CSFS Course 4
Accounting, Funding and Tax Consequences
How a self-funded plan is funded and accounted for: claims funds and reserves, incurred-but-not-reported liability, cash flow through a plan year, and the tax treatment that follows.
259 practice questions · page 6 of 6, questions 251–259 · answers and explanations included · updated September 2026
9 questions on this page 6 of 6, each with the answer and the reasoning behind it. Read straight through, or quiz yourself on them and the ones you miss stay in rotation until you get them right.
- 251
The nondiscrimination rules of IRC Section 105(h) apply to self-funded medical reimbursement plans. Do these same rules apply to fully insured plans?
- •No, insured plans are subject to stricter nondiscrimination rules under IRC Section 501(c)(9)
- •No, the nondiscrimination rules of IRC Section 105(h) apply only to self-funded reimbursement plans, not to insured plans, because underwriting considerations generally preclude abuses in insured plans
- •Yes, but only for insured plans with more than 100 participants
- •Yes, the same nondiscrimination rules apply equally to both self-funded and insured plans
Show answer
No, the nondiscrimination rules of IRC Section 105(h) apply only to self-funded reimbursement plans, not to insured plans, because underwriting considerations generally preclude abuses in insured plans
The nondiscrimination rules of IRC Section 105(h) apply only to self-funded health care reimbursement plans. Because underwriting considerations generally preclude or effectively limit abuses in insured plans, such plans need not meet the requirements of IRC Section 105-11(c). A plan written by a policy of insurance that does not involve shifting of risk to an unrelated third party is considered self-funded.
- 252
In the 'high-low' plan design for self-funded plans, both a rich and a basic plan must be offered to all participants. What happens to discrimination under this approach?
- •Discrimination is eliminated entirely because all participants have equal access to both plans
- •Discrimination is reduced but not eliminated, requiring an annual IRS filing to justify the plan design
- •Discrimination is shifted from the self-funded plan to the payroll, where it is acceptable
- •Discrimination is shifted to the stop-loss carrier, which assumes the risk differential
Show answer
Discrimination is shifted from the self-funded plan to the payroll, where it is acceptable
The self-funded high-low approach has the virtue of offering the rich benefits to the rank and file, even though election by rank-and-file workers may be minimal. While discrimination is shifted from the self-funded plan to the payroll (where it is acceptable), there are private IRS letter rulings dealing with imputed income that could apply in certain circumstances.
- 253
Under the discrimination rules for self-funded plans, what is the tax consequence when there is discrimination in favor of the prohibited group (owners, for example)?
- •All participants are subject to additional income tax on the full value of plan benefits
- •Such persons get taxed on the economics of the extra benefits; discrimination in favor of non-prohibited groups (rank-and-file) does not result in tax consequences
- •The employer loses the ability to deduct any plan contributions for the tax year
- •The entire plan loses its tax-exempt status for all participants
Show answer
Such persons get taxed on the economics of the extra benefits; discrimination in favor of non-prohibited groups (rank-and-file) does not result in tax consequences
Rule 1 of discrimination in self-funded plans states that if there is discrimination in favor of the prohibited group (owners, for example), such persons get taxed on the economics of the extra benefits. However, discrimination in favor of the non-prohibited groups (rank-and-file employees) does not result in tax consequences.
- 254
Under Rule 2 of the discrimination rules for self-funded plans, what is the consequence of discrimination against the federally protected group?
- •A $100 per day excise tax similar to the COBRA infraction penalty
- •A 25% excise tax on all benefits paid during the discriminatory period
- •Required correction within 90 days or the plan is deemed terminated
- •Severe consequences, such as loss of plan tax status
Show answer
Severe consequences, such as loss of plan tax status
Rule 2 states that there must be no discrimination, direct or de facto, against the federally protected group. To do so will result in severe consequences, such as loss of plan tax status. The federally protected groups are defined by laws such as ADEA, Title VII of the Civil Rights Act, Equal Pay Act, and statutes related to veterans.
- 255
Under IRC Section 105(h), is a self-funded plan considered discriminatory simply because highly compensated individuals use its benefits more extensively than rank-and-file employees?
