Chapter 9 Federal Tax Considerations For Health Insurance
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- 1.
Karen purchased a Long Term Care Policy and her Advisor informed her that the premiums would qualify as a tax deductible expense. Karen is concerned about the IRS taxing her benefits. What taxes will have to be paid on these benefits?
- A.
None
- B.
7.5% Federal Income Tax
- C.
FICA
- D.
State Withholding
Correct Answer
A. NoneExplanation
The correct answer is None. Long term care insurance benefits are generally not taxable. The premiums paid for the policy may be tax deductible, but the benefits received are typically not subject to income tax. FICA taxes and state withholding do not apply to long term care insurance benefits.Rate this question:
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- 2.
For Group medical and Dental expensed insurance, what percentage of premium paid by the employer is deductible as a business expense?
- A.
50%
- B.
100%
- C.
60%
- D.
90%
Correct Answer
B. 100%Explanation
The correct answer is 100%. In group medical and dental expense insurance, the employer can deduct the entire premium amount as a business expense. This means that the employer can claim a tax deduction for the full amount they pay towards the insurance premiums for their employees. This deduction helps to reduce the employer's taxable income and can result in significant savings for the business.Rate this question:
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- 3.
If a business pays premiums for a Key Employee Disability policy, which of the following is true about the tax consequences?
- A.
The benefits are taxable
- B.
The premiums must be paid with after-tax dollars
- C.
The benefits are not taxable
- D.
The premiums can be deducted from business expenses
Correct Answer
C. The benefits are not taxableExplanation
If a business pays premiums for a Key Employee Disability policy, the benefits received from the policy are not taxable. This means that the business does not have to pay taxes on the benefits it receives. Additionally, the premiums for the policy can be deducted from the business expenses, providing a potential tax benefit for the business.Rate this question:
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- 4.
Concerning group Medical and Dental insurance, which of the following statements is INCORRECT?”
- A.
Employee benefits are tax deductible the year in which they were received.
- B.
Employee paid premiums may be deducted if certain conditions are met.
- C.
Benefits received by the employee are free from federal income tax.
- D.
Premiums paid by the employer are deductible as a business expense.
Correct Answer
A. Employee benefits are tax deductible the year in which they were received.Explanation
The statement "Employee benefits are tax deductible the year in which they were received" is incorrect. Employee benefits are not tax deductible in the year they are received. Instead, they are typically tax-free for the employee, meaning they are not subject to federal income tax. However, the premiums paid by the employer for group medical and dental insurance are deductible as a business expense. Additionally, employee-paid premiums may be deductible if certain conditions are met.Rate this question:
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- 5.
Taxation on Individual Disability Income is best described as incorrect in which statement?
- A.
“If paid by the individual, the premiums are tax deductible”
- B.
“All Benefits are Tax Free”
- C.
“Premiums not Deductible”
- D.
“If contributory the part paid by the employer is taxable as income, the employees contribution is nontaxable”
Correct Answer
A. “If paid by the individual, the premiums are tax deductible”Explanation
The statement "If paid by the individual, the premiums are tax deductible" is incorrect because premiums paid by the individual for disability income insurance are generally not tax deductible.Rate this question:
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- 6.
Which benefits are subject to FICA withholdings for Social Security purposes?
- A.
Benefits paid to most qualified disabled employers
- B.
Benefits paid to disabled employees, which are attributed to the employer’s contribution
- C.
Benefits paid to unqualified employees
- D.
Benefits paid to unqualified employers
Correct Answer
B. Benefits paid to disabled employees, which are attributed to the employer’s contribution -
- 7.
Which of the following determines whether insurance benefits are taxed?
- A.
Contract provisions
- B.
Sub-Contract provisions
- C.
If the premiums were or were not taxed
- D.
State statutes
Correct Answer
C. If the premiums were or were not taxedExplanation
The taxation of insurance benefits is determined by whether the premiums paid for the insurance policy were taxed or not. If the premiums were taxed, then the benefits are generally not taxed. However, if the premiums were not taxed, then the benefits may be subject to taxation. The other options listed, such as contract provisions, sub-contract provisions, and state statutes, do not directly determine whether insurance benefits are taxed or not.Rate this question:
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- 8.
Lisa and Lena own a shop together. They are partners in their business of 2 years. Lisa is a designer and Lena is a seamstress. Lisa worries that if Lena becomes disabled, that would affect their business. She inquires about purchasing disability buy-sell insurance. What does her agent tell her about that type of policy?
- A.
A Disability Buy-Sell plan protects the insured in case of disability. It allows the policyowner to buy out the partner’s interest in the business, but when benefits are paid out, taxes must be paid
- B.
The agent suggests a Key Person Disability plan so that Lisa can buy out Lena’s portion because a Buy-Sell policy won’t give Lisa the cash to purchase Lena’s portion of the business
- C.
A Disability Buy-Sell plan protects the insured in case of disability. It allows the policyowner to buy out the partner’s interest in the business, and the benefits are tax free.
