TOOLS & TECHNIQUES OF LIFE INSURANCE PLANNING



TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING

11th Edition

College Course Materials

Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®

Associate Professor

CFP® Program Director

Personal Financial Planning Department

University of Missouri-Columbia

Please Note: Correct answers for each question are indicated in bold type. After each question, the number of the page containing information relevant to answering the question is given. When a calculation is necessary or the reasoning behind a given answer may be unclear, a brief rationale for the correct answer is also given.

Part B: Employee Benefit Planning

Disability

Chapter 50: Sick Pay (Short-Term Disability)

True/False

50.1 By law, sick pay or short-term disability benefits must be explained to employees in a written summary plan description

50.2 The definition of disability is typically more restrictive in short-term disability plans than in long term disability plans.

50.3 Disability benefits are subject to federal income tax withholding if paid directly by employer.

Answers:

50.1 True [p. 379]

50.2 False [p. 380]

50.3 True [p. 380]

Multiple Choice

50.4 Which of the following can an employer chose when designing a short-term disability or sick pay policy?

a. who is covered

b. level of benefits

c. terms and conditions of coverage

d. all of the above

e. only b and c

Answer: D [p. 379]

50.5 Common characteristics of a sick pay plan include

a. coverage for full time employees only

b. providing 100% of salary for up to 6 months

c. allowing carryover of unused benefits subject to employer imposed maximum

d. a and c

e. b and c

Answer: D [p. 379]

50.6 Which of the following is (are) true when comparing short-term disability with long-term disability

a. short-term disability typically covers more employees than long term disability

b. long-term disability policies use a ‘regular occupation’ definition of disability instead of the “any occupation” definition used in short-term disability policies

c. short-term disability policies are typically more generous

d. a and b

e. a and c

Answer: E [p. 380]

Application

50.7 Crocker Technologies wants to provide a sick pay plan that has more favorable benefits for their executives than for their line workers. Under ERISA, however, such an approach would be deemed discriminatory and thus disallowed.

a. true

b. false

Answer: B [p. 382]

50.8 Harriet Jacobs earns $140 per day as an associate manager at Praxton Manufacturing. Praxton provides all employees with three sick days a month at full pay. Unused sick pay benefits can be accumulated to a maximum of 90 days. Harriet has accumulated 5 days of unused sick pay. Praxton also pays premiums on short-term disability insurance for all employees. The short-term disability insurance pays 80% of earnings from 10 business days after onset of illness or injury to return to work or six months, whichever occurs first.

Last month, Harriet was in an auto accident and broke both legs and her left arm. She was unable to work for three full weeks. How much income will Harriet receive while she is unable to work?

a. $420

b. $560

c. $1260

d. $1680

e. $2100

Answer: C [p. 379 – Harriet is out 3 full weeks or 15 working days. She has 5 days of sick pay so she will receive full pay for 5 days $140 x 5 = $700. The short-term disability policy will pay beginning business day 10 from onset of injury. Days 10 to 15, Harriet will receive 80% of her regular pay or ($140 x 5) x .80 = $560. Thus, all together, Harrier will receive $700 + $560 = $1260 from a combination of her sick pay and short-term disability policy. Notice she receives no income for the 5 days after her sick pay benefits have ended and her short-term disability have not yet begun.]

50.9 Albert Johnson pays part of the premium for a short-term disability insurance policy through payroll deductions. Albert can deduct the cost of the policy when he files his personal income tax.

a. true

b. false

Answer: B [p. 380]

50.10 Movin’ On, a local moving and storage company, pays short-term disability insurance premiums for the company’s 30 employees. These premiums are treated as wages and are subject to Social Security (FICA) and employment taxes (FUTA).

a. true

b. false

Answer: B [p. 382]

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