GBA 1 Module 9 Test Questions
and Answers
What are the primary advantages to an employee in receiving benefits under a
cafeteria plan? - Answer-the most notable advantage is probably the preferential tax
treatment afforded to these benefits. Employees directly save money since they pay
for their share of benefit expenses on a tax-favored basis. Contributions to a cafeteria
plan are exempt from federal income tax and are not subject to the Federal Insurance
Contributions Act (FICA-Social Security) and the Federal Unemployment Tax Act
(FUTA) taxes. Also, most state and local tax laws follow the federal tax treatment.
What are the primary disadvantages to an employee in receiving benefits under the
umbrella of a cafeteria plan? - Answer-the primary disadvantage of a cafeteria plan is
the
fact that benefit elections generally must be made prior to the beginning of the plan
year and, with limited exception, the election is irrevocable during the entire period
of coverage. Another significant disadvantage that applies to a health care FSA is the
"use-it-or-lose-it" rule
since there is no
FICA-Social Security tax on cafeteria plan benefit dollars, an employee who
participates in a cafeteria plan may realize a slight reduction in Social Security
benefits or in the accumulation of benefits under his or her employer-sponsored
retirement plan.
Discuss the advantages to employers in offering their employee benefits through a
cafeteria plan. - Answer-there are significant financial incentives. The
employer realizes payroll cost savings because the employer does not pay FICA or
FUTA taxes on amounts contributed to the cafeteria plan. In addition, deferral
amounts are not considered wages for purposes of determining workers'
compensation premiums and other payroll-based expenses. State and local tax
treatment varies, with many states offering the same preferential tax treatment as
offered by the federal government. In addition to financial incentives, cafeteria plans
create greater employee awareness of the overall value of their benefits.
can also serve as a mechanism to control escalating benefit costs, limiting employer
contributions, and preventing the wasting of benefit dollars on duplicate/unneeded
benefits
, What potential disadvantages do employers face in sponsoring a cafeteria plan? -
Answer-The primary disadvantage to the employer involves the ongoing cost of
administration and operation of such a plan.
Adverse selection becomes a greater risk when employees can opt in and out of
various benefit plans.
Finally, while the Affordable Care Act (ACA) relaxed requirements for small
employers, cafeteria plans are subject to complex coverage and nondiscrimination
testing in order to comply with federal tax law.
Given that cafeteria plans are not all the same, describe the different types of
cafeteria plans allowable under IRC Section 125. - Answer-Cafeteria plans were given
their name because
benefits are offered to employees cafeteria-style, with plan participants selecting the
benefits they need. These optional benefits are purchased with dollars or credits
given to the participant as part of a benefit package. In some instances, employees
are not given any employer money to spend but can enhance their overall benefit
package by making tax-favored contributions to the cafeteria plan.
Generic terms would include such references as flexible benefit
programs, flexible compensation, choice plans and flex plans. If a plan includes only
pretax premium conversion, it often is referred to as a premium conversion plan,
premium-only plan or POP. While the different types of cafeteria plans vary in
complexity, at their core they are similar in that employees use the plan as a vehicle
for obtaining selected employee benefits on a tax-favored basis.
Discuss the characteristics of a premium conversion plan and why it is perceived
as a cafeteria plan in its simplest form. - Answer-In a premium conversion plan, there
are no employer contributions and the plan is
offered to employees so they may pay for their insurance costs on a tax-favored basis.
Because there are no employer contributions or flexible credits, this type of plan is
perceived as a cafeteria plan in its simplest form. A cafeteria plan is the only means
that can be used for employees to pay for insurance costs on a tax-favored basis.
As a general rule, which types of benefits typically provide a premium conversion
feature under a flexible benefit plan? - Answer-as a general rule, a premium conversion
feature is
only used for medical insurance (including dental, vision and other types of medical
coverage) and group term life insurance not in excess of $50,000.
