DECA Human Resources Management Practice Exam

What does a Flexible Spending Account allow employees to do?

1. To save money for retirement

2. To set aside pre-tax money for healthcare expenses

3. To pay for educational expenses post-tax

4. To receive tax refunds at the end of the year

The correct answer is: To set aside pre-tax money for healthcare expenses

A Flexible Spending Account (FSA) allows employees to set aside pre-tax money specifically for healthcare expenses, which is why this option is correct. This pre-tax contribution reduces the taxable income of the employee, ultimately leading to tax savings. Employees can use the funds in their FSA to cover eligible out-of-pocket health expenses such as copayments, deductibles, and certain medical supplies. Contributions to an FSA are typically made through payroll deductions, allowing employees to manage their healthcare costs more efficiently. This financial arrangement helps in budgeting for healthcare needs while maximizing tax benefits. The other options do not accurately describe the function of an FSA. Saving money for retirement pertains to accounts such as 401(k)s or IRAs, while paying for educational expenses involves different forms of tax treatments and accounts not associated with FSAs. Lastly, an FSA does not operate on the principle of receiving tax refunds; rather, it allows employees to use pre-tax contributions throughout the year for qualified expenses.