What is the primary purpose of a Flexible Spending Account?

The primary purpose of a Flexible Spending Account (FSA) is to set aside funds for future medical expenses. FSAs allow employees to allocate a certain amount of their pre-tax earnings to cover qualified out-of-pocket medical expenses, which can include things like copayments, prescription medications, and certain healthcare treatments. This approach provides a tax advantage, as the money contributed to the FSA is not subject to federal income tax and, in most cases, state taxes, effectively reducing taxable income.

Utilizing an FSA can enhance employee financial well-being by helping to manage and predict healthcare costs, enabling individuals to budget for expected medical expenses throughout the year. Unused funds in an FSA may typically be forfeited at the end of the plan year, emphasizing the need for careful budgeting.

The other options address different aspects of employee benefits or payroll management that do not align with the specific purpose of an FSA. For example, increasing employee wages pertains to salary compensation and does not involve pre-tax contributions for medical expenses. Providing retirement benefits relates to long-term savings accounts, while managing employee payroll is focused on compensating employees rather than medical expense allocation.