Question

A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500.

a. Both employees must include all benefits received in gross income.
b. The officer must include $500 in gross income.
c. The officer must include $1,500 in gross income.
d. The hourly employee must include $1,000 in gross income.
e. None of these.

Answer 1

The officer received full reimbursement for $1,500 in medical expenses, which is considered taxable income. Option C, the officer must include $1,500 in gross income, is correct.

Step-by-step explanation:

In medical expenses, the officer received full reimbursement for $1,500 that considered as a taxable income. Meanwhile, the hourly worker, subject to a $1,000 threshold, received reimbursement of $500, therefore not exceeding the $1,000 deductible and isn't required to include any additional amount in gross income.

In this scenario, the officer benefited from a plan that covered all expenses not paid by the insurer, resulting in the entire $1,500 reimbursement being taxable income. Conversely, the hourly worker fell under a plan that required them to cover the initial $1,000, receiving only $500 in excess of that threshold, which isn't taxable.

This difference in treatment between the officer and hourly worker arises from the disparity in their reimbursement plans, where the officer's plan covers all additional costs, while the hourly worker has a deductible to meet before full coverage kicks in.

Correct answer: c. The officer must include $1,500 in gross income.