LO.2, 5 Bluebird, Inc., does not provide its employees with any tax-exempt fringe benefits.

The company is considering adopting a hospital and medical benefits insurance plan that will cost approximately $9,000 per employee. To adopt this plan, the company may have to reduce salaries and/or lower future salary increases. Bluebird is in the 35% (combined Federal and state rates) bracket. Bluebird is also responsible for matching the Social Security and Medicare taxes withheld on employees’ salaries (at the full 7.65% rate for 2012). The hospital and medical benefits insurance plan will not be subject to the Social Security and Medicare taxes, and the company is not eligible for the small business credit for health insurance. The employees generally fall into two marginal tax rate groups:

Income Tax Social Security and Medicare Tax Total

.15 .0565 . 2065

.35 .0145 . 3645 The company has asked you to assist in its financial planning for the hospital and medical benefits insurance plan by computing the following:

a. How much taxable compensation is the equivalent of $9,000 of exempt compensation for each of the two classes of employees?

b. What is the company’s after-tax cost of the taxable compensation computed in part (a)?

c. What is the company’s after-tax cost of the exempt compensation?

d. Briefly explain your conclusions from the preceding analysis.