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 after-tax and insurance pay will:

Question

Quizplus · Accepted Answer

If United Company pays the employee's hospitalization insurance premiums, the employees will not have to pay the $8,000 premium with after-tax dollars. Therefore, the employee's taxable income will decrease, resulting in a lower tax liability. The employees in the higher income (35% marginal tax bracket) will receive a larger tax benefit than those in the lower paid employees (10% and 15% marginal tax bracket). As a result, their after-tax and insurance pay will increase more than employees in the lower tax brackets. Therefore, the correct choice is C.

All Employees of United Company Are Covered by a Group