Employee Costs and Fringe Benefits - See Special Enrollment Exam

1. How much of the discounts Meg received is includible in her 2025 gross income?
   Answer: $120 IRC § 132(c) excludes qualified employee discounts, but a merchandise discount is excludable only up to the employer's gross profit percentage of the price offered to customers, and a service discount only up to 20% of that price. Merchandise: the actual discount is $600 ($2,000 - $1,400); the excludable amount is $500 (25% of $2,000); so $100 is taxable. Repair service: the actual discount is $60 ($200 - $140); the excludable amount is $40 (20% of $200); so $20 is taxable. Total $120. Choice A treats both discounts as fully excludable and ignores the statutory limits. Choice B taxes only the excess service discount but treats the entire merchandise discount as excludable. Choice C taxes only the excess merchandise discount but treats the entire service discount as excludable.
2. For a given month in 2025, what amount, if any, must an employee include in gross income for these benefits?
   Answer: $75, because the transit pass exceeds the $325 monthly limit by $75 and the parking benefit is within its separate $325 monthly limit. Under IRC § 132(f), qualified transportation fringes are excludable from gross income up to monthly limits, and for 2025 the limits are $325 for transit/vanpool and $325 for qualified parking, applied separately. The $300 parking benefit is fully excludable; the $400 transit pass is excludable only up to $325, so $75 is included. Choice C is correct. Choice A ignores the monthly cap. Choice B treats the two category limits as a single $325 ceiling, producing $375. Choice D treats all employer-provided transportation as taxable, contrary to § 132(f).
3. During each month of 2025, an employer provides an employee with qualified parking worth $400 and a transit pass worth $300. The employee makes no contribution toward either benefit. What amount of the combined monthly value is included in the employee's gross income?
   Answer: $75 IRC §132(f)(2) limits the exclusion for qualified transportation fringes. For 2025, the monthly cap is $325 for transit pass/commuter highway vehicle transportation and a separate $325 cap for qualified parking. The transit pass is entirely within its cap, so none of its value is taxable. The parking excess is $400 − $325 = $75, and that excess is includible in wages. Choice A ignores the dollar caps. Choice B would tax the transit pass even though it is within the transit cap. Choice C applies a single $325 combined cap to both benefits ($400 + $300 − $325 = $375), but the transit and parking caps are separate. Choice D is correct.
4. An employer maintains a §125 cafeteria plan with a health flexible spending arrangement that allows the maximum carryover permitted by IRS guidance. For 2025, the salary-reduction limit is $3,300. After all timely claims for 2025 are submitted, an employee has contributed $3,300 to the health FSA and has $850 of unused benefits. Which statement is correct?
   Answer: The employee may carry over $660 to 2026; the $190 balance is forfeited, and the carryover does not count against the next year's salary-reduction contribution limit. IRC § 125(i); Notice 2013-71, as modified by Notice 2020-33; Rev. Proc. 2024-40. For 2025 the health FSA salary-reduction limit is $3,300, and a plan may permit unused amounts of up to 20% of that limit, or $660, to be carried over to the next plan year. The carryover does not count against the 2026 salary-reduction limit, and it is not included in income. Any unused amount above the carryover maximum is forfeited under the use-or-lose rule: $850 − $660 = $190 is forfeited. Choice A is correct. Choice B is wrong because the carryover guidance permits a plan to allow a limited carryover; the use-or-lose rule applies only to the excess. Choice C is wrong because a forfeited amount is not paid to the employee and is not includible in the employee's gross income. Choice D is wrong twice: the carryover is capped at $660, not the full $850, and a carryover does not reduce the employee's 2026 salary-reduction limit.
5. How much of the discount must Dana include in gross income as wages?
   Answer: $150, because the discount exceeds the excludable gross-profit-percentage portion by that amount. Under IRC § 132(c), a qualified employee discount on goods is excludable only up to the employer's gross profit percentage times the price offered to customers. Dana's discount is $400 ($1,000 − $600), but only $250 (25% of $1,000) is a qualified employee discount, so $150 is taxable wages. Choice A is correct. Choice B ignores the gross-profit limit. Choice C applies the 20% cap that applies only to discounts on services. Choice D treats the whole discount as taxable, ignoring the exclusion.
