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
Fringe Benefits
Chapter 59: VEBA Welfare Benefit Trust
True/False
59.1
Whole life insurance can be used to fund a death benefit in a VEBA.
59.2
A VEBA plan that diverts a disproportionate share of benefits to owner-employees is tax
exempt.
59.3
Plan participants can borrow from a VEBA.
Answers:
59.1 True [pp. 420, 421]
59.2 False [p. 420]
59.3 False [p. 422]
Multiple Choice
59.4
VEBA regulations permit all of the following VEBA benefits except:
a.
b.
c.
d.
e.
life insurance on the life of an employee after retirement
sick and accident benefits
unemployment and job training benefits
vacation benefits
payment of moving expenses for a transferred employee
Answer: E [p. 420]
59.5
Disadvantages of a VEBA include all of the following except:
a. plan must be carefully designed to avoid over funding
b.
c.
d.
e.
employer can lose control of plan design
plan must be structured for exclusive benefit of highly compensated employees
installation and administration is complex
can be too costly for small employers
Answer: C [p. 419]
59.6
All of the following are prohibited as a VEBA benefit except:
a. deferred compensation plans
b. employee saving plans
c. severance benefits
d. homeowner’s property insurance for executive who uses his home to entertain clients
e. commuting expenses
Answer: C [p. 420]
Application
59.7
Bentwell Enterprises has used a VEBA for the past 10 years to fund sick and accident
benefits for employees. In January of this year, owners of Bentwell decided to terminate
the VEBA at the end of June, right before their new fiscal year. On June 30, the VEBA had
a balance of $500,000. Unpaid employee claims on the funds amounted to $440,530.
Which of the following is (are) true for Bentwell?
a. Bentwell can retain up to $50,000 of the remaining balance without penalty, but must
pay 100% penalty tax on any amount retained above $50,000
b. to avoid penalty tax, Bentwell must distribute the entire remaining balance to covered
employees
c. Bentwell faces a 10% penalty tax on any part of the balance retained by the company
d. a and b
e. b and c
Answer: B [pp. 421-422]
59.8
Cork Manufacturing uses a VEBA to fund the purchase of $500,000 of group term life
insurance on the owner Bob N. Cork. Which of the following is true regarding the tax
treatment of this insurance for Bob?
a.
b.
c.
d.
entire premium payment is considered taxable income to Bob
life insurance held by the VEBA must be counted as part of Bob’s estate
Bob’s beneficiary will receive the first $50,000 of proceeds tax-free
if Bob makes an irrevocable beneficiary designation at least 3 years before he dies,
policy proceeds will be kept out of his estate
e. since a VEBA was used to fund the life insurance purchase, proceeds to Bob’s
beneficiary will be taxed
Answer: D [pp. 420-421]
59.9
Brenda Hopkins, owner of Ultimate Sports Gear, Inc. is considering joining a multipleemployer VEBA plan. She wants to use a VEBA to fund vacation benefits for her staff.
She has asked you, her financial advisor, to explain the advantages and disadvantages of
a VEBA for her business. You tell her all of the following except:
a. a VEBA establishes an irrevocable trust for the exclusive benefit of her employees
b. using a multi-employer plan, she may lose control of some aspects of the plan’s design
c. she can narrowly focus the plan on just key employees or only long term employees
without violation of tax code
d. by prefunding employee benefit costs, she can accelerate her tax deduction
e. she could use the VEBA to provide other benefits in addition to vacation benefits
Answer: C [p. 419]
59.10 I. B. Greedy, owner of Mizer Enterprises, has a VEBA that provides a disproportionate
share of benefits to Greedy. You explain to Greedy that structuring the VEBA in this way:
a.
b.
c.
d.
is efficient since it gives Greedy benefits in proportion to his ownership interest
places him at risk of losing the VEBA’s tax exempt status
will allow him to receive tax exempt benefits
enables him to fund the VEBA with whole life insurance to add a savings component to
the plan
e. limits the amount that he can deposit in the VEBA since the amount of compensation
used in the plan’s benefit formula is $200,000, about half of Greedy’s salary
Answer: B [p. 419-420]