Final answer:
Group medical expense premiums are deductible for the employer and, when used for medical expenses, benefits received by the employee are generally tax-free. An actuarially fair premium for a whole group may lead to adverse selection if it does not reflect the risk levels of individual subgroups accurately.
Step-by-step explanation:
The correct answer regarding the taxation of group medical expense premiums/benefits is that premiums are generally deductible for the employer, and the benefits received by the employee are generally not considered taxable income when paid due to a health issue. Therefore, option A) 'Premiums are deductible for the employer, and benefits are taxable for the employee' is not entirely correct since the benefits are typically tax-free for the employee when used for medical expenses. The correct statement would be that premiums are deductible for the employer, and benefits are generally tax-free for the employee.
Group medical expense insurance is a form of employment-based insurance, where the premiums paid by the employer for their employees' health plan coverage are considered a business expense. Hence, they are deductible from the employer's income. On the other hand, insurance benefits received by employees for their medical expenses are not included in their gross income and are not subject to tax under most circumstances.
If an insurance company is charging the actuarially fair premium to the entire group as a whole rather than to each subgroup separately, it may result in an average premium that does not adequately reflect the risk of each subgroup. This could lead to adverse selection if healthier individuals or subgroups decide the premium is too high for their expected level of benefit and choose not to participate.