D8. Federal Tax Considerations for Health Insurance

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  1. Group health insurance benefits are NOT taxable to the employee, EXCEPT for:
    A) Accidental Death and Dismemberment
    B) Disability income
    C) Medical expense
    D) Dental expense
    • B) Disability income
    • Benefits received by an employee from a group Disability Income policy are taxable to the employee to the extent that they are attributable to that portion of the premium the employer paid. For example, if the employer paid 75% of the premium and the employee paid 25%, the employee would have to pay tax on 75% of the benefits received. Benefits received from medical expense, dental expense and AD&D are not taxable to the employee.
  2. What percentage of group Accidental Death and Dismemberment (AD&D) benefits are taxable to the employee:
    A) None
    B) 25%
    C) 10%
    D) 20%
    • A) None
    • Like life insurance, AD&D benefits are not taxable, regardless of who paid the premium.
  3. The Internal Revenue Service may tax which of the following benefits, if any, like wages and salary:
    A) Welfare benefits
    B) Social Security Disability benefits
    C) Workers' Compensation benefits
    D) None of the above
    • D) None of the above
    • Although Social Security retirement benefits may be taxable, none of those listed here are.
  4. A self-employed individual can deduct what percentage of the premium they pay for disability insurance from their adjusted gross income:
    A) Zero
    B) 75%
    C) 25%
    D) 50%
    • A) Zero
    • A self-employed individual is not allowed to deduct the premium they pay for their disability insurance.
  5. All of the following are true regarding the tax implications of medical expense insurance purchased by a partnership to cover all of the business partners, EXCEPT:
    A) Premiums paid by the partnership are not taxable to the business partners
    B) Each partner may deduct their proportionate share of the premiums paid
    C) Benefits paid to the business partners are tax free
    D) The partnership may deduct 100% of the premium paid
    • B) Each partner may deduct their proportionate share of the premiums paid
    • Premiums for health insurance paid by a partnership are tax deductible to the partnership, not the individual partners, as a business expense. Partnerships, as a business entity, keep track of their income and expenses over a period of time. After their expenses have been subtracted, the partnership will distribute their "net profits" to the partners, which will then be reflected on their individual tax returns.
  6. If an employee pays 25% of the premium for a disability policy and receives $800 in monthly benefits, how much would be taxable:
    A) $100
    B) $800
    C) $600
    D) $200
    • C) $600
    • Since there is no answer of zero, you can assume this is a disability income policy. In a group disability income policy, the percentage of premium the employer pays is attributed to the taxable percentage of benefits. So, since the employer paid 75% of the premium, 75%, or $600, of the benefits would be taxable.
  7. An employee is covered by a group disability income policy where they work and have to contribute 25% of the premium. If their monthly benefit is $4,000, how much of their benefit will be taxable if they become disabled:
    A) All
    B) $3,000
    C) $1,000
    D) None
    • B) $3,000
    • This is "contributory" group disability income insurance, since the employee has to pay part of the premium. If they pay 25% of the premium, then the employer must be paying the other 75%. That portion of the benefits that are attributable to what the employer pays for are taxable as ordinary income to the employee, which in this case, would be $3,000. That portion that the employee receives that is attributable to what they paid for, which in this case would be $1,000, is not taxable.
  8. Distributions that are taken from a Health Savings Account (HSA) that are used to purchase a new sport utility vehicle are:
    A) Taxable as ordinary income
    B) Taxable as capital gains
    C) Taxable as ordinary income plus a 20% penalty
    D) Not taxable
    • C) Taxable as ordinary income plus a 20% penalty
    • Distributions taken from HSAs that are used to pay other than qualified medical expenses are includable in gross income and are subject to a 20% penalty.
  9. Which two types of disability income insurance have tax deductible premiums:
    A) Group disability income and partnership buy out
    B) Individual disability income and key person
    C) Business overhead and group disability income
    D) Business overhead and key person
    • C) Business overhead and group disability income
    • Group disability income premiums paid by an employer and business overhead insurance premiums are both tax deductible, but both have taxable benefits.
  10. Which of the following describes the tax implications of a Key Person disability income policy purchased by an employer to cover a valued employee:
    A) Benefits are taxable to the employer
    B) Benefits are taxable to the employee
    C) Premiums are not tax deductible but benefits are not taxed
    D) Premiums are tax deductible as a business expense
    • C) Premiums are not tax deductible but benefits are not taxed
    • Key Person disability insurance is purchased by an employer to cover the disability of a key or valued employee. The employer pays the premium, and if the key person becomes disabled, the benefits are paid to the employer to pay for the expenses related to hiring and training a replacement. The premiums are not tax deductible, but the benefits are not taxable.
