Introduction to Risk Management and Insurance, 10e (Dorfman/Cather)
Chapter 19 Employee Benefits
1) Which of the following patterns would not be allowed in determining the face amount of life
insurance in a qualified group life insurance plan?
A) 150% of gross annual wage
B) All hourly workers $100,000, all salaried workers $150,000
C) $50,000 for each employee
D) Bill Gates, CEO, $500,000 and all other workers $100,000
2) Which of the following is not a characteristic of group insurance?
A) Benefits are individually selected by the employee.
B) One master contract is provided to the employer.
C) For larger employer groups, there is no medical exam required for coverage.
D) Group insurance premiums are lower than comparable individual coverage.
3) Which of the following is not a goal of the government, employer or employee in providing
employee benefits?
A) Raise tax revenue
B) Provide security for employees
C) Retain, attract and compensate employees
D) Encourage savings for retirement
4) A defined contribution retirement plan can be advantageous for an employer because:
A) the employer may take the tax advantages without funding the plan
B) cost containment can be effective
C) only individuals that retire will receive benefits and therefore the costs are reduced
D) the investment risk is shifted to the employee after the contribution is made
5) Which one of the following is not a typical exclusion/limitation in group major medical plans?
A) Cosmetic surgery
B) Custodial care
C) Emergency medical care
D) Mental health expenses
6) Characteristics of group insurance include all the following except:
A) one master contract is issued to the employer; individual certificates of coverage are issued to
employees
B) the group is underwritten as a whole
C) the group was not formed to purchase insurance on a group basis
D) pre-existing health impairments are always covered
7) Which of the following is not required for qualification of a group health or disability plan?
A) Must cover all full-time and part-time employees from the first day of work
B) Must be in writing
C) Must create legally enforceable rights for the employees
D) Must be for the exclusive benefit of the employees
8) An integrated disability income plan is one that:
A) limits the amount of coverage to 50 percent of pre-disability take home wage
B) coordinates the waiting period with other sick leave and personal leave plans
C) requires a participation provision such as 20/80 when paying for eligible expenses
D) coordinates the benefits under Social Security and the disability income plan
9) Under ERISA, which of these is not required of a qualified plan?
A) Plans must cover all full-time employees with at least one year of service.
B) Plans should not provide disproportionately high benefits to the highly compensated
employees.
C) Defined benefit plans must be funded in advance according to ERISA requirements.
D) All employees must receive the same percentage of wages as benefits.
10) Which of the following is not a reasonable justification of employee benefits from the point
of view of the employer?
A) Take advantage of business tax benefits
B) Retain, motivate and attract employees
C) Can legally funnel disproportionately high benefits to the owners on a tax advantaged basis
D) Allows freedom of benefit selection as opposed to the government mandating employee
minimum benefits
11) From an employee’s perspective, tax deferral is beneficial because:
A) current taxes are increased in return for reduced taxes later
B) money can be invested that would ordinarily be paid in current income taxes
C) tax rates in the future are guaranteed to be lower
D) since tax policy varies, there may be no tax on retirement income in the future
12) Because medical expenses may be covered by more than one policy, health insurance
policies normally contain a ________ clause to prevent unnecessary termination of the insured.
A) coordination of benefits
B) reinstatement
C) pro-rata
D) cost containment
13) Which of the following is not an employee benefit provided by private insurance?
A) Group health insurance
B) Unemployment insurance
C) Pension plans
D) Group life insurance
14) Which of the following plans provide retirement benefits?
A) 401(k) plans
B) Cafeteria plans
C) 403(b) plans
D) Both A and C
15) Suppose you have a 401(k) plan, and you would like to draw the money out when you are
age 45. You want the money to send your child to college. What will happen if you draw all the
money out and close the account?
A) You will have to pay income taxes on the withdrawal.
B) You will have to pay income taxes, plus a tax penalty, on the withdrawal.
C) You will receive the money tax-free, since you paid taxes on it when you deposited it.
D) You will only have to pay taxes on the amount of money drawn out that represents interest
earned on your deposits.
16) Which of the following are potential benefits of a 401(k) or 403(b) plan?
