Question

Which of the following statements concerning health care flexible spending accounts is (are) correct?

1. The funds for the account are derived from the employee accepting a reduction in salary.

2. The dollars allocated to the spending account are generally not included in the employee’s gross income.

3. All dollars not used to purchase benefits in the specific year are carried over to the next year.

Answer 1

Option 2 is correct:

FSAs allow employees to contribute pre-tax dollars to an account set up by their employer. They can later withdraw these funds tax-free to pay for qualified health insurance premiums, out-of-pocket medical costs, day care provider fees, or private pre-school and kindergarten expenses.

Also, one potential reason for low participation rates has to do with the "use it or loss it" rule limiting the ability to cumulate funds in an FSA account. Money deposited into an FSA account is forfeit if not used in the benefit year—forfeit by the employee and received back by the company.