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Flexible Spending Accounts (FSAs), also known as “Section 125 Plans” or “Cafeteria Plans”, were developed as part of IRS Section 125 to provide employees with tax relief for their un-reimbursed medical and dependent day-care costs. FSAs enable employees to utilize pre-tax dollars to save Federal, FICA, and, in most cases, state taxes when paying for eligible expenses not covered by traditional insurance plans.
Health Spending Accounts (HSAs) are similar tax-advantaged accounts available to US taxpayers who are enrolled in select health plans. The funds contributed to an HSA account are not subject to federal income tax at the time of deposit. Unlike an FSA, funds roll over and accumulate year to year if not spent. Some FSA and HSA plans offer a special debit card to access tax-favored spending accounts.