I. You can make yourself low-interest loans.
II. You can save for retirement.
III. Your contributions to the plan are tax-free.
IV. Your contributions to the plan are tax-deferred.
A) I, II, III and IV
B) I, II, and III only
C) I, II and IV only
D) I and II only
17) Which of the following is not a characteristic of group insurance provided by an employer?
A) Many persons are covered under one contract.
B) Volume discount results in a lower cost for the coverage.
C) Evidence of insurability usually is not required.
D) Employers cannot require employees to share in the cost.
18) Which of the following statements about Roth IRAs is false?
A) Contributions made to a Roth IRA are not tax deductible, but are tax-free when withdrawn.
B) Withdrawals of contributions made at any time are not subject to taxation.
C) Withdrawals of investment earnings are not subject to taxation as long as the taxpayer is at
least 55 years old and the Roth IRA has existed for at least five years.
D) Withdrawals of investment earnings are not subject to taxation if they are used to (up to
$10,000 worth) to buy a first home, and if the Roth IRA has existed for at least five years.
19) What does ERISA stand for?
A) Employer Retirement Income Security Act
B) Employee Retirement Income Security Act
C) Employee Restitution and Income Security Act
D) Employer Required Insurance Standards Amendment
20) When you are “100% vested” in a pension plan, what does that mean?
A) You own 100% of your contributions, but you do not own the employer’s contributions to the
plan.
B) You own 100% of the employer’s contributions, but you do not own your contributions to the
plan.
C) You own 100% of your contributions to the plan.
D) You own 100% of the employer’s contributions to the plan.
21) The primary purpose of a 401(k) plan is to:
A) save for retirement on a tax-deferred basis
B) save for retirement on a tax-free basis
C) save for retirement and have your employer match your contributions, all on a tax-free basis
D) have a forced savings plan for emergencies
22) Jane is offered a pension plan through her employer. The plan agrees that if she will deposit
6% of her salary to a retirement account, the employer will deposit a matching amount. When
Jane retires, whatever money is in the account will belong to her. What is the proper name for
this type of pension plan?
A) A vested pension plan
B) A defined contribution plan
C) A defined benefit plan
D) A tax-deferred savings plan (401(k))
23) Our government gets several advantages from the private employee benefit systems. Which
of the following is not one of those advantages?
A) Fewer people are dependent on welfare programs.
B) The burden on the Social Security program is reduced if people have private pensions and life
insurance.
C) Government control of the economy is avoided if the funds to finance benefits remain in
private hands.
D) All of the above are advantages.
24) The Family and Medical Leave Act:
A) applies to employers having 15 or more employees
B) gives employees the right to have paid leave for the birth of a child
C) gives employees the right to have unpaid leave to care for a foster child
D) does not require employees to give employers medical evidence of the illness that requires
their leave
25) Which of the following statements about IRAs is false?
A) Annual contributions made to the account are tax-deductible up to certain amounts.
B) They earn tax-deferred investment income.
C) Only people in certain income categories can make deductible IRA contributions.
D) The maximum annual deductible contribution is $4,000 per person.
26) Which of the following statements about IRAs is false?
A) Withdrawals made after age 59-1/2 are taxed as ordinary income in the year they are
received.
B) Only deductible contributions and tax deferred interest paid out during retirement are taxed as
income.
C) Early withdrawal from an IRA causes a 20% tax penalty to be incurred.
D) Withdrawal of IRA funds must begin by age 70-1/2.
27) Which of the following is/are advantages of tax-deferred income benefits?
I. Postponing tax payments allows interest to accrue on dollars owed to the government.
II. Deferral allows compound interest to also accumulate on a tax-deferred basis.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
28) The maximum tax-deductible contribution an employer can take on a profit-sharing plan
distribution is:
A) $25,000 per employee
B) 25% of all eligible employees’ compensation
C) 50% of all eligible employees’ compensation
D) 5% of after-tax corporate profits
29) In the year 2012, what is the maximum amount you can contribute to a 401(k) plan per year?
A) 10% of your salary
B) $10,000
C) 12.4% of your salary, or, $11,000 (whichever is greater)
D) $17,000
30) The maximum amount that can be contributed to an IRA is:
A) 2% of your salary or $4,000, whichever is less
B) $3,000 in 2012, and $5,000 after 2012
C) $5,000 in 2012
D) $6,000 in 2012, and then it increases $500 per year through 2020
31) The traditional “tripod approach” to economic security assumed that who would provide
economic security for the individual worker?
