# Question: Flexible spending accounts FSA allow employees to set aside a

Flexible spending accounts (FSA) allow employees to set aside a portion of their earnings to be used for approved medical expenses. The major advantage of an FSA is that the funds are not subject to payroll taxes and reduce an employee’s taxable income. For example, if the employee is in a 30% tax bracket and funds an FSA with \$ 1,000, the person reduces his or her tax burden by \$ 300. The disadvantages of an FSA are:
• An employee must decide how much of his or her earnings to deposit in the account at the beginning of the year.
• The funds can only be used for specific medical expenses.
• Any unused funds at the end of the year are lost to the employee.
Beth needs to decide how much of her earnings to deposit into her employer’s FSA. She is considering \$ 1,000, \$ 1,500, \$ 2,000, and \$ 2,500 and is currently in a 25% tax bracket. Construct a decision table showing the costs of depositing these amounts along with annual medical expenses of \$ 1,000, \$ 1,500, \$ 2,000, and \$ 2,500. When Beth’s medical expenses exceed the amount deposited in the FSA, the cost is the missed opportunity to reduce her tax burden. When Beth’s medical expenses are less than the amount deposited, the cost is the unused funds that are lost to her. When medical expenses equal the amount deposited in the FSA, there is no cost to Beth.

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