[littlecpathatcould]

Hi all,

I’m sitting for Reg tomorrow and have been studying with Becker. On the practice test I took yesterday, I had a question (below) that I thought totally came out if left field. I even went back into the book to see if I had just glossed over something important. Lo and behold, what the section covers on this topic doesn’t include the equation that I was supposed to know. Grr

Anyway, I’m hoping to get some advice on getting this question to make more sense and hopefully find a less obscure equation to add to my toolbox. With that, I give you the question:

Red, Inc. Provides group term life insurance to the employees of the corporation. Susan, a manager, received $200,000 of coverage for the year at a cost to Red, Inc. of $2,800. The Uniform Premiums (based in Susan’s age) are $9 a year for $1,000 protection. How much of the premiums must Susan include in her gross income this year?

A) $0

B) $1,800

C) $2,800

D) $1,350

Answer: D

I knew that the $50,000 rule for maximum non taxable coverage, but the rest of the formula that explains the answer is bizarrely worded and only makes sense if I stare at it for ages.

Total coverage – $200,000

Less: Max non-taxable coverage – <$50,000>

Excess taxable = $150,000

Units – $1,000

Divide excess taxable by units to get taxable units – 150

Taxable cost per unit – $9

Taxable units x cost per unit = taxable benefit – $1,350

After typing it all out I guess it makes more sense. It just infuriates me that Becker has these formulas that you should know, yet you don’t find out about them until you get a question wrong.

I’m still hoping to create a less messy formula, but I also hope this helps someone who was in the same boat I was. Better to find out these formulas now than not know them for the exam!

[Anonymous]

I wouldn't exactly think of this problem as requiring a “formula” per se…as you stated, you know the rule is that any coverage > $50,000 will be included in gross income. Thus, you know that the cost of premiums for $150,000 worth of coverage must be recognized. If each $1,000 of coverage costs $9, then you have 150 of them to account for. I know I am basically repeating what you showed, but I think it's more of getting in the mindset of not being concerned that you need to access a formula in your mind to solve something like this.

And to add to that, you know $0 isn't correct, $2,800 is obviously all of it which you know isn't right, and then $1,800 would just be $2,800 – $1,000 which wouldn't mean anything helpful here.

[littlecpathatcould]

Good points chiguy, thanks! For me some of the concepts that have formulas in the books make sense to me to the point of not needing them, while others are my lifelines to not totally messing up. For me they're a backup in case I have a brain fart and the wording of the question gets me, I can fall back on the formulas.

The more I look at this question the more I'm going “d'oh!”

[Anonymous]

Whatever premiums are associated with benefits exceeding 50,000, that is the taxable income that must be added to an employees wages. Know that concept and you are good.

[Author]

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