Georgia Navigator Practice Exam

What is a key feature of a Flexible Spending Account (FSA)?

1. Funds do not expire at the end of the year

2. Employee contributions are made pre-tax

3. Only employed individuals can contribute

4. There is no limit on the amount that can be contributed

The correct answer is: Employee contributions are made pre-tax

A key feature of a Flexible Spending Account (FSA) is that employee contributions are made pre-tax. This means that the money you contribute to an FSA is deducted from your salary before taxes are calculated, effectively reducing your taxable income. By utilizing pre-tax contributions, employees can save money on their overall tax liability, making it a financially advantageous option for managing healthcare or dependent care expenses. Other options highlight aspects that do not accurately reflect the characteristics of an FSA. For instance, funds typically do expire at the end of the plan year, encouraging employees to use their contributions within that time frame. Additionally, an FSA is designed for employees, but that doesn't restrict contributions solely to employed individuals; specific eligibility criteria may vary. Lastly, there is usually a limit set on the amount that can be contributed to an FSA each year, which is determined by the employer and subject to IRS limits. These nuances establish why the pre-tax nature of contributions stands out as a defining feature of FSAs.