Question

Roger is in the 35% marginal tax bracket. Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan. Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan. However, Roger incurred only $1,100 in actual expenses for which he was reimbursed. Under the plan, he must forfeit the $100 unused amount. His after-tax cost of overfunding the plan is $65.

A) True
B) False

Answer 1

The statement is true. Roger saved money by overfunding the flexible spending plan.

Step-by-step explanation:

Based on the given information, the statement is True.

Roger's salary was reduced by $1,200 for contributions to the flexible spending plan. This means that Roger's taxable income was reduced by $1,200. Since Roger is in the 35% marginal tax bracket, the amount of taxes he saved due to the reduction in taxable income is $1,200 * 35% = $420.

However, Roger only had $1,100 in actual medical and dental expenses for which he was reimbursed. Since the excess contribution of $100 is forfeited and not used for reimbursements, Roger effectively missed out on the tax savings for this amount. Therefore, the after-tax cost of overfunding the plan for Roger is $100 - $420 = $-320.

Since the after-tax cost is negative, it means that Roger actually saved money by overfunding the plan. Therefore, the statement is True.