Question

Winter Company provides its employees a medical insurance plan that does not cover any dental
expenses. Therefore Winter offers its employees an opportunity to enroll in a flexible spending
account up to $2,650 (salary reduction) which could be used toward dental expenses. If Joseph
is in the 30% marginal tax bracket, how much would Joseph save in federal
income tax if Joseph were to enroll in the flexible spending plan?
a. Zero
b. 795
c. 1,855
d. 2,650

Answer 1

As per the details given in the question medical insurance plan does not cover dental expenses. So that the company allows the employee to spend flexibly to the extant of $2650 and was reduced from salary. This can be allowed as a deduction to the employees. Since there was a reduction in the amount of salary, there will be corresponding reduction in the amount of tax to which the employee fall. Since the employee Mr Joseph fall in the tax bracket of 30 % the amount of savings in federal tax is $795 (i.e., 2650 X 30 %) . Option b $795