SEE - Special Enrollment Exam Quiz: Employee Costs And Fringe Benefits
15 questions · exam conditions
0:00
Employee Costs And Fringe BenefitsQuestion 1 of 15

Gemma, a customer service employee, receives a framed watch from her employer, Redstone Corp., in 2025 as a length-of-service award at a service ceremony. Gemma has worked for Redstone for 10 years and has not received a previous service award. The watch cost $1,750 and had a fair market value of $1,750. It was awarded under Redstone's written, nondiscriminatory employee achievement award plan. During 2025, Redstone awarded 12 achievement awards under the plan; the total cost of all 12 awards was $7,200.

What is the correct treatment of the award?

Gemma includes $150 in gross income, and Redstone may deduct $1,600 for the award as a qualified plan award.
Gemma excludes the entire $1,750 because the award is tangible personal property, was given for length of service under a written nondiscriminatory plan, and is her first service award.
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.
Gemma includes the entire $1,750 in gross income because the average cost of awards exceeded $400, making the plan nonqualified and leaving no exclusion.
← Back to quizzes

SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Employee Costs And Fringe Benefits

Practice Employee Costs And Fringe Benefits in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Employee Costs And Fringe Benefits, giving you a quick way to practice the rules, question types, and explanations that matter most for SEE - Special Enrollment Exam.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Gemma, a customer service employee, receives a framed watch from her employer, Redstone Corp., in 2025 as a length-of-service award at a service ceremony. Gemma has worked for Redstone for 10 years and has not received a previous service award. The watch cost $1,750 and had a fair market value of $1,750. It was awarded under Redstone's written, nondiscriminatory employee achievement award plan. During 2025, Redstone awarded 12 achievement awards under the plan; the total cost of all 12 awards was $7,200.

What is the correct treatment of the award?

  1. Gemma includes $150 in gross income, and Redstone may deduct $1,600 for the award as a qualified plan award.
  2. Gemma excludes the entire $1,750 because the award is tangible personal property, was given for length of service under a written nondiscriminatory plan, and is her first service award.
  3. 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. (correct answer)
  4. Gemma includes the entire $1,750 in gross income because the average cost of awards exceeded $400, making the plan nonqualified and leaving no exclusion.
Explanation: 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.

Question 2

Nordic, Inc., a calendar-year corporation, provides group-term life insurance to its employees. Nordic provides $100,000 of coverage to its five key employees and $20,000 of coverage to all other employees. The plan does not meet the nondiscrimination requirements of IRC § 79 for 2025. Marcus, one of the key employees, has employer-paid coverage of $100,000.

How is the coverage treated for Marcus for 2025?

  1. Marcus may exclude the cost of the first $50,000 of coverage and must include the Table I cost of the $50,000 of coverage above that amount.
  2. Nordic may not deduct any premium paid for Marcus's coverage, and Marcus may exclude the coverage because the plan's failure is penalized at the corporate level.
  3. Marcus must include only the employer's actual premium allocable to the $50,000 of coverage above the first $50,000, and no Table I amount is used.
  4. 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. (correct answer)
Explanation: 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.

Question 3

In 2025, Rico becomes the resident manager of an apartment complex. His employer requires him to live in a furnished apartment on the premises so he can respond to tenant emergencies, and it is a condition of his employment that he accept the apartment. The employer also pays Rico $250 per month as a meal allowance because the apartment has no kitchen.

Which statement correctly describes the tax treatment of the lodging and the meal allowance?

  1. 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. (correct answer)
  2. Both the apartment value and the meal allowance are excluded from gross income because the lodging is required and the allowance permits Rico to eat on the premises.
  3. The apartment value is included in gross income because a management position cannot satisfy the convenience-of-employer test, but the meal allowance is excluded.
  4. Both the apartment value and the meal allowance are included in gross income because any benefit paid in cash or provided in lieu of cash is taxable and no cash allowance can qualify for an exclusion.
Explanation: 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.

Question 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?

  1. 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. (correct answer)
  2. The employee must forfeit the entire $850 because health FSA amounts are subject to a use-or-lose rule and carryovers are not permitted.
  3. The employee may carry over $660 to 2026; the $190 balance is includible in gross income for 2025.
  4. The employee may carry over $850 to 2026; the carryover is not taxable but reduces the employee's 2026 salary-reduction contribution limit.
Explanation: 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.

Question 5

Zephyr Electronics operates retail stores. Its employee handbook gives every employee the same right to buy store merchandise at 40% off the price offered to customers. Dana, a sales associate at a Zephyr store, buys a laptop for personal use. The laptop is regularly offered to customers at $1,000, and Dana pays $600. Zephyr's gross profit percentage on merchandise for 2025 is 25%.

How much of the discount must Dana include in gross income as wages?

  1. $150, because the discount exceeds the excludable gross-profit-percentage portion by that amount. (correct answer)
  2. $0, because the discount is an employee discount offered to all employees on the same terms.
  3. $200, because the discount exceeds the 20% cap that applies to discounts on services.
  4. $400, because employee discounts are taxable as compensation when an employee buys at less than the customer price.
Explanation: 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(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.

Question 6

Ridgeline Corp. provides each of its employees with a transit pass worth $400 per month and a parking space in a garage near the office valued at $300 per month. The benefits are provided as qualified transportation fringes and are available to all employees on the same terms. An employee has no option to receive cash instead of the benefits.

For a given month in 2025, what amount, if any, must an employee include in gross income for these benefits?