Describe the workings of a cafeteria plan that includes FSAs - Answer-FSAs, also called
reimbursement
accounts. When an FSA is funded purely
by salary deferrals, the participant is choosing between two (or more if offered more
than medical coverage) benefits consisting of cash and qualified benefits. FSAs offer
and Answers
What are the primary advantages to an employee in receiving benefits under a
cafeteria plan? - Answer-the most notable advantage is probably the preferential tax
treatment afforded to these benefits. Employees directly save money since they pay
for their share of benefit expenses on a tax-favored basis. Contributions to a cafeteria
plan are exempt from federal income tax and are not subject to the Federal Insurance
Contributions Act (FICA-Social Security) and the Federal Unemployment Tax Act
(FUTA) taxes. Also, most state and local tax laws follow the federal tax treatment.
What are the primary disadvantages to an employee in receiving benefits under the
umbrella of a cafeteria plan? - Answer-the primary disadvantage of a cafeteria plan is
the
fact that benefit elections generally must be made prior to the beginning of the plan
year and, with limited exception, the election is irrevocable during the entire period
of coverage. Another significant disadvantage that applies to a health care FSA is the
"use-it-or-lose-it" rule
since there is no
FICA-Social Security tax on cafeteria plan benefit dollars, an employee who
participates in a cafeteria plan may realize a slight reduction in Social Security
benefits or in the accumulation of benefits under his or her employer-sponsored
retirement plan.
Discuss the advantages to employers in offering their employee benefits through a
cafeteria plan. - Answer-there are significant financial incentives. The
employer realizes payroll cost savings because the employer does not pay FICA or
FUTA taxes on amounts contributed to the cafeteria plan. In addition, deferral
amounts are not considered wages for purposes of determining workers'
compensation premiums and other payroll-based expenses. State and local tax
treatment varies, with many states offering the same preferential tax treatment as
offered by the federal government. In addition to financial incentives, cafeteria plans
create greater employee awareness of the overall value of their benefits.
can also serve as a mechanism to control escalating benefit costs, limiting employer
contributions, and preventing the wasting of benefit dollars on duplicate/unneeded
benefits
, What potential disadvantages do employers face in sponsoring a cafeteria plan? -
Answer-The primary disadvantage to the employer involves the ongoing cost of
administration and operation of such a plan.
Adverse selection becomes a greater risk when employees can opt in and out of
various benefit plans.
Finally, while the Affordable Care Act (ACA) relaxed requirements for small
employers, cafeteria plans are subject to complex coverage and nondiscrimination
testing in order to comply with federal tax law.
Given that cafeteria plans are not all the same, describe the different types of
cafeteria plans allowable under IRC Section 125. - Answer-Cafeteria plans were given
their name because
benefits are offered to employees cafeteria-style, with plan participants selecting the
benefits they need. These optional benefits are purchased with dollars or credits
given to the participant as part of a benefit package. In some instances, employees
are not given any employer money to spend but can enhance their overall benefit
package by making tax-favored contributions to the cafeteria plan.
Generic terms would include such references as flexible benefit
programs, flexible compensation, choice plans and flex plans. If a plan includes only
pretax premium conversion, it often is referred to as a premium conversion plan,
premium-only plan or POP. While the different types of cafeteria plans vary in
complexity, at their core they are similar in that employees use the plan as a vehicle
for obtaining selected employee benefits on a tax-favored basis.
Discuss the characteristics of a premium conversion plan and why it is perceived
as a cafeteria plan in its simplest form. - Answer-In a premium conversion plan, there
are no employer contributions and the plan is
offered to employees so they may pay for their insurance costs on a tax-favored basis.
Because there are no employer contributions or flexible credits, this type of plan is
perceived as a cafeteria plan in its simplest form. A cafeteria plan is the only means
that can be used for employees to pay for insurance costs on a tax-favored basis.
As a general rule, which types of benefits typically provide a premium conversion
feature under a flexible benefit plan? - Answer-as a general rule, a premium conversion
feature is
only used for medical insurance (including dental, vision and other types of medical
coverage) and group term life insurance not in excess of $50,000.
Describe the workings of a cafeteria plan that includes FSAs - Answer-FSAs, also called
reimbursement
accounts. When an FSA is funded purely
by salary deferrals, the participant is choosing between two (or more if offered more
than medical coverage) benefits consisting of cash and qualified benefits. FSAs offer