6. How is the coverage treated for Marcus for 2025?
   Answer: Marcus must include the greater of the actual cost or the Table I cost of the entire $100,000 of group-term life insurance coverage. IRC § 79(a) generally excludes the cost of the first $50,000 of group-term life insurance and taxes the excess under Table I. Under IRC § 79(d), however, if the plan discriminates in favor of key employees, the $50,000 exclusion is unavailable to key employees, and the key employee must include the greater of the actual cost or Table I cost of the entire coverage. Choice D is correct. Choice A states the nondiscriminatory rule. Choice B is wrong because the employer's deduction is not disallowed by § 79(d). Choice C uses only actual premium cost and ignores the Table I comparison and the loss of the $50,000 exclusion.
7. Ignoring K's wages, how much of the benefits listed above is includible in K's 2025 gross income?
   Answer: $12,000 IRC § 106(a) excludes employer-paid group health plan premiums. IRC § 132(f) limits the transit-pass exclusion to $325 per month in 2025. IRC § 132(g)(2) and § 217(g) make a moving-expense reimbursement taxable to a taxpayer who is not a member of the Armed Forces. IRC § 106(d)(1) excludes employer HSA contributions only up to the § 223(b) annual limit ($4,300 for self-only coverage in 2025). IRC § 132(j)(4) excludes only on-premises athletic facilities, and this $1,200 membership is not a de minimis fringe under IRC § 132(e). Computation: health premiums $0; transit pass excess ($500 - $325) × 12 = $2,100; moving reimbursement $8,000; HSA excess $5,000 - $4,300 = $700; gym membership $1,200; total $12,000. Choice A ($10,800) omits the $1,200 gym membership, but off-premises fitness-club memberships are taxable fringe benefits. Choice B ($11,300) omits the $700 HSA excess, treating the employer HSA contribution as fully excludable even though K's self-only annual limit is $4,300. Choice D ($24,000) adds the $12,000 health-insurance premiums, but those premiums are excluded under IRC § 106(a).
8. Which statement correctly describes the treatment of the $15,000 premium payment for 2025?
   Answer: Renu reports the $15,000 as wages on Ren's Form W-2, Ren includes it in gross income, and Ren may deduct the premiums as an adjustment to income. IRC § 1372 treats a more-than-2% S corporation shareholder as a partner for employee fringe benefit purposes, so the § 106 exclusion for employer-provided health coverage does not apply to Ren. The premium must be included on Ren's Form W-2 as wages; Renu may deduct it as compensation, and Ren may deduct qualifying premiums as an adjustment to gross income under IRC § 162(l), not as an itemized medical expense. Choice A applies the ordinary employee exclusion rule to a 2% S corporation shareholder, which § 1372 overrides. Choice C mischaracterizes compensation for services as a Schedule K-1 distribution; the payment is not excluded as a return of basis. Choice D is wrong because Renu may deduct the amount as compensation and Ren's deduction, when available, is an adjustment to income rather than an itemized medical expense.
9. For 2025, an unmarried employee, age 59, is covered all year by a self-only high-deductible health plan that satisfies the HDHP rules. He is not enrolled in Medicare and cannot be claimed as a dependent by another taxpayer. His employer contributes $2,000 to his health savings account during 2025, and he makes no other HSA contributions. What is the maximum amount he may contribute directly to his HSA for 2025 and deduct on his return?
   Answer: $3,300 IRC §223(b)(1) sets the 2025 HSA contribution limit at $4,300 for self-only coverage, and IRC §223(b)(3) adds a $1,000 catch-up for an individual age 55 or older. Employer HSA contributions under IRC §106 are excluded from gross income but count against the same statutory limit. The employee's combined limit is $4,300 + $1,000 = $5,300, so his own maximum contribution is $5,300 − $2,000 = $3,300. Choice A starts from the $4,300 base limit and subtracts the employer contribution, ignoring the catch-up. Choice C uses the base self-only limit only, ignoring both the catch-up and the employer contribution. Choice D ignores the employer contribution and treats the full combined limit as available for the employee's own contribution. Choice B is correct.
10. What is the correct treatment of the award?
    Answer: Gemma includes $1,350 in gross income, and Redstone's deduction for this award is limited to $400 because the plan's average award cost exceeded $400. Under IRC §§ 74(c) and 274(j), an employee achievement award may be excluded only up to the amount the employer may deduct, and the $1,600 qualified-plan limit applies only when the average cost of all awards under the plan is not more than $400. Here the average is $7,200 ÷ 12 = $600, so the plan does not qualify for the $1,600 limit; Redstone's deduction with respect to this award is capped at $400, and Gemma excludes only $400, leaving $1,350 of the award includible in income. Choice C is correct. Choice A applies the $1,600 limit while ignoring the average-cost failure. Choice B ignores both the average-cost failure and the $1,600 statutory maximum. Choice D incorrectly treats the whole award as taxable; the $400 exclusion remains available.
