What is a "Flexible Spending Account (FSA)"?

A Flexible Spending Account (FSA) is an employer-established benefit that allows employees to set aside a portion of their earnings, before tax, to pay for eligible healthcare costs. This means that employees can use pre-tax dollars for out-of-pocket medical expenses, such as copayments, deductibles, and certain healthcare products and services, which ultimately helps reduce their taxable income.

The primary benefit of an FSA lies in its tax advantages; because contributions are made from gross wages, participants lower their overall income tax burden. The money in an FSA does not roll over from year to year, so participants must estimate their annual healthcare expenses carefully and use the funds within the designated plan year, or they may lose any remaining balance.

The other options do not accurately describe an FSA. It is not a retirement savings account, nor is it a general emergency fund; instead, it is specifically for healthcare costs. Additionally, it is distinct from normal health insurance policies, as it is a savings mechanism that supplements health expenses rather than serving as a form of insurance coverage.