What is a flexible spending account (FSA)?

A flexible spending account (FSA) is specifically designed as a tax-advantaged account that allows employees to set aside pre-tax dollars to pay for qualifying health care expenses. This includes out-of-pocket medical costs such as deductibles, co-pays, and certain prescription medications. The primary benefit of an FSA is that contributions are made before taxes are deducted, which can reduce an employee's taxable income and ultimately, their overall tax burden.

The funds contributed to an FSA must be used within a certain time frame, typically within the plan year, although some plans may offer a grace period or allow a small carryover of unused funds. This structure encourages employees to plan for and cover health care costs while providing tax benefits.

In contrast, the other options represent different types of financial accounts that serve other purposes, such as retirement savings, investments for future income, or loan accounts, which do not align with the primary function of an FSA in managing healthcare expenses.