Question

Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year.

I. Group medical and hospitalization insurance for the employee, $3,600 a year.
II. Group medical and hospitalization insurance for the employee's spouse and children, $1,200 a year.
III. Child-care payments, actual cost but not more than $4,800 a year.
IV. Cash required to bring the total of benefits and cash to $8,000.
Which of the following statements is true?
a. Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the $2,000.
b. Paul, a full-time employee, elects to receive $8,000 cash because his wife's employer provided these same insurance benefits for him. Paul is not required to include the $8,000 in gross income.
c. Sue, a full-time employee, elects to receive choices I, II and $3,200 for III. Sue is required to include $3,200 in gross income.
d. All of these.
e. None of these.

Answer 1

Option c is correct. Sue, a full-time employee, must include $3,200 in gross income when she selects choices I, II, and $3,200 for III.

Step-by-step explanation:

The correct statement is option c. Sue, a full-time employee, elects to receive choices I, II, and $3,200 for III. Sue is required to include $3,200 in gross income.

In this scenario, Sue selects group medical and hospitalization insurance for herself and her spouse and children, which costs $1,200 a year (Choice II). She also elects to receive child-care payments, which cost $3,200 a year (Choice III). According to the cafeteria plan rules, the total benefits received by the employee cannot exceed $8,000 a year. Since Sue has selected $1,200 for Choice II and $3,200 for Choice III, the remaining $3,600 ($8,000 - $1,200 - $3,200) is allocated for Group medical and hospitalization insurance for herself (Choice I).