All employees of United Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the premiums. Instead of giving raises next year, United is considering paying the employee's hospitalization insurance premiums. If the change is made, the employee's aftertax and insurance pay will:

Question

All employees of United Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the premiums. Instead of giving raises next year, United is considering paying the employee's hospitalization insurance premiums. If the change is made, the employee's after­tax and insurance pay will:

Quizplus · Accepted Answer

If United pays the employee's hospitalization insurance premiums, it will be a non-taxable fringe benefit for the employees. This means that the employees will not have to pay taxes on the premium amount. Therefore, the higher income employees (in the 35% marginal tax bracket) will benefit more as they would have paid higher taxes on the premium amount. The lower paid employees (in the 10% and 15% marginal tax bracket) will see a smaller increase in after-tax pay. However, overall, the employee's after-tax and insurance pay will increase for all employees. Therefore, option C is the correct answer.

All Employees of United Company Are Covered by a Group