Which regulation sets the requirements for the tax treatment of an FSA?

The correct regulation that sets the requirements for the tax treatment of a Flexible Spending Account (FSA) is IRC Section 125. This section of the Internal Revenue Code specifically outlines the tax benefits associated with cafeteria plans, which include FSAs. IRC Section 125 allows employees to choose between different types of benefits, including health and welfare benefits, and provides favorable tax treatment for contributions made to these accounts.

FSAs allow employees to set aside pre-tax dollars for qualified medical expenses, reducing their taxable income. This tax advantage is a key aspect outlined in IRC Section 125, making it the relevant regulation for understanding the tax implications of participating in an FSA.

Understanding IRC Section 125 is essential for both employers and employees, as it guides the establishment and administration of these plans, ensuring compliance with tax law and maximizing benefits for participants.