The correct income tax ramifications for Miranda, who is covered by her employer's money purchase pension plan with life insurance coverage, are that she would not be taxed on the pure protection cost of the life insurance but must include this cost in her taxable income.
- When it comes to a money purchase pension plan that provides life insurance coverage for an employee, such as Miranda, it is important to understand the income tax implications.
- Statement I is correct; Miranda will not be taxed on the pure protection cost of the life insurance, which is the amount attributed to the life insurance coverage only and not to any investment or savings component.
- This cost is generally provided as a tax-free benefit.
- Statement II is not correct because money purchase pension plans can offer life insurance coverage as one of their benefits.
- Statement III is also correct; since the IRS treats the pure protection cost as an economic benefit, Miranda must include this cost in her taxable income.
- Lastly, Statement IV is incorrect.
- The pure protection cost of the life insurance is not treated as nontaxable basis; instead, it will be taxable to the extent that it exceeds the amount Miranda has paid for the coverage.
- Therefore, the correct statements regarding Miranda's income tax ramifications are I and III.
- As a result, the corresponding answer is C) I and III.
Question:
Miranda is covered by her employer's money purchase pension plan. If the plan provides life insurance on Miranda's life, which of these statements regarding Miranda's income tax ramifications are CORRECT?
I) Miranda will not be taxed on the pure protection cost of the life insurance.
II) A money purchase pension plan is not allowed to provide life insurance coverage.
III) Miranda must include the pure protection cost of the life insurance in her taxable income.
IV) The pure protection cost of the life insurance will be treated as nontaxable basis once Miranda begins receiving distributions from the plan.
A) II only
B) III and IV
C) I and III
D) I, III, and IV