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23 Nov 2019

Joe’s salary is $40,000 per year. His health insurance costs $6,000 of which $4,000 is paid by the employer and $2,000 is paid by Joe through salary reduction. Ignoring any other taxes and benefits, which of the following statements is true about the taxation of Joe’s income and health benefits?

a.The employer will be able to deduct Joe’s salary and $6,000 health insurance premium cost as a business expense.

b.Joe will owe tax on his $40,000 income, but not on the $6,000 health insurance benefit.

c.Joe will owe tax on $34,000 because the $6,000 insurance benefit is not taxable to him.

d.Joe’s taxable income will be reduced by the $2,000 he pays in health insurance premium and he will not owe any tax on the $4,000 paid by his employer.

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Keith Leannon
Keith LeannonLv2
24 Apr 2019
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The Federal tax code allows businesses but not individuals to deduct the cost of health insurance premiums from their taxable income. Consider a company named HeadBook that could either spend $5000 on an insurance policy for an employee named Vanessa or could increase her annual salary by $5000 instead.

a. As far as the tax code is concerned, HeadBook will increase its expenses by $5000 in either case. If it pays for the policy, it incurs a $5000 health care expense. If it raises Vanessa’s salary by $5000, it incurs $5000 of salary expense. If HeadBook is profitable and pays corporate profit taxes at a marginal 35 percent rate, by how much will HeadBook’s tax liability be reduced in either case?

The firm will pay $ less in taxes.

b. Suppose that Vanessa pays personal income tax at a marginal 20 percent rate. If HeadBook increases her salary by $5000, how much of that increase will she have after paying taxes on that raise? $

If Vanessa can only devote what remains after paying taxes on the $5000 to purchasing health insurance, how much will she be able to spend on health insurance for herself? $

c. If HeadBook spends the $5000 on a health insurance policy for Vanessa instead of giving it to her as a raise, how many more dollars will HeadBook be able to spend on Vanessa’s health insurance than if she had to purchase it herself after being given a $5000 raise and paying taxes on that raise? $

d. Would Vanessa prefer to have the raise or to have HeadBook purchase insurance for her? (Click to select)Vanessa would prefer to have a raise in her annual salary.Vanessa would prefer to have HeadBook purchase insurance for her.

Would HeadBook have any profit motive for denying Vanessa her preference? (Click to select)NoYes

e. Suppose the government changes the tax law so that individuals can now deduct the cost of health insurance from their personal incomes. If Vanessa gets the $5000 raise and then spends all of it on health insurance, will her tax liability change? (Click to select)NoYes

How much will she be able to spend on health insurance? $

Will she now have a preference for HeadBook to buy insurance on her behalf? (Click to select)YesNo

You are a small employer who has believed in providing top-notch benefits to your 250 employees for many years. For the last several years you have provided a wide choice of health benefits through a cafeteria plan and made very generous contributions to their cost. Employees could choose between a comprehensive major medical plan and two different PPOs and were required to pay for only 10% of the cost. Everyone received vision coverage at no cost. All employees had their choice between two different dental plans with the employer paying 75% of the premium. Employees could elect to receive long-term care insurance for themselves and their parents and pay for it through a salary reduction plan with pre-tax dollars. As a result of these wonderful benefits, you don’t experience much turnover amongst your employees. However, your costs have been increasing lately at an alarming rate. You realize you must change the way you provide benefits. You are considering either a core-plus plan or a modular plan. The core-plus plan would provide everyone with health insurance through a point of service plan (POS) at no cost to the employee. Additionally, employees would be given a certain number of benefit credits to apply toward the purchase of vision, dental and/or long-term care insurance that would fund approximately 20% of the costs of the optional benefits. They could contribute toward the remaining cost on a pre-tax basis. The modular plan would offer employees a choice between three plans: Plan L would completely cover the cost for employees to enroll in an HMO for both expenses and dental insurance. Plan M would provide coverage in a POS plan for medical and a modest dental insurance policy, requiring employees to cover 20% of the cost. Plan H would give employees health, dental and vision insurance through a PPO with employees paying 40% of the cost. Again, any costs borne by employees would be set up on a pre-tax basis. Discuss the following:

a.How will the new plans allow you to control your benefit costs compared with the current arrangement? Be specific.

b.How do you think your employees will react to switching away from their previous cafeteria plan? Explain.

c. Do you think the core-plus plan or modular plan will be better? Justify your selection with specific reasons.

You are a small employer who has believed in providing top-notch benefits to your 250 employees for many years. For the last several years you have provided a wide choice of health benefits through a cafeteria plan and made very generous contributions to their cost. Employees could choose between a comprehensive major medical plan and two different PPOs and were required to pay for only 10% of the cost. Everyone received vision coverage at no cost. All employees had their choice between two different dental plans with the employer paying 75% of the premium. Employees could elect to receive long-term care insurance for themselves and their parents and pay for it through a salary reduction plan with pre-tax dollars. As a result of these wonderful benefits, you don’t experience much turnover amongst your employees. However, your costs have been increasing lately at an alarming rate. You realize you must change the way you provide benefits.

You are considering either a core-plus plan or a modular plan. The core-plus plan would provide everyone with health insurance through a point of service plan (POS) at no cost to the employee. Additionally, employees would be given a certain number of benefit credits to apply toward the purchase of vision, dental and/or long-term care insurance that would fund approximately 20% of the costs of the optional benefits. They could contribute toward the remaining cost on a pre-tax basis. The modular plan would offer employees a choice between three plans: Plan L would completely cover the cost for employees to enroll in an HMO for both expenses and dental insurance. Plan M would provide coverage in a POS plan for medical and a modest dental insurance policy, requiring employees to cover 20% of the cost. Plan H would give employees health, dental and vision insurance through a PPO with employees paying 40% of the cost. Again, any costs borne by employees would be set up on a pre-tax basis.

Discuss the following:

a. How will the new plans allow you to control your benefit costs compared with the current arrangement? Be specific.

b. How do you think your employees will react to switching away from their previous cafeteria plan? Explain.

c. Do you think the core-plus plan or modular plan will be better? Justify your selection with specific reasons.

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