  11. If an employee pays 100% of their premium for their group disability income insurance coverage, what percentage of their monthly benefit will be taxable if they become disabled:
    A) None
    B) 100%
    C) 50%
    D) 75%
    • A) None
    • Since the employee paid 100% of their group disability income premium, none of the benefits would be taxable. But let's reverse it: if the employer paid 100% of the premiums, then 100% of the benefits would be taxable.
  12. Benefits paid by which of the following types of health insurance are taxable:
    A) Medical expense
    B) Individual disability income
    C) Business overhead
    D) Key person
    • C) Business overhead
    • Both business overhead insurance and group disability income insurance have tax deductible premiums, but the benefits payable are taxable.
  13. How much of the premium that a sole proprietor pays for their family medical expense insurance is tax deductible:
    A) None
    B) 100%
    C) 75%
    D) 50%
    • B) 100%
    • Sole proprietors and business partners are entitled to deduct 100% of the premiums they pay for their individual or family medical expense insurance as a business expense.
  14. What percentage of contributions made to an HSA (Health Savings Account) are taxable:
    A) 28%
    B) None
    C) 50%
    D) 25%
    • B) None
    • Contributions to an HSA are made in before tax dollars, meaning they are not taxable.
  15. On a group disability income policy, an employer pays 60% of the premiums on behalf of the covered employees. If an employee who has gross income of $5,000 a month becomes totally disabled, how much of their monthly benefit will be taxable:
    A) $5,000
    B) $2,000
    C) None
    D) $3,000
    • D) $3,000
    • On group disability income, that portion of the benefits that are attributable to the portion of the premium paid by the employer are taxable to the employee. Since the employer pays 60% of the premiums, $3,000 of the $5,000 monthly benefit would be taxable.
  16. All of the following are required in order to establish an HSA, EXCEPT:
    A) Have a plan that includes coverage for prescription drugs
    B) To be under age 65
    C) Have a high deductible plan
    D) Have a plan that includes maximum out-of-pocket expenses
    • A) Have a plan that includes coverage for prescription drugs
    • In order to establish an HSA you must be under age 65, not be enrolled in Medicare, have a high deductible plan and have a plan with maximum out-of-pocket limits. There is no requirement that the plan include coverage for prescription drugs.
  17. What are the tax implications for the premiums paid by the employer on a non-contributory group disability income plan and the benefits paid to employees:
    A) Premiums are not deductible for employer; benefits are not taxable to employees
    B) Premiums are deductible for employer; benefits are taxable to employees
    C) Premiums are deductible for employer; benefits are not taxable to employees
    D) Premiums are not deductible for employer; benefits are taxable to employees
    • B) Premiums are deductible for employer; benefits are taxable to employees
    • On group disability income insurance, employers may tax deduct all premiums they pay as a business expense. However, all benefits paid to employees that are attributable to the premiums paid by the employer are taxable to the employees. In contrast, on individual disability income policies, premiums paid by individuals are not tax deductible and benefits received are not taxable.
  18. Which of the following is generally true regarding the tax implications of individual health insurance coverage:
    A) Benefits are taxable, but premiums are not tax deductible
    B) Benefits are not taxable, but premiums are tax deductible
    C) Premiums are not tax deductible, but benefits are not taxable
    D) Premiums paid are not tax deductible, but benefits are taxable
    • C) Premiums are not tax deductible, but benefits are not taxable
    • Generally, premiums paid for individual health insurance are not tax deductible and benefits are not taxable. However, an exception applies to premiums for individual medical expense and qualified LTC insurance, which are deductible to the extent that they exceed 10% of the individual's adjusted gross income.
  19. All of following are true about Health Savings Accounts (HSAs), EXCEPT:
    A) Earnings are tax deferred
    B) Contributions are tax deductible
    C) Qualified medical distributions are tax fee
    D) They are subject to year-end tax penalties
    D) They are subject to year-end tax penalties
    (this multiple choice question has been scrambled)
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D8. Federal Tax Considerations for Health Insurance
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Federal Tax Considerations for Health Insurance DISABILITY
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