1.Your firm has been providing long term care insurance (covering nursing home c

Question

1.Your firm has been providing long term care insurance (covering nursing home care) for your workers. It costs the firm $2200 per year per employee to provide this benefit. Suppose it also costs employees $2200 per year to buy on their own. The employees’ marginal tax rate is 28%.

a)If your firm decided to stop providing the insurance, by how much would it need to increase salary so that employees could continue to buy the benefit on their own?

b)Suppose most of your employees are in their 20s and early 30s. Is this a good benefit to provide? Or should the firm stop providing it (without increasing salary)? Explain your answer.

Explanation / Answer

a) In order to find out increase in salary of employee we will also need to consider its marginal tax rate of 28 %

as after the amount of additional tax is paid on additional income of employee, he shouled be left with 2200 which he pays as insurance amount.

Out of total increase in salary 28 % will go in taxes , it means only 72 % (100-28) will cover insurance cost of 2200

re arranging this we find that 2200 of insurance amount is equivalent to 72% of increased salary

so, Increased salary = 2200 / 72 % , = 3055.56

Now, if he pays 28 % tax, it will amount to = 855.56

Amount left after taxes will be = 3055.56-855.56, = 2200

b) Yes it is good benefit to provide as if employees are in 20's and early 30's, they must be panning their children in near future for which nursing come is required. It will work as a good motivator.

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