That’s because flex spending accounts, which allow taxpayers to use pretax dollars for out-of-pocket medical expenses, have a “use it or lose it” provision that requires them to use all of the money by the end of the year or watch it disappear. It’s the law.

So with all of that extra spending going on, I have a new play that has a history of running at year’s end: Drugstore.com (DSCM: NASDAQ).

While flex account holders can spend the funds on medical expenses not covered by insurance — like laser eye surgery, dental expenses, psychiatric care, vaccinations, immunizations and dermatological services, etc. — they can also spend it on certain over-the-counter medications that can be paid for using the flex spending account, thanks to a September 2003 announcement from the Treasury Department and the IRS:

“Today, the Treasury Department and the IRS announced over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts. Treasury and IRS issued guidance clarifying that reimbursements for nonprescription drugs by an employer health plan are excluded from income. Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee.”

However, according to Forbes.com, “OTC products are reimbursable if they are used to alleviate or treat personal injuries or sickness and are generally accepted as falling within the category of medicine or drugs.”

Regardless, there are millions of dollars still left in flex spending accounts that must be spent…or they’ll disappear forever.

According to Forbes, Drugstore.com “called upon some of the largest U.S. benefits administrators to create a list of items that are eligible for reimbursement under most plans. On its Web site, Drugstore.com offers some 2,000 OTC items deemed likely to be eligible at its ‘FSA Store.’ Shoppers can print a detailed receipt to submit to their FSA administrator for reimbursement, and all purchases made throughout the year on the site can be consolidated in a single FSA receipt.”

The company, which also places icons next to items on its Web site that are typically eligible for reimbursement, seems to have historically benefited from the spend-it-or-lose-it flex account trend.

From December 2001 to January 2002, Drugstore.com ran from a low of about 90 cents to about $4.50. From December 2002 to January 2003, the company ran from about $1.75 to about $2.75. From December 2003 to January 2004, it ran from about $5.50 to about $8.  From December 2004 to January 2005, it ran from about $3 to $3.75.  And from December 2005 to January 2006, it ran from about $2.50 to $3.30.

I’m speculating that shares of DSCM could run again from December 2006 to January 2007. A good strategy would be to buy in mid- to late-December, holding until the second week of January.

Take care,
Ian Cooper
November 21, 2006

Investing in Flex Spending Accounts was originally featured in the Penny Sleuth.