PSI Ohio Insurance Practice Exam

What is the purpose of a Flexible Spending Account (FSA) for covered employees?

1. To increase retirement savings

2. To reduce tax liability on income

3. To pay medical expenses through reduced compensation

4. To invest in stocks and bonds

The correct answer is: To pay medical expenses through reduced compensation

A Flexible Spending Account (FSA) is designed specifically to allow employees to set aside pre-tax money to pay for eligible medical expenses. The primary purpose is to help manage out-of-pocket healthcare costs by reducing the taxable income of the employees. When employees contribute to an FSA, their taxable income decreases, which means they incur tax liability on a smaller amount of income. This directly assists in budgeting for healthcare expenses, making it more affordable for the employees who have chosen to participate. In the context of the options provided, while paying medical expenses is a primary function of an FSA, it is not merely about compensating for these expenses through a reduction in cash but rather through the unique structure of the account, which provides tax advantages. The ability to use pre-tax dollars for qualified medical costs effectively lowers the direct out-of-pocket expenses that employees experience. The other options relate to financial strategies, such as increasing retirement savings or investing, which are not the core functions of an FSA. While FSAs can indirectly support financial health by reducing immediate healthcare costs, their primary intent is to facilitate the payment of medical expenses in a tax-advantaged manner.