exceed 20%
d. claims are paid by an insurance company that does nothing else for the plan
e. administrative expenses are handled by an insurance company that does nothing else
for the plan
Answer: B [p. 372]
48.10 Devon McArdy, a highly paid executive, was covered under his company’s health
reimbursement arrangement when he was hired. The rank and file employees, however,
have to wait for 3 years before being covered. This year, Devon was reimbursed $10,000
for hospital and surgical expenses for care for a broken arm and shoulder after a skiing
accident. In the same year, amounts reimbursed to all highly compensated employees
through the company’s health reimbursement arrangement totaled $20,000 out of a total of
$100,000 of reimbursements to all employees. Devon must report $______ as additional
taxable income.
a.
b.
c.
d.
e.
$10,000
$ 8,000
$ 5,000
$ 4,000
$ 2,000
Answer: E [p. 373 – Devon must report amount reimbursed ($10,000) x {amount paid to all highly
compensated employees ($20,000) / reimbursement to all employees ($100,000)} = $2,000]