Hannah is an employee of Bolero Corporation.Bolero pays the medical insurance premiums of all of its employees.Because of large deductible levels and limitations on the payment of certain medical expenses,the basic health insurance policy does not cover all medical costs.During the current year,Bolero adopted a Flexible Benefits Plan that employees can contribute into to pay for any medical expenses not covered by insurance.Hannah pays $2,500 into the plan during the current year.Premiums paid by Bolero for Hannah's medical insurance were $5,000.
I.Hannah's gross income from her Bolero salary is reduced by the $2,500 payment into the Flexible Benefits Plan.
II.Amounts paid for medical costs by the medical insurance policy are excluded from Hannah's gross income.

Question

Hannah is an employee of Bolero Corporation.Bolero pays the medical insurance premiums of all of its employees.Because of large deductible levels and limitations on the payment of certain medical expenses,the basic health insurance policy does not cover all medical costs.During the current year,Bolero adopted a Flexible Benefits Plan that employees can contribute into to pay for any medical expenses not covered by insurance.Hannah pays $2,500 into the plan during the current year.Premiums paid by Bolero for Hannah's medical insurance were $5,000.
I.Hannah's gross income from her Bolero salary is reduced by the $2,500 payment into the Flexible Benefits Plan.
II.Amounts paid for medical costs by the medical insurance policy are excluded from Hannah's gross income.
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Quizplus · Accepted Answer

Statement I is correct because the $2,500 payment into the Flexible Benefits Plan is made with pre-tax dollars and thus reduces Hannah's taxable income.

Statement II is correct because the amounts paid for medical costs by the medical insurance policy are not included in Hannah's gross income. The premiums paid by Bolero for Hannah's medical insurance are also excluded from her gross income. However, any amounts reimbursed from the Flexible Benefits Plan for medical expenses would be taxable income.

Hannah Is an Employee of Bolero Corporation