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?

A) Miranda will not be taxed on the pure protection cost of the life insurance.
B) A money purchase pension plan is not allowed to provide life insurance coverage.
C) Miranda must include the pure protection cost of the life insurance in her taxable income.
D) The pure protection cost of the life insurance will be treated as nontaxable basis once Miranda begins receiving distributions from the plan.

Answer 1

Miranda must include the pure protection cost of life insurance provided by her money purchase pension plan in her taxable income, per IRS guidelines.B) A money purchase pension plan is not allowed to provide life insurance coverage.

Step-by-step explanation:

When participating in a money purchase pension plan that provides life insurance, Miranda must include the cost of pure protection (the amount of the premium covering the risk of death but not investment) in her taxable income. This is according to IRS guidelines which state that employer-provided life insurance over $50,000 must be income reported. So, to answer the question, statement C) Miranda must include the pure protection cost of the life insurance in her taxable income, is CORRECT. The other options either misrepresent the tax laws or describe rules that do not apply to money purchase pension plans.