New York Child Abuse Identification and Reporting Practice Exam

In which of the following does a covered employee agree to a reduction in compensation so the amount can be used to cover medical expenses?

1. Health Savings Account (HSA)

2. Flexible Spending Account (FSA)

3. Health Reimbursement Account (HRA)

4. Employer-Sponsored Insurance

The correct answer is: Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is a tax-advantaged financial account that allows employees to set aside a portion of their earnings to pay for eligible medical expenses. Employees can contribute pre-tax dollars, which reduces their taxable income. The funds in an FSA are deducted from the employee's paycheck, effectively leading to a reduction in compensation. This money is then available to cover various out-of-pocket medical expenses incurred during the plan year, such as co-pays, deductibles, and prescriptions, up to the annual limit set by the employer. In contrast, Health Savings Accounts (HSAs) are designed for individuals with high-deductible health plans (HDHPs) and allow contributions to be made tax-free, but they don't directly involve a reduction in compensation like an FSA does. Health Reimbursement Accounts (HRAs), on the other hand, are employer-funded plans that reimburse employees for medical expenses; however, they do not involve direct employee contributions or payroll deductions, which is central to the FSA process. Employer-Sponsored Insurance refers to health insurance provided by an employer, but it doesn’t imply an agreement to reduce compensation for medical expenses specifically. This interaction is unique to the structure of FSAs, making them the correct answer