What is a lifestyle spending account?

Many employers are familiar with account-based benefits like health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). But some may not be as familiar with lifestyle spending accounts (LSAs), which are a relatively new benefit type.

LSAs are a flexible benefit that enables employers to help pay for various types of expenses that employees encounter in their daily lives. Because they cover more than just medical expenses, an LSA can be seen as more meaningful to employees, positively impacting retention and recruitment efforts, improving morale, and boosting employee engagement.

A recent survey¹ found that 70% of companies are considering adding an LSA to their benefits package. Before you sign up for an LSA, you need to fully understand how it works. Below, we’ll explain what an LSA is, its pros and cons, and an alternative benefit option you can use to invest in your employees’ overall well-being.

Learn more about how fringe benefits can boost your team’s morale in our guide

What is a lifestyle spending account?

A lifestyle spending account, also known as a lifestyle account, perk allowance, or specialty benefit, is an employer-funded account designed to support employees’ physical, mental, and financial wellness. Unlike FSAs and HSAs, the IRS classifies most LSA funds as taxable income for employees if spent.

LSAs are known for their flexibility. Employers design all aspects of their LSA, including contribution limits, frequency, allowance amount, participation requirements (including if you can add dependents to the account), allowable expenses, and what happens to unused funds at the end of the year.

While they’re easier to administer than traditional benefits, you can have a third-party administrator or benefits platform administer your LSA if you or your HR team want to outsource the task.

How does a lifestyle spending account work?

In some ways, LSAs work similarly to other account-based benefits, but they’re much more customizable. Let’s start with how you fund the account.

In many cases, LSAs are set up as reimbursement accounts. Only an employer can contribute to an LSA, and there are no annual contribution minimums or limits unless you design a tax-free benefit. According to Mercer², most employers contribute between $500 to $2,000 a year toward each employee’s LSA. But you can contribute more if you want to support more expensive services, like adoption, surrogacy, or IVF treatment.

You can also decide whether you want to allow LSA funds to roll over annually or if they’ll run on a “use it or lose it” system. Either way, if they’re set up under a reimbursement model, any unused LSA funds will stay with you, helping you remain as cost-effective as possible while still providing employees a great benefit.

Next, you can choose which products, services, and expenses LSA funds can be applied to. Once you pick your eligible expenses, your employees make purchases and receive reimbursements up to their set allowance amount.

Some examples of common LSA expenses and categories are:

• Physical health, such as gym and health club memberships, workout apps, fitness classes, exercise equipment, personal trainers, nutritional supplements, employee wellness programs, and athletic clothes
• Mental health, such as meditation apps, online talk therapy, massages, park passes, and counseling services
• Remote work costs like office equipment, cell phone, and internet service
• Virtual care, like telehealth and telemedicine services
• Professional development classes, continuing education courses, and training
• Family support like child care, daycare, kids’ activities, and pet care
• Grocery and meal delivery services
• Charitable donations
• Financial health and planning services
• Student loan repayment and tuition assistance

You can work with a tax professional to design a tax-advantaged LSA. However, most LSAs are taxable. With taxable LSAs, your employees must pay income tax on the money they spend from their LSA each year. Any amount rolled over or forfeited isn’t taxable gross income—only the spent money will be taxed.

What are the pros of a lifestyle spending account?

There are many advantages to having an LSA at your organization. Let’s go over a few of those below so you can see how they can help your company stand out to current and potential employees.

1. They’re inclusive and flexible

Having inclusive and diverse perks like LSAs promotes a positive workplace culture and shows that your company puts the health and well-being of your employees first.

LSAs aren’t a “one size fits all” benefit, so they’re great at equally supporting all types of employees. Women, remote employees, LGBTQ+ workers, people with disabilities, and working parents can receive a broad range of benefits to pay for the services and items that best meet their personal needs.

LSAs flexible enough that you can offer a higher allowance to one group, like individuals with disabilities. Or, if you want to promote equality, you can give every employee the same allowance amount. Whatever you choose, your employees will appreciate choosing how to spend their money.

2. They help you attract and retain talent

These days, it’s hard to stand out among your competitors if you don’t have a benefits package that includes perks. Companies that offer perks like an LSA have an easier time attracting candidates and retaining them as employees because it shows you care about their well-being.

According to a Gallup poll³, only 25% of employees feel their company cares about their well-being. Those who believe their employer cares are 69% less likely to search for a new job, 71% less likely to experience burnout, and five times more likely to be a company advocate.

