Which statement is true regarding flexible spending and health savings accounts?

The statement about flexible spending accounts (FSAs) and health savings accounts (HSAs) being shown as reductions to your W-2 income is correct because contributions to these accounts are made pre-tax. This means that the amount you contribute to either an FSA or HSA is deducted from your gross income, which lowers your taxable income for the year. As a result, this leads to potential tax savings as you pay less in federal taxes. By reducing your taxable income, you can effectively lower your overall tax burden, taking advantage of the tax benefits that these accounts offer.

Flexible spending accounts have specific rules regarding carryover and usage, typically requiring that funds be utilized within the plan year or within a short grace period unless the employer provides a carryover option. Health savings accounts do allow funds to roll over indefinitely, which is a crucial distinction. Additionally, both types of accounts can be utilized across various types of medical expenses, not just specific insurance plans. This flexibility reinforces the advantage they provide regarding healthcare costs. Understanding the tax implications is essential, as it directly impacts financial planning and budgeting for both current and future medical expenses.