Cindy is an employee of Silvertone Corporation. Silvertone 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, Silvertone adopted a Cafeteria Plan funded entirely by Silvertone. The plan provides for $3,000 per employee, and Cindy elects $2,500 for her medical costs not covered by the basic policy. She takes the remaining $500 in cash. Actual payments for Cindy's medical care of $1,500 are made from the Cafeteria Plan.
I.Cindy's gross income is increased by the $1,000 of the $2,500 allocation not used for additional medical expenses.
II.Cindy's gross income is increased by the $1,500 paid out of the Cafeteria Plan.

Question

Cindy is an employee of Silvertone Corporation. Silvertone 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, Silvertone adopted a Cafeteria Plan funded entirely by Silvertone. The plan provides for $3,000 per employee, and Cindy elects $2,500 for her medical costs not covered by the basic policy. She takes the remaining $500 in cash. Actual payments for Cindy's medical care of $1,500 are made from the Cafeteria Plan.
I.Cindy's gross income is increased by the $1,000 of the $2,500 allocation not used for additional medical expenses.
II.Cindy's gross income is increased by the $1,500 paid out of the Cafeteria Plan.
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Quizplus · Accepted Answer

Under a Cafeteria Plan, amounts that are not used for eligible expenses are typically not included in gross income unless they are received as cash. In this scenario, Cindy's gross income is increased only by the $500 she takes in cash. The $1,000 of the $2,500 allocation not used for additional medical expenses does not increase her gross income because it was not received as cash or other benefits. The $1,500 paid out of the Cafeteria Plan for medical care is also not included in gross income because it is used for qualified medical expenses.

Cindy Is an Employee of Silvertone Corporation