Question

Heather is a full-time employee of Drake Company and participates in the company's flexible spending plan that is available to all employees. Which of the following is correct?

a) Heather reduced her salary by $1,200, actually spent $1,500, and received only $1,200 as reimbursement for her medical expenses. Heather's gross income will be reduced by $1,500.

b) Heather reduced her salary by $1,200 and received only $900 as reimbursement for her actual medical expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200.

c) Heather reduced her salary by $1,200 and received only $800 as reimbursement for her medical expenses. She is not refunded the $400. Her gross income is reduced by $800.

d) Heather reduced her salary by $1,200 and received only $900 as reimbursement for her medical expenses. She forfeits the $300. Her gross income is reduced by $300.

e) None of these.

Answer 1

Heather's gross income is reduced by $800, the reimbursed amount for her medical expenses under the company's flexible spending plan, and she will not get the unused $400 back.

Step-by-step explanation:

The situation described with Heather involves a flexible spending plan, which is a specialized account used to pay for specific medical expenses with pre-tax dollars, thus reducing her taxable income. Since Heather elected to reduce her salary by $1,200 to contribute to the plan but only received $800 in reimbursement for her medical expenses, she will not receive the remaining $400 back as it is often a 'use-it-or-lose-it' type of benefit.

Consequently, the proper amount by which Heather's gross income is reduced is the amount of the qualified expenses for which she received reimbursement, which is $800. Therefore, her gross income will be reduced by $800, not by the full $1,200 she contributed to the flexible spending account.