Danielle Fields-Damato entered the final stretch of December with two shopping dilemmas.
The 45-year-old compliance officer from Deer Park, N.Y., needed to buy Christmas presents for her husband. She also needed to spend much of the remaining $2,460 she had left in her tax-free flexible spending account for medical expenses. Otherwise she’d forfeit a chunk of the money.
So Ms. Fields-Damato did what any loving and cost-conscious spouse would do. She bought hundreds of dollars of medical products that qualified for FSA reimbursement, wrapped them and put them under the tree.
To fill her husband’s stocking, she bought a half-dozen varieties of sunscreen, bandages, ice packs and wristbands to treat seasickness. She’ll also present him with an elaborate first-aid kit for their boat on Christmas morning.
“It’s like a win-win,” she said of her medical holiday shopping spree.
A resourceful batch of consumers have adopted a novel method for draining their FSAs before use-it-or-lose-it deadlines kick in at year’s end. They’re using the accounts to fund blood-pressure monitors, transcutaneous electrical nerve stimulation machines and other qualified medical products as holiday gifts.
Internal Revenue Service rules allowed workers to put up to $2,650 in the employer-sponsored plans in 2018. WageWorks , which manages FSAs and other benefits for 6.9 million workers, said its average participant put $1,204 into their account last year and forfeited $172 of it to their employer when they didn’t use the money in time.
No one knows exactly how much money gets forfeited each year, but it is likely in the millions of dollars. Employers must reinvest the money into administering the plans or spend it on benefits.
The growth of online retailers that sell exclusively FSA-reimbursable products, such as FSAstore.com and FSAmarket.com, has made it easier for consumers to find over-the-counter products and buy them with spending cards linked to the accounts. New York-based FSAstore.com surveyed customers earlier this month and found that nearly 400 of them plan to use the accounts to buy holiday gifts for their dependents.
On their lists: acne creams, shoe insoles, saline nose wipes and glucose strips.
“You’re showing your spouse or your kids that their wellness is really important to you,” said Alana B. Elias Kornfeld, vice president of brand strategy and content at FSAstore.com, which sells more than 4,000 products that can be purchased using these accounts.
Of course, what’s thoughtfully practical to the gift-giver could come off as lacking in cheer. “Think about it: If your spouse bought you a defibrillator for Christmas, you probably wouldn’t be excited by that,” said Jody Dietel, chief compliance officer of WageWorks.
Kevin Fischer, director of operations at Carlsbad, Calif.-based FSAmarket.com, used his account to buy his father a $37 hot-and-cold-therapy back brace for Christmas last year. He thought it would help alleviate the back pain his dad was getting from working in the yard. His dad took it as his son’s way of pointing out he was getting old.
“Oh really, you think I need this?” Mr. Fischer recalls his father saying upon opening the gift. To which he responded, “You do because you’re always complaining about your back.”
As the debate about his father’s well-being unfolded, “he mentioned that he could still beat me at ping pong,” Mr. Fischer said.
Heidi Capela, a nurse from San Diego, recently realized she had about $2,000 left in her account. She decided therapeutic gifts would be perfect for her father, who suffers from nerve pain, so she used the account to buy him a $231 kit for muscle and joint pain relief, which includes a light-therapy pain treatment system and knee and ankle wraps.
She found reimbursable aromatherapy neck warmers to give secretaries at the health-care company where she works. “They probably need them because I’m a pain in the neck,” she said.
There’s one catch. IRS rules say that FSA dollars should only be used for qualified medical expenses for the employee, the employee’s spouse or dependents. FSA-oriented retailers and plan sponsors urge shoppers to follow the rules. “Think about something for your spouse or kids,” said Ms. Dietel of WageWorks.
Asked whether the IRS enforces the rule, an IRS spokesman said, “We hope you’re being compliant about it.”
FSAs got their start as a workplace perk through the Revenue Act of 1978, which allowed employees to set aside tax-free dollars to pay for medical expenses like deductibles and coinsurance. The IRS later ruled that if employees didn’t spend the money by year’s end, they would forfeit it. The IRS also expanded the list of eligible products to include over-the-counter remedies.
Some employers let workers carry over remaining funds into the beginning of the following year, or roll over up to $500. Other plans still hold fast to the Dec. 31 deadline.
More A-Heds
“Putting this money into this account is kind of like buying an expiring gift card at a store that has an unappealing selection,” said Joel Waldfogel, an economics professor at the University of Minnesota’s Carlson School of Management.
Jacob Larrabee, a 39-year-old firefighter in Barre, Vt., concedes that the bandages and contact lens solution he purchased to fill the stockings of his wife and children are “not the most exciting stuff.”
Still, buying them with his FSA, which had about $2,000 left in it early this month, had a clear upside. “It’s like money that I didn’t know I had,” he said.
Write to Janet Adamy at janet.adamy@wsj.com