Question

In 2015, Jill, age 35, received a job offer with two alternative compensation packages to choose from. The first package offers her $125,000 annual salary with no qualified fringe benefits, requires her to pay $3,200 a year for parking and will purchase life insurance at a cost of $2,100. The second package offers $115,000 annual salary, employer-provided health insurance, annual free parking (worth $310 per month), $212,000 of life insurance (purchasing on her own would have been $2,100 annually), and free flight benefits (she figures that it will save her $6,250 per year). If Jill chooses the first package, she would purchase health and life insurance benefits at $5,500 and $2,100, respectively, annually after taxes and spend another $6,250 in flights while traveling. Assume her marginal tax rate is 28 percent.

5-year Age Bracket Cost per $1,000 of Protection for One Month
Under 25 $0.05
25 to 29 0.06
30 to 34 0.08
35 to 39 0.09
40 to 44 0.10
45 to 49 0.15
50 to 54 0.23
55 to 59 0.43
60 to 64 0.66
65 to 69 1.27
70 and above 2.06

a-1. Which compensation package should she choose?

a-2. How much would she benefit in after-tax dollars by choosing this compensation package instead of the other compensation package?

b-1. Assume the first package offers $138,000 salary with no qualified benefits instead of $125,000 salary plus benefits. Which compensation package should she choose?

b-2. How much would she benefit in after-tax dollars by choosing this package?

Answer 1

a-1. To determine which compensation package Jill should choose, we need to compare the total value of each package. Let's calculate the values of each package:

Package 1:

Annual salary: $125,000

Parking cost: $3,200

Life insurance cost: $2,100

Health insurance cost: $5,500 (after-tax)

Flights cost: $6,250

Total value of Package 1 = Annual salary - Parking cost - Life insurance cost - Health insurance cost - Flights cost

Total value of Package 1 = $125,000 - $3,200 - $2,100 - $5,500 - $6,250

Package 2:

Annual salary: $115,000

Employer-provided health insurance: Included

Free parking value: $3,720 (12 months * $310 per month)

Life insurance value: $212,000 (annual cost if purchased individually)

Free flight benefits value: $6,250

Total value of Package 2 = Annual salary + Free parking value + Life insurance value + Free flight benefits value

Total value of Package 2 = $115,000 + $3,720 + $212,000 + $6,250

To choose the better package, Jill should compare the total values of Package 1 and Package 2 and select the one with the higher value.

a-2. To calculate the after-tax benefit of choosing one package over the other, we need to consider Jill's marginal tax rate. Let's calculate the after-tax benefit:

After-tax benefit = (Total value of chosen package - Total value of other package) * (1 - Marginal tax rate)

After-tax benefit = (Total value of chosen package - Total value of other package) * (1 - 0.28)

b-1. If the first package offers a $138,000 salary instead of $125,000, the calculations for both packages would be as follows:

Package 1:

Annual salary: $138,000

Parking cost: $3,200

Life insurance cost: $2,100

Health insurance cost: $5,500 (after-tax)

Flights cost: $6,250

Package 2:

Annual salary: $115,000

Employer-provided health insurance: Included

Free parking value: $3,720 (12 months * $310 per month)

Life insurance value: $212,000 (annual cost if purchased individually)

Free flight benefits value: $6,250

To determine which package Jill should choose, compare the total values of Package 1 and Package 2.

b-2. Calculate the after-tax benefit of choosing one package over the other using the updated salary values and the marginal tax rate. The formula for after-tax benefit remains the same:

After-tax benefit = (Total value of chosen package - Total value of other package) * (1 - Marginal tax rate)

After-tax benefit = (Total value of chosen package - Total value of other package) * (1 - 0.28)