- •No, a plan is not considered discriminatory simply because highly compensated individuals use benefits more extensively; however, if a benefit is terminated and the timing disproportionately favors HCEs, discrimination could occur
- •No, but only if the plan passes both the eligibility and benefits tests under IRC Section 105(h)
- •Yes, any disparity in utilization between HCEs and rank-and-file employees creates a presumption of discrimination
- •Yes, unless the employer can demonstrate that HCEs have higher medical needs based on actuarial data
Show answer
No, a plan is not considered discriminatory simply because highly compensated individuals use benefits more extensively; however, if a benefit is terminated and the timing disproportionately favors HCEs, discrimination could occur
A plan is not considered discriminatory simply because highly compensated individuals use its benefits more extensively than rank-and-file employees. However, if a plan or specific benefit is terminated, it may result in prohibited discrimination if the timing disproportionately favors HCEs. The plan must be nondiscriminatory both in its design and operation.
- 256
How are plan-provided death benefits generally treated for estate tax purposes?
- •They appear to be as subject to estate taxes as death benefits from other sources, but may be paid free of estate tax consequences if the participant was divested of all rights of ownership
- •They are always exempt from estate taxes because they are employer-provided benefits
- •They are exempt from estate taxes only if funded through a VEBA trust
- •They are subject to estate taxes only if the death benefit exceeds $50,000
Show answer
They appear to be as subject to estate taxes as death benefits from other sources, but may be paid free of estate tax consequences if the participant was divested of all rights of ownership
However they are funded, plan-provided death benefits appear to be as subject to estate taxes as death benefits from other sources. Death benefits may generally be paid free of estate tax consequences if the participant was divested of all rights of ownership. The power to change the beneficiary constitutes incidence of ownership.
- 257
Does the power to elect optional modes of settlement constitute an incidence of ownership sufficient to trigger estate tax inclusion for a death benefit?
- •No, a Court of Appeals held that the power to elect optional modes of settlement did not constitute a substantial degree of control sufficient to constitute incidence of ownership
- •No, but only if the settlement options were established at the time the plan was created
- •Yes, any power over the benefit arrangement constitutes incidence of ownership for estate tax purposes
- •Yes, but only if the insured also had the power to change the beneficiary
Show answer
No, a Court of Appeals held that the power to elect optional modes of settlement did not constitute a substantial degree of control sufficient to constitute incidence of ownership
A Court of Appeals held that the power of an insured to elect optional modes of settlement did not constitute a substantial degree of control sufficient to constitute incidence of ownership. However, the power to change the beneficiary does constitute incidence of ownership for estate tax purposes.
- 258
Are employer-paid COBRA premiums taxable to the participant?
- •No, the IRS has ruled that the employer-paid COBRA subsidy is not taxable to the participant
- •Only if the COBRA premiums exceed what the employer paid for active employee coverage
- •Yes, but only if the participant's income exceeds $150,000 per year
- •Yes, employer-paid COBRA premiums are treated as taxable compensation to the participant
Show answer
No, the IRS has ruled that the employer-paid COBRA subsidy is not taxable to the participant
The IRS has ruled that employer-paid COBRA premiums are not taxable to the participant. This means the subsidy provided by the employer for COBRA continuation coverage does not create a tax liability for the former employee or qualifying beneficiary.
- 259
A participant in a self-funded health care plan claims a medical bill as a personal medical deduction in tax year one, and then receives a reimbursement for that same bill from the plan in tax year two. What is the tax consequence?
- •The participant may choose either the deduction or the exclusion but must notify the IRS of the election by April 15 of year two
- •The participant may claim the deduction in year one and exclude the reimbursement in year two because they are in separate tax years
- •The participant may not claim the medical bill as a deduction in year one and also treat the reimbursement as excluded income in year two; the reimbursement must be reported as income
- •The participant must amend the year one return to remove the deduction, but is not required to report the reimbursement as income
Show answer
The participant may not claim the medical bill as a deduction in year one and also treat the reimbursement as excluded income in year two; the reimbursement must be reported as income
A person may not show a medical bill as a personal medical deduction in tax year one and treat a reimbursement thereof as excluded income in tax year two. This prevents double tax benefits from the same medical expense. The reimbursement received in year two would need to be included in income to the extent a tax benefit was received from the deduction in year one.
CSFS is the Certified Self-Funding Specialist designation. These are my own practice questions, written while studying for the exam. This site is not affiliated with, endorsed by, or connected to the organisation that administers the CSFS designation, and nothing here is official exam content or a substitute for the course material.
Studying now, placing business later
When you are ready to quote one, the directory lists the markets, DPC providers, RBP vendors, PBMs and administrators that serve each state — with what each one publishes about group size and underwriting.
Spotted a wrong answer? Email sam@edw4rds.com and it gets fixed.