How does a flexible spending account (FSA) function?

A flexible spending account (FSA) functions as a tax-advantaged account that enables individuals to set aside pre-tax dollars for eligible medical expenses. Contributions made to an FSA reduce the employee's taxable income, which can lead to substantial tax savings. The funds in an FSA can be used for a variety of qualified expenses, such as copayments, deductibles, and certain over-the-counter items, making it convenient for managing out-of-pocket healthcare costs. This account is especially beneficial for those who anticipate having regular medical expenses.

While an FSA does help cover out-of-pocket expenses not included in a standard insurance policy, focusing on it as a tax-advantaged account emphasizes its primary function. The other options either present misunderstandings about what an FSA is or misrepresent its key benefits, such as suggesting refunds for unused funds, which is not a standard feature of FSAs, as typically, any unused balance at the end of the plan year may be forfeited.