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

Answer 1

Miranda must include the pure protection cost of the life insurance from her money purchase pension plan in her taxable income, but this cost will become a non-taxable basis during distributions.

Step-by-step explanation:

Miranda's participation in her employer's money purchase pension plan, which includes life insurance, has specific income tax implications. Statements III and IV correctly describe these implications:

III. **Miranda must include the pure protection cost of the life insurance in her taxable income.**

This statement is accurate because the value of life insurance coverage provided by the employer is considered a taxable benefit to the employee. The cost of the life insurance coverage, known as the "pure protection cost," is included in Miranda's taxable income.

IV. **The cost of the life insurance will be treated as non-taxable basis once she begins receiving distributions from the plan.**

This statement is also correct. While the pure protection cost is included in Miranda's taxable income during her active participation in the plan, when she begins receiving distributions from the money purchase pension plan, a portion of those distributions will be treated as a return of her non-taxable basis. This non-taxable basis represents the amount that she contributed to the plan with after-tax dollars.

In summary, Miranda will be taxed on the pure protection cost of the life insurance coverage while actively participating in the plan, and this cost will be treated as non-taxable basis when she starts receiving distributions from the money purchase pension plan. These tax implications are in line with the treatment of life insurance benefits within qualified pension plans.