Homework answers / question archive / Hunter is a single 45-year-old who is employed by an engineering firm that includes a diverse array of taxable and nontaxable fringe benefits within the overall compensation package it offers its employees

Hunter is a single 45-year-old who is employed by an engineering firm that includes a diverse array of taxable and nontaxable fringe benefits within the overall compensation package it offers its employees

Sociology

Share With

---

Hunter is a single 45-year-old who is employed by an engineering firm that includes a diverse array of taxable and nontaxable fringe benefits within the overall compensation package it offers its employees. Employees receive a base salary in addition to occasional incentive awards (i.e. bonuses); the incentive awards are often in the form of noncash perks. The company also offers different forms of equity-based compensation to reward its highest performing employees.  

 

Hunter does not itemize deductions, and he does not have any available tax credits or estimated tax payments. His employer withheld $23,668 from his paychecks for income tax withholding.  

 

Hunter's base salary for calendar-year 2018 was $101,350. He embarked on an all-expenses-paid 5-day Caribbean cruise in April 2018, which he received from his employer in lieu of a cash bonus. The cruise and related travel expenses would have cost Hunter $4,025 if had paid for the trip out-of-pocket. His employer agreed to give Hunter an extra $1,375 in cash to cover his tax liability on the value of the cruise (referred to as a "tax gross-up"). Tax gross-up payments are included on an employee's paycheck as ordinary wages subject to income and payroll taxes. 

 

Hunter also took advantage of the following pre-tax payroll deductions:

 

• Annual employee contribution to employer's 401(k) qualified plan = 6% * $101,350 base salary = $6,081/year (his employer provides a 75% match as well, i.e. $4,560.75/year)
• Annual employee contribution to a flexible spending account ("FSA") = $2,400/year
• Annual employee contribution to health insurance plan = $1,440/year

 

A summary of the above-mentioned compensation details is provided in the following table:

 

Description2018 AmountBase salary$101,350Non-cash incentive award - all-expenses-paid cruise vacation$4,025Tax gross-up for the non-cash incentive award$1,375Payroll deduction - Employee 401(k) contributions$6,081Payroll deduction - Employee FSA contributions$2,400Payroll deduction - Employee portion of insurance premiums$1,440Income taxes withheld from paychecks$23,668

 

Hunter is a highly-valued engineer at the company and thus has been rewarded quite handsomely the past few years with several equity-based compensation awards. In 2018 Hunter decided to sell 4,360 shares of stock that he received pursuant to the terms of these awards.

 

Type of Equity Award Section 83(b) Election?Number of Options/Shares GrantedGrant DateFMV/share @ Grant (Exercise Price) Vest DateFMV/Share @ Vest Exercise DateFMV/Share @ Exercise Number of Shares SoldSale DateSales Proceeds per Share Restricted StockYes610 shares1/1/2016$9.501/1/2018$11.75  6105/1/2018$17.50Restricted StockNo950 shares1/1/2017$11.301/1/2018$11.75  9505/1/2018$17.50Restricted StockYes1,225 shares1/1/2018$11.751/1/2019$10.90     Nonqualified Stock Options 100 options - 7 shares per option1/1/2016$9.501/1/2017$11.301/1/2017$11.307005/1/2018$17.50Nonqualified Stock Options 200 options - 7 shares per option1/1/2017$11.301/1/2018$11.751/1/2018$11.751,4005/1/2018$17.50Incentive Stock Options 100 options - 7 shares per option1/1/2016$9.501/1/2017$11.301/1/2017$11.307005/1/2018$17.50Incentive Stock Options 200 options - 7 shares per option1/1/2017$11.301/1/2018$11.751/1/2018$11.75    

In addition to his base salary, incentive award and equity-based compensation, Hunter also received the following taxable AND non-taxable fringe benefits from his employer during 2018:

 

Fringe BenefitDescriptionCompany's Annual CostHunter's Annual CostHealth insuranceThe company offers health insurance* to all employees. The monthly premium for each employee is $300, of which the company pays 60% and the employee pays 40% via a pre-tax payroll deduction.

*Hunter elected to receive health insurance coverage for 2018.

$2,160/year$1,440/yearAccidental death and dismemberment ("AD&D") insuranceThe company provides AD&D insurance to all employees, free-of-charge.$180/year$0Fitness facility membershipThe company offers a fitness facility membership* to all employees, free-of-charge. The fitness facility is not located on the company's business premises and is open to the general public. 

*Hunter elected to receive a membership in the fitness facility for 2018.

$816/year$0Employer-provided cell phoneThe company provides all engineers with a company phone, due to frequent after-hours client calls as well as the significant number of clients residing outside of the United States. Employees are not allowed to use their company phone to make personal calls.$444/year$0Basic group-term life insurance policyThe company provides group-term life insurance ($50,000 policy) to all employees, free-of-charge.$90/year$0Supplemental group-term life insurance policyThe company offers supplemental group-term life insurance* to all employees. The supplemental life insurance coverage employees can elect is capped at 8 times their base salary or $500,000, whichever is lower.  

*Hunter elected to receive the maximum allowable $500,000 in supplemental life insurance for 2018.

$900/year$240/yearEmployer-provided mealsThe company provides catered lunches to all employees on Mondays and Wednesdays, free-of-charge. The meals are furnished for the convenience of the company and are provided on the company's business premises.$1,352/year$0Qualified parkingThe company provides qualified parking access at a parking garage located on the company's business premises to all employees, free-of-charge.  $3,900/year ($325/month)$0

 

When employees make a Section 83(b) election with respect to their restricted stock grant, they do so under the assumption that the company's stock price is going to increase before the restricted stock vests. 

 

There are certain trade-offs the employee must be willing to live with if they make a Section 83(b) election:  (1) the possibility of having to recognize taxable wages in an earlier tax year (if the vesting date occurs in a year subsequent to the grant date), (2) the risk that the stock price will actually decrease instead of increase, and (3) the risk that they may leave the company or otherwise forfeit their right to the restricted stock before the vesting date.

 

Compute the amount of cash that Hunter could have saved if he had the benefit of hindsight and could avoid making any unfavorable Section 83(b) election decisions. In other words, if Hunter could have minimized his taxable wages related to his restricted stock grants in 2016, 2017 and 2018, what would the difference have been in the total income taxes and FICA taxes he actually paid? 

 

You may assume Hunter's taxable wages each year were taxed at a combined rate of 31.65% (24% marginal tax rate + 7.65% FICA). Do not consider any present value implications when computing the cash savings that Hunter missed out on. 

 

Your answer should be provided as a positive number and rounded to ZERO decimal places.  

Numeric Response