  1. $0, because qualified transportation fringes are entirely excludable from gross income.
  2. $375, because the $325 monthly limit is a combined cap on transit and parking benefits and both benefits count toward it.
  3. $75, because the transit pass exceeds the $325 monthly limit by $75 and the parking benefit is within its separate $325 monthly limit. (correct answer)
  4. $700, because the fair market value of employer-provided transportation benefits is always taxable as wages.
Explanation: 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).

Question 7

Tulip Corp. maintains a written, nondiscriminatory dependent care assistance program that covers all employees. In 2025, Tulip reimburses Priya, a marketing manager, $4,200 for care of her 4-year-old son while she is at work. The care is provided by Priya's 17-year-old daughter at the daughter's home. Priya is not a 5% owner of Tulip.

How much of the $4,200 reimbursement is excludable from Priya's gross income?

  1. $4,200, because the son is a qualifying individual and the expenses are employment-related.
  2. $2,100, because dependent care assistance paid to a relative is excludable only up to one-half of the assistance.
  3. $0, because amounts paid for care provided by an employee's child who is under age 19 are not dependent care assistance. (correct answer)
  4. $0, because a dependent care assistance program may reimburse only care provided by a licensed child care facility.
Explanation: 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.

Question 8

In 2025, Acme Inc., a calendar-year S corporation, pays $14,000 of health insurance premiums for Marta, who owns 30% of Acme and works full time as its CFO. Acme's group health plan covers all employees, and the premium is paid under that group policy.

What is the correct tax treatment of the $14,000 premium?

  1. Acme deducts the premiums as an employee benefit plan expense, and the premiums are excluded from Marta's gross income under IRC § 106 because the plan is a group medical plan covering all employees and is nondiscriminatory.
  2. 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. (correct answer)
  3. Acme treats the premiums as a distribution to Marta, reduces her stock basis by $14,000, reports the distribution on Schedule K-1, and treats it as a nontaxable return of basis rather than compensation.
  4. Acme reports the premiums as a guaranteed payment to Marta on Schedule K-1, subject to income tax withholding, and Marta reports the amount as net earnings from self-employment on Schedule SE.
Explanation: 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.

Question 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?

  1. $2,300
  2. $3,300 (correct answer)
  3. $4,300
  4. $5,300
Explanation: 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.

Question 10

Cobalt Electronics is a single-line business that sells electronics and provides repair services to customers. In 2025, under a nondiscriminatory employee discount plan, Meg, a sales associate, bought an entertainment system with a regular customer price of $2,000 and paid $1,400. She also had Cobalt repair her refrigerator; the regular customer price for that repair was $200, and Meg paid $140. Cobalt's gross profit percentage on merchandise for the year was 25%.

How much of the discounts Meg received is includible in her 2025 gross income?

  1. $0
  2. $20
  3. $100
  4. $120 (correct answer)
Explanation: 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(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(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.

Question 11

Ren owns 100% of Renu Inc., an S corporation, and works full-time as its president. In 2025, Renu paid $15,000 of group health insurance premiums covering Ren and his family. Renu paid Ren a $120,000 salary reported on Form W-2; the $15,000 premium was not included in that amount. Ren is not eligible for health coverage through any other employer.

Which statement correctly describes the treatment of the $15,000 premium payment for 2025?

  1. Renu deducts the $15,000 as an employee benefit expense, and Ren excludes it from gross income because employer-provided health coverage is generally tax-free.
  2. 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. (correct answer)
  3. Renu reports the $15,000 on Schedule K-1 as a nondividend distribution, and Ren excludes it from income to the extent of his stock basis.
  4. Renu cannot deduct the $15,000, and Ren may deduct the premium only as an itemized medical expense to the extent it exceeds 7.5% of AGI.
Explanation: 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.

Question 12

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?

  1. $0
  2. $300
  3. $375
  4. $75 (correct answer)
Explanation: 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 325combinedcaptobothbenefits(325 combined cap to both benefits (400 + $300 − $325 = $375), but the transit and parking caps are separate. Choice D is correct.

Question 13

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?

  1. $0
  2. $500 (correct answer)
  3. $900
  4. $1,500
Explanation: 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.

Question 14

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?

  1. $34,750
  2. $37,000
  3. $40,750 (correct answer)
  4. $70,000
Explanation: 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.

Question 15

K is single, age 40, and is a common-law employee of Verde Industries, a C corporation that does not maintain a cafeteria plan. During 2025, Verde provided K with the following: employer-paid group health insurance premiums of $12,000; a monthly transit pass worth $500 for K's commute as a qualified transportation fringe; an $8,000 reimbursement of K's moving expenses for a job-related move to a new city (K is not a member of the Armed Forces); a $5,000 direct contribution to K's health savings account (HSA) (K had self-only high-deductible health plan coverage all year, made no other HSA contribution, and no corrective distribution was made); and an annual membership at a local fitness center costing $1,200 (the fitness center is not on Verde's premises).

Ignoring K's wages, how much of the benefits listed above is includible in K's 2025 gross income?

  1. $10,800
  2. $11,300
  3. $12,000 (correct answer)
  4. $24,000
Explanation: IRC § 106(a) excludes employer-paid group health plan premiums. IRC § 132(f) limits the transit-pass exclusion to 325permonthin2025.IRC§132(g)(2)and§217(g)makeamoving−expensereimbursementtaxabletoataxpayerwhoisnotamemberoftheArmedForces.IRC§106(d)(1)excludesemployerHSAcontributionsonlyuptothe§223(b)annuallimit(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;transitpassexcess(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.ChoiceA(12,000. Choice A (10,800) omits the 1,200gymmembership,butoff−premisesfitness−clubmembershipsaretaxablefringebenefits.ChoiceB(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.ChoiceD(4,300. Choice D (24,000) adds the $12,000 health-insurance premiums, but those premiums are excluded under IRC § 106(a).