National Evaluation Series (NES) Business Studies Practice Test

Why might a company choose to implement a flexible spending account plan for its employees?

1. To increase employee turnover

2. To provide tax-free ways for employees to pay for out-of-pocket expenses

3. To reduce company profits

4. To manage employee grievances

The correct answer is: To provide tax-free ways for employees to pay for out-of-pocket expenses

Implementing a flexible spending account (FSA) plan can be a strategic choice for companies looking to enhance their employee benefits package. One of the main advantages of an FSA is that it allows employees to set aside pre-tax earnings to pay for qualified out-of-pocket expenses, such as medical costs, dependent care, and other eligible expenses. This tax advantage translates to increased take-home pay for employees, which can boost their overall job satisfaction and perceived value of the benefits offered by their employer. By utilizing pre-tax dollars, employees save on income and payroll taxes, which effectively lowers their total out-of-pocket expenses for necessary costs. This is particularly appealing to workers who may have frequent medical expenses or children requiring daycare. Moreover, offering FSAs can serve to attract and retain talent, as prospective employees often look for comprehensive benefits when evaluating job offers. In contrast, the other options do not accurately reflect the benefits or purposes of implementing an FSA plan. Increasing employee turnover or managing grievances does not align with the objectives of FSAs, which are primarily designed to provide financial support for employees. Additionally, reducing company profits runs counter to the incentive structure of employee benefits, which are aimed at promoting a productive workforce rather than incurring unnecessary financial burdens.