What type of accounts can organizations establish for employees to cover medical expenses using pretax funds?

Organizations establish flexible spending accounts for employees to cover medical expenses using pretax funds. These accounts allow employees to set aside a portion of their earnings before taxes are deducted, which can then be used to pay for eligible medical expenses throughout the plan year. This approach not only helps reduce taxable income but also allows employees to manage healthcare costs more effectively.

Flexible spending accounts are advantageous because they encourage employees to anticipate and budget for their medical expenses, effectively increasing their purchasing power for healthcare. Moreover, contributions to these accounts typically do not incur payroll taxes, leading to additional savings for both the employer and employee.

Health savings accounts, while also used for medical expenses, are specifically tied to high-deductible health plans and offer different contributions and tax benefits. Retirement savings accounts, on the other hand, are focused on long-term savings for retirement and do not apply to medical expenses. Dependent care accounts are designed for covering daycare expenses for dependents and, while also utilizing pretax funds, do not apply to medical expenses directly.

This distinction makes flexible spending accounts the correct choice for employees seeking options to manage their medical expenses effectively with pretax income.