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
Disability
Chapter 51: Long-Term Disability Insurance
True/False
51.1
Employer-provided long-term disability plans are subject to nondiscrimination rules.
51.2
Long-term disability payments generally replace close to 100% of salary for a limited time
(e.g. 6 months), and then drop down to around 60% of former income
51.3
Employer payment of premium for long-term disability insurance on an employee is taxable
to that employee in the year the payment is made.
Answers:
51.1 False [p. 383]
51.2 False [p. 384]
51.3 False [p. 385]
Multiple Choice
51.4
Common exclusions in a long-term disability policy include which of the following:
a.
b.
c.
d.
e.
disability during a time the employee is not under a physician’s care
disability caused by a self-inflicted injury
disability beginning before the employee is eligible for plan coverage
all of the above
only a and b
Answer: D [p. 383]
51.5
ERISA requirements of long-term disability plans include which of the following:
a. plan provisions written and communicated to employees in a summary plan document
(SPD)
b. meeting eligibility and vesting rules
c. meeting funding requirements
d. a and c
e. b and c
Answer: A [p. 386]
51.6
Common features of long-term disability policies include:
a.
b.
c.
d.
e.
waiting period of 3 to 12 months before eligible for benefits
cover full-ime employees only
a broad definition of disability
a and b
a and c
Answer: D [p. 383]
Application
51.7
Baldwin Tire Company wants to provide executives with long-term disability coverage that
has different amounts of coverage and terms and conditions than what’s provided for rank
and file employees. If Baldwin takes this action, their long-term disability coverage plan will
be deemed discriminatory and disallowed.
a. true
b. false
Answer: B [p. 383]
51.8
Homer Tanner, a foreman at Wellville Steel, pays the premium for a long-term disability
policy that has a three-month waiting period and replaces 70% of pay. Homer suffered
brain damage in an auto accident. Full recovery took nine months. Six months after the
accident, Homer was able to return to work on a part-time basis. Still very unsteady on his
feet, Homer oversaw just one section of the production line while in a wheelchair. Homer’s
long-term disability payments ceased when he went back to work. Which of the following
is true?
I. Homer’s long-term disability payments were taxed as ordinary income
II. Homer’s long-term disability payments were tax-free
III. the definition of disability in his long-term disability policy was “own occupation”
IV. the definition of disability in his long-term disability policy was “qualified for”
V. the definition of disability in his long-term disability policy was “total and permanent”
a. I and III
b. II and III
c. I and IV
d. II and IV
e. I and V
Answer: D [p. 384]
51.9
Mosher Gahn’s employer, Ace Accounting and Bookkeeping services, provides long-term
disability insurance for employees. Ace pays 70% of the premium and the employee pays
30%. Last year, Mosher had a serious heart attack and could not work at all for nine
months. Then, he returned to work on a part-time basis for a couple of months before
returning full time almost a year after the heart attack. Which of the following is (are) true
regarding Mosher’s long-term disability benefits?
a.
b.
c.
d.
e.
Mosher will be taxed on the entire benefit
Mosher will pay income tax on 30% of the benefits received
Mosher will pay income tax on 70% of the benefits received
Mosher will pay no income tax on the benefits received
As long as Mosher cannot work, he does not pay tax on benefits earned. Once he
begins working again, however, he must pay income tax on the entire benefit received
Answer: C [p. 384]
51.10 Conservative Corp. wants to provide employees with low cost long-term disability
coverage. As the company’s financial advisor, you explain that integrating long-term
disability coverage with ________ will accomplish that goal
a.
b.
c.
d.
e.
Social Security
qualified or nonqualified retirement plans
worker’s compensation
all of the above
only a and c
Answer: D [p. 384]