Which statement correctly contrasts contributory and noncontributory group life plans?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
In a noncontributory group plan the employer pays the entire premium, and all eligible employees are generally covered automatically. In a contributory plan employees share in paying the premium, typically through payroll deduction, and a high percentage of eligible employees must enroll for the plan to be financially sound. The contribution structure affects eligibility, enrollment, and the overall cost of the plan. Understanding the distinction is essential when counseling employers on group coverage design, because participation requirements and the tax treatment of premium contributions differ between the two structures.
Why the other options are wrong
- B) Contributory means employees contribute part of the cost, not that the employer pays everything. The term itself signals employee participation in premium payment, typically through payroll deduction from each worker’s wages.
- C) There is no requirement that employees pay half the premium in a noncontributory plan; employees pay nothing at all. Noncontributory means the employer funds the entire premium with no employee contribution.
- D) Dependents can be covered in both contributory and noncontributory plans depending on the plan design. The contribution structure does not determine dependent eligibility, which is a separate decision made by the plan sponsor.
Memory hook
Noncontributory = boss pays all. Contributory = everyone chips in via payroll deduction.