Chapter 9 Federal Tax Considerations For Health Insurance

1. For Group medical and Dental expensed insurance, what percentage of premium paid by the employer is deductible as a business expense?

50%

100%

60%

90%

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.

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.

2. Group Accidental Death and Dismemberment premiums are:

Fully contributory

Partially deductible to the employer

Deductible to the employer as a business expense

Not deductible to the employer

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.

Explanation

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.

3. Which benefits are subject to FICA withholdings for Social Security purposes?

Benefits paid to most qualified disabled employers

Benefits paid to disabled employees, which are attributed to the employer’s contribution

Benefits paid to unqualified employees

Benefits paid to unqualified employers

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Explanation

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4. Which of the following determines whether insurance benefits are taxed?

Contract provisions

Sub-Contract provisions

If the premiums were or were not taxed

State statutes

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.

Explanation

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.

5. 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?

$10,000

$2,500

$7,500

None

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.

Explanation

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.

6. 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 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

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

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.

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

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.

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.

7. 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?

None

7.5% Federal Income Tax

FICA

State Withholding

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.

Explanation

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.

8. 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?

No tax

Premium tax

All taxes

Income tax

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.

Explanation

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.

9. Under what type of policy would Excessive benefits paid, possibly be taxable as ordinary income to the Insured?

Long Term Care

Group Disability

Social Security

Indemnity Plan

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.

Explanation

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.

10. Benefits received from a Business Overhead expense policy:

Replace a disabled employer’s salary

Are not taxable

Are taxable

Replace an employee’s pension

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.

Explanation

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.

11. If a business pays premiums for a Key Employee Disability policy, which of the following is true about the tax consequences?

The benefits are taxable

The premiums must be paid with after-tax dollars

The benefits are not taxable

The premiums can be deducted from business expenses

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.

Explanation

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.

12. Which of the following is NOT true regarding benefits paid to disabled employees?

The benefits are attributable to the employer

Tax withholding is required for the first 6 months

They are exempt from the Social Security tax after 12 months

They are subject to FICA withholding for Social Security

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.

Explanation

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.

13. Under a Key Person Disability Income policy, premium payments:

Are made by the business and are tax-deductible

Are made by the business and are not tax-deductible

Are made by the employee and are not tax-deductible

Are made by the employee and are tax-free

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.

Explanation

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.

14. Which of the following is NOT correct concerning taxation of disability income benefits?

If the employer paid the premiums, income benefits are taxable to the insured as ordinary income

If the insured paid the premiums, any disability income benefits are tax free

If the benefits are for a permanent loss, they are not subject to income taxation no matter who paid the premium

If paid by the individual, the premiums are tax deductible

If the premiums for disability income benefits are paid by the individual, they are not tax deductible.

Explanation

If the premiums for disability income benefits are paid by the individual, they are not tax deductible.

15. Taxation on Individual Disability Income is best described as incorrect in which statement?

“If paid by the individual, the premiums are tax deductible”

“All Benefits are Tax Free”

“Premiums not Deductible”

“If contributory the part paid by the employer is taxable as income, the employees contribution is nontaxable”

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.

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.

16. Concerning group Medical and Dental insurance, which of the following statements is INCORRECT?"

Employee benefits are tax deductible the year in which they were received.

Employee paid premiums may be deducted if certain conditions are met.

Benefits received by the employee are free from federal income tax.

Premiums paid by the employer are deductible as a business expense.

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.

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.