- D.
The agent informs the ladies that the premiums aren’t deductible, and benefits are not tax free. He advises them that the plan is not a sensible purchase for them at the time
Correct Answer
C. A Disability Buy-Sell plan protects the insured in case of disability. It allows the policyowner to buy out the partner’s interest in the business, and the benefits are tax free.Explanation
The correct answer is that a Disability Buy-Sell plan protects the insured in case of disability. It allows the policyowner to buy out the partner's interest in the business, and the benefits are tax free. This means that if Lena becomes disabled, Lisa can use the insurance benefits to buy out Lena's portion of the business without having to pay taxes on the money received. This type of policy provides financial protection and ensures the continuity of the business in the event of a partner's disability.Rate this question:
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- 9.
In an individual long-term care insurance plan, the insured is able to deduct the premiums from taxes. What income taxation will be imposed on the benefits received?
- A.
No tax
- B.
Premium tax
- C.
All taxes
- D.
Income tax
Correct Answer
A. No taxExplanation
The benefits received from an individual long-term care insurance plan are not subject to income taxation. This means that the insured does not have to pay taxes on the benefits received. This is a benefit of having long-term care insurance, as it allows individuals to receive financial assistance for their long-term care needs without having to worry about additional taxes.Rate this question:
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- 10.
Benefits received from a Business Overhead expense policy:
- A.
Replace a disabled employer’s salary
- B.
Are not taxable
- C.
Are taxable
- D.
Replace an employee’s pension
Correct Answer
C. Are taxableExplanation
The benefits received from a Business Overhead expense policy are taxable. This means that the money received from the policy will be subject to taxes.Rate this question:
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- 11.
Under a Key Person Disability Income policy, premium payments:
- A.
Are made by the business and are tax-deductible
- B.
Are made by the business and are not tax-deductible
- C.
Are made by the employee and are not tax-deductible
- D.
Are made by the employee and are tax-free
Correct Answer
B. Are made by the business and are not tax-deductibleExplanation
Premium payments under a Key Person Disability Income policy are made by the business and are not tax-deductible. This means that the business cannot claim these premium payments as a tax deduction.Rate this question:
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- 12.
Which of the following is NOT correct concerning taxation of disability income benefits?
- A.
If the employer paid the premiums, income benefits are taxable to the insured as ordinary income
- B.
If the insured paid the premiums, any disability income benefits are tax free
- C.
If the benefits are for a permanent loss, they are not subject to income taxation no matter who paid the premium
- D.
If paid by the individual, the premiums are tax deductible
Correct Answer
D. If paid by the individual, the premiums are tax deductibleExplanation
If the premiums for disability income benefits are paid by the individual, they are not tax deductible.Rate this question:
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- 13.
Which of the following is NOT true regarding benefits paid to disabled employees?
- A.
The benefits are attributable to the employer
- B.
Tax withholding is required for the first 6 months
- C.
They are exempt from the Social Security tax after 12 months
- D.
They are subject to FICA withholding for Social Security
Correct Answer
C. They are exempt from the Social Security tax after 12 monthsExplanation
Disabled employees are not exempt from the Social Security tax after 12 months. This means that even after 12 months, disabled employees are still subject to FICA withholding for Social Security.Rate this question:
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- 14.
Group Accidental Death and Dismemberment premiums are:
- A.
Fully contributory
- B.
Partially deductible to the employer
- C.
Deductible to the employer as a business expense
- D.
Not deductible to the employer
Correct Answer
C. Deductible to the employer as a business expenseExplanation
Group Accidental Death and Dismemberment (AD&D) premiums are deductible to the employer as a business expense. This means that the employer can deduct the cost of these premiums from their taxable income when filing their taxes. This deduction helps to reduce the employer's overall tax liability.Rate this question:
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- 15.
Under what type of policy would Excessive benefits paid, possibly be taxable as ordinary income to the Insured?
- A.
Long Term Care
- B.
Group Disability
- C.
Social Security
- D.
Indemnity Plan
Correct Answer
A. Long Term CareExplanation
Excessive benefits paid under a Long Term Care policy may be taxable as ordinary income to the Insured. This is because Long Term Care policies are designed to provide coverage for extended periods of care, typically for individuals who are unable to perform certain activities of daily living. If the benefits paid exceed the actual expenses incurred for long-term care, the excess amount may be considered taxable income.Rate this question:
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- 16.
Jason receives anannual disability benefit of $10,000. His employer contributed 75% of the premium. How much of Jason's benefits is subject to income tax?
- A.
$10,000
- B.
$2,500
- C.
$7,500
- D.
None
Correct Answer
C. $7,500Explanation
Jason's annual disability benefit is $10,000. His employer contributed 75% of the premium, which means that Jason paid 25% of the premium himself. Since Jason paid a portion of the premium, only the portion of the benefit that he paid for is subject to income tax. Therefore, $7,500 of Jason's benefits is subject to income tax.Rate this question:
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