A) The employer and the worker
B) The employer and the government
C) The government and the worker
D) The employer, the worker, and the government
32) The monthly fee that HMOs charge employers is called the:
A) capitation payment
B) capitation and insurance premium
C) insurance premium
D) subscription fee
33) In the historic tripod approach to economic security, how much of an individual’s economic
security was the employer anticipated to provide?
A) 1/4
B) 1/3
C) 1/2
D) 3/4
34) What is the main reason for the increase in employee benefit costs during the last 15 years?
A) Cost of funding retirement income
B) Cost of sick leave and worker absenteeism
C) Cost of health insurance
D) None of the above
35) Instead of purchasing group health insurance, many employers now self-fund health benefits
for their employees. Who normally administers such a self-funded health program?
A) The risk management department
B) The human resources department
C) State health insurance pools
D) A third-party administrator
36) The popularity of defined benefit pension plans has:
A) increased
B) decreased
C) remained about the same
D) become so low that these plans are no longer legal
37) Mary Jane divorces her husband Dustin. Dustin was previously covered by Mary Jane’s
group health insurance plan offered by her employer. How long can Dustin continue his health
coverage, according to COBRA provisions?
A) 0 months
B) 18 months
C) 24 months
D) 36 months
38) Carlos and Mary are married, and covered under Carlos’ group health plan provided by his
employer. Carlos dies. How long can Mary continue her health coverage, according to COBRA
provisions?
A) 0 months
B) 18 months
C) 24 months
D) 36 months
39) HIPPA applies to group health plans that cover ________ or more employees.
A) 2
B) 15
C) 20
D) 50
40) According to HIPPA, which of the following reasons can be used to legally exclude an
employee from the employer’s group health plan?
A) Health status
B) Medical history
C) Disability
D) None of the above
41) Wex Enterprises hires you as a benefit consultant. Mr. Wex wants to reduce the number of
employees covered by the company’s group health insurance plan. Which of the following
reasons would you advise him to use to legally determine who to exclude from the health
insurance plan?
A) Health status of the employee
B) Job classification (hourly employee versus salaried employee)
C) Genetic information about employees
D) Disability of employees
42) A cash balance pension plan guarantees the participating employee:
A) nothing
B) a minimum interest rate on the employee’s retirement savings
C) a minimum monthly pension amount for the first 10 years of retirement
D) none of the above
43) Which of the following is not a factor that has caused the decline in defined benefit plans in
the U.S.?
A) Increasing mobility of the workforce
B) Global competition causing employers to reduce expenses
C) Reduced employer liability for pension plan results under a defined benefit plan
D) Employee, and not the employer, bears the investment risk of a defined contribution plan
44) The traditional American method of providing retirement and health benefits is best
described as a democratic socialist approach.
45) Generally, the justification from the employer’s point of view in providing employee benefits
is to attract, retain and motivate employees.
46) The term “tax deferral” refers to the ability to pay taxes at a later date on otherwise currently
taxable income.
47) One requirement of group insurance is that the group be formed for the purpose of
purchasing coverage.
48) The face amount of group term life insurance is typically not selectable by the individual
employee and therefore can be based on salary.
49) A group disability plan that considers Social Security disability benefits is referred to as an
integrated plan.
50) Major medical insurance provides first dollar coverage for any in-hospital expenses.
51) A defined contribution retirement plan defines the amount of benefits to be contributed to the
employee during retirement.
52) A qualified benefit plan must not discriminate in favor of highly compensated employees.
53) Short term disability programs continue the employee’s salary for six or fewer months.
54) Why are employers interested in providing employee benefits to their employees?
55) What are the rules to be considered a qualified plan?
56) Explain how employees are taxed on group life insurance supplied as an employee benefit.
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57) Explain the difference between a PPO and an HMO.
58) Explain the difference between a defined contribution and a defined benefit plan.
59) Explain the advantages to an employer of a defined benefit pension plan versus a defined
contribution pension plan.