Question

Rosa's employer has instituted a flexible benefits program. Rosa will use the plan to pay for her daughter's dental expenses and other medical expenses that are not covered by health insurance. Rosa is in the 24% marginal tax bracket and estimates that the medical and dental expenses not covered by health insurance will be within the range of $4,000 to $5,000. Her employer's plan permits her to set aside as much as $5,000 in the flexible benefits account. Rosa does not itemize her deductions. a. Rosa puts $4,000 into her flexible benefits account, and her actual expenses are $5,000. What is her cost of underestimating the expenses

Answer 1

The cost of underestimating the expenses is $240.

Step-by-step explanation:

A flexible benefits program can be described as a spending plan in which an employee agrees to a lower cash compensation when the employer has also agreed to pay some costs which the employer can pay without the need for the employee to recognize gross income. Therefore, the medical expenses of the employee for the next year will be estimated by the employee and he or she will accept a deduction equal to the estimated expenses from his or her salary.

From the question, the following are given:

Amount put into flexible benefits account by Rosa = $4,000

Rosa's Actual expenses = $5,000

Marginal tax rate = 24%

Therefore, we have:

Amount by which the account is underestimated by Rosa = Rosa's Actual expenses - Amount put into flexible benefits account by Rosa = $5,000 - $4,000 = $1,000

Rosa's cost of underestimating the expenses = Amount by which the account is underestimated by Rosa * Marginal tax rate = $1,000 * 24% = $240

Therefore, the cost of underestimating the expenses is $240.