11. An unmarried employee, age 62, participates in a 401(k) plan and has no other elective deferrals for 2025. The plan permits all catch-up contributions allowed by law. The employee elects the maximum pre-tax salary deferral for the year, and the employer makes a matching contribution of $6,000. What total amount of the salary deferral and matching contribution is excluded from gross income for 2025?
    Answer: $40,750 IRC §402(g)(1) limits 2025 elective deferrals to $23,500. Under IRC §414(v), participants age 60 through 63 may make a higher catch-up contribution of $11,250 instead of the regular age-50 catch-up of $7,500, so the employee may defer $34,750. Employer matching contributions to a qualified plan are not currently included in gross income. The excluded amount is $34,750 + $6,000 = $40,750, which is below the §415(c) annual additions limit of $70,000. Choice A omits the matching contribution. Choice B uses the regular $7,500 catch-up instead of the $11,250 catch-up. Choice D treats the annual additions cap as if it were the amount contributed. Choice C is correct.
12. What is the correct tax treatment of the $14,000 premium?
    Answer: Acme must report the premiums as wages in Box 1 of Marta's Form W-2 and may deduct them as compensation; the premiums are not subject to Social Security, Medicare, or FUTA taxes, and Marta may deduct them as self-employed health insurance. Under IRC § 1372, a more-than-2% S corporation shareholder is treated as a partner for fringe benefit purposes, so the § 106 exclusion for employer-provided health coverage does not apply. Rev. Rul. 91-26 requires the premiums to be included in the shareholder-employee's gross income and reported as wages on Form W-2; the S corporation may deduct them as compensation, and the amounts are not treated as FICA or FUTA wages. Choice B correctly states this treatment. Choice A applies § 106 to a 2% shareholder and ignores § 1372. Choice C treats compensation as a stock basis distribution. Choice D applies the partnership guaranteed-payment rule, which is not the S corporation W-2 rule.
13. Which statement correctly describes the tax treatment of the lodging and the meal allowance?
    Answer: The apartment value is excluded from gross income, but the meal allowance is included in gross income because meals must be furnished in kind on the employer's business premises. IRC § 119 excludes employer-furnished lodging only if it is on the employer's business premises, is for the employer's convenience, and is required as a condition of employment. Rico's apartment satisfies all three tests, so its value is excluded. The monthly cash allowance is not excludable under § 119, which applies to meals furnished in kind (and lodging furnished in kind), not cash allowances; a cash meal allowance is includible in gross income. Choice A is correct. Choice B incorrectly treats the cash allowance as satisfying the in-kind rule. Choice C misstates the convenience-of-employer test and also wrongly treats the meal allowance as excludable. Choice D incorrectly asserts that every cash or cash-substitute benefit is taxable and ignores the statutory exclusion for qualifying lodging.
14. An employer maintains a reimbursement arrangement that is otherwise an accountable plan. In 2025, the employer advances an employee $1,500 for business travel. The employee substantiates $900 of business travel expenses and, by the required date, returns $100 of the advance, but does not return the remaining $500. What amount of the advance, if any, is included in the employee's gross income for 2025?
    Answer: $500 Treas. Reg. §1.62-2 provides that reimbursements under an accountable plan are excluded only to the extent the employee substantiates the expenses and returns any excess within a reasonable period. Because $500 of the advance is neither substantiated nor returned, that amount is treated as paid under a nonaccountable plan and is included in wages. The substantiated $900 is excluded, and the $100 returned is not income. Choice A ignores the unreturned excess. Choice C would tax the substantiated portion. Choice D treats the entire advance as taxable even though the arrangement is otherwise accountable, overstating the includible amount. Choice B is correct.
15. How much of the $4,200 reimbursement is excludable from Priya's gross income?
    Answer: $0, because amounts paid for care provided by an employee's child who is under age 19 are not dependent care assistance. Under IRC § 129, employer-provided dependent care assistance is excludable if it is furnished under a written program for employment-related care of a qualifying individual. The statute does not treat as dependent care assistance amounts paid to a child of the employee who is under age 19. Since Priya's 17-year-old daughter provided the care, none of the $4,200 reimbursement is excludable. Choice C is correct. Choice A ignores the provider disqualification. Choice B invents a partial exclusion for relative-provided care. Choice D adds a licensing requirement that is not part of § 129.

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