Flexible spending accounts (FSAs) are a great way for employees to set aside pretax funds for health costs. The tax savings can go a long way toward easing the cost of health care, and employers also benefit because they don’t have to pay payroll taxes on FSA funds. However, FSAs have always had a big drawback that limited their usefulness: a “use-it-or-lose-it” feature. Money placed in an FSA had to be spent by the end of the calendar year, as funds could not be rolled over into the following year.

The FSA results were predictable: Many employees failed to put money into their FSAs. Those that did often contributed a too-small amount of money for fear of losing out, and participants who put in too much money raced to spend their entire balances at the end of the year, sometimes on things that they didn’t really need.

Rollover Changes

The nature of FSAs changed in late 2012, when the Internal Revenue Service issued new rules that made using flexible spending accounts more adjustable. Employers now have the option of allowing participants to roll over up to $500 of unused funds to the next calendar year or to institute a grace period of two-and-a-half months for leftover funds to be spent. Employers don’t have to allow this new flexibility, but if they do, they can choose either the $500 rollover or the grace period, but not both.

According to HealthCare.gov, FSA funds can be used for many health costs, including visits to doctors, dentists and hospitals. They can also be used for co-payments, deductibles and prescription medications. If your health plan pays for over-the-counter medications, then an FSA can also be used, but patients will need to obtain a prescription. Employees often ask if they can use FSAs to pay insurance premiums, but in general, the answer is no.

FSAs can be used to purchase quite a long list of items, including some that might be a surprise. Examples of allowed expenses include: acupuncture, braille books for the visually impaired, contact lenses and glasses, fertility treatments, guide dogs, lodging when obtaining medical care, orthodontics, radon mitigation, transportation for medical care, and vasectomies. The IRS breaks down qualified medical expenses for FSAs and major exceptions.

As the end of the year approaches, help your employees understand how to ensure they don’t lose any of the money they have in their account. And when you choose a new plan, consider various consumer driven health plans and determine which will make the most sense for your business.

David E. Williams is president of Health Business Group, a strategy consulting firm serving clients in technology-enabled health care services, pharmaceuticals, biotech, medical devices and software. He is frequently quoted in the media on the business of health care and is the author of the Health Business Blog. David sits on the board of both private health care companies and nonprofits.