What is a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) is designed to allow employees to set aside pre-tax earnings to pay for eligible medical expenses. The contributions made to this account decrease taxable income, which can ultimately result in tax savings for the individual. Funds in an FSA can be used to pay for a variety of medical costs not covered by health insurance, such as copayments, deductibles, and certain over-the-counter expenses.

The correct choice accurately reflects the primary function of an FSA as a tax-advantaged vehicle to manage and defer tax liabilities related to healthcare expenses. By using money from an FSA for qualified medical costs, individuals can strategically minimize their out-of-pocket expenses while benefitting from tax savings.

Understanding this concept is crucial for financial planning regarding healthcare costs, as it highlights how FSAs can be instrumental in managing expenditures efficiently within the framework of the tax code.