By offering an LSA and promoting its ability to financially support your employees throughout their wellness journey, you’ll help yourself stand out and retain your employees for the long haul.

3. They encourage your employees to be proactive

While many benefits, like health insurance, are seen as reactive perks for when problems arise, LSAs encourage a more proactive approach. By implementing an LSA, you can encourage your employees to focus on all aspects of wellness by giving them the financial means to build healthy habits and offset costs they’ll face along the way.

For example, physical exercise and improved mental health are known to help individuals be more focused, productive, and happier in their daily lives. With an LSA, your employees may feel more motivated and financially able to make healthy changes, like purchasing a gym membership or getting mental health counseling.

What are the cons of a lifestyle spending account?

Although there are many advantages to LSAs, you should know there are some disadvantages to these types of benefits before you get started.

1. They’re inclusive and flexible

As mentioned above, generally, money spent from an employee’s LSA is subject to income taxes. In contrast, your employee's withdrawals and reimbursements are tax-free if you offer an HSA, HRA, or FSA.

Therefore, if this is your first time offering an LSA, your employees may not want to participate in a taxable benefit that will cost them more money during tax season—even if they like the other advantages of the account.

2. Potential ERISA and ACA complications

Other tax-advantaged health benefits are subject to certain regulations, like the Employee Retirement Income Security Act of 1974 (ERISA)⁴. While taxable LSAs aren’t usually subject to federal laws, an LSA could be subject to ERISA if your employees use it to pay for specific health or wellness expenses.

Medical reimbursement claims from an LSA should be taxable as a non-group health benefit. This means that expenses listed in Section 213 of the Internal Revenue Code⁵ should be excluded from your LSA benefit, as those items are limited to group health plans, HSAs, and HRAs. If you do reimburse employees for these items, you can't require any proof of purchase. Personal expenses that are beneficial to general health aren’t considered medical care.

A health LSA also doesn't satisfy the Affordable Care Act's employer mandate for organizations with 50 or more full-time equivalent employees (FTEs). If you want to offer a compliant health benefit and you have 50 or more FTEs, you should consider an HRA or a group health plan.

If you’re unsure how to set up your LSA benefit to avoid a compliance pitfall, you should consult a lawyer or benefits specialist before you offer an LSA to your employees.

3. You may need a good-sized budget to make it worthwhile

LSAs are employer-funded only, so contributing to each employee’s account will add to your annual benefits budget. Because many lifestyle services and products, like family support, groceries, and student loan repayments, are especially costly these days, your employees may not see the value in their LSA unless you provide a large enough budget.

According to Mercer, an annual allowance of $250 per employee isn’t valuable enough for an employee to cover anything particularly worthwhile. Plus, it may not be worth your time and effort to administer an LSA if your employees don’t find it impactful.

Depending on the size of your budget, it can be challenging to strike a good balance between staying cost-effective and providing a generous benefit to your employees that they will want to use.

How PeopleKeep can help you offer an employee stipend

If you like the idea of an LSA, but you want an even more flexible option, you can go with an employee stipend. Stipends are a fixed amount of money offered to employees to help pay for a wide range of lifestyle expenses. Once you set your allowance amount, your employees can spend the funds on whatever eligible expenses they choose.

Stipends are even less regulated than HSAs, HRAs, and LSAs. Stipend allowances are essentially grossing up employee wages. You can’t require them to spend the money on a particular type of expense—even if you want them to do so.

If you’re new to offering employee stipends, PeopleKeep’s WorkPerks software makes it easy. WorkPerks is a stipend administration solution for businesses of all sizes that allows you to offer reimbursable, customizable employee perks for health, wellness, remote work, and more.

Here are the steps to creating an employee stipend benefit with WorkPerks:

• Set a budget
• Choose which benefits and categories you’d like to make reimbursable for your employees
• Create eligible employee classes based on bonafide job-based criteria such as salaried, full-time, hourly, etc. (optional)
• Add your employees to the benefit
• Reimburse employees when they submit proof of an eligible expense

By administering your benefits with WorkPerks, you’ll have all your fringe benefits in one place for easy reimbursement—no matter how many expense categories you choose to cover. Better yet, administering your employee benefits only takes a few minutes every month, so you can have more time to take care of running your business.

Conclusion

If you’re looking to supplement your health benefit or simply add to your compensation package, LSAs are a great option for supporting employees' wellness. But depending on the type of coverage you want to offer, they may not meet your exact needs.

Offering an employee stipend through PeopleKeep is an even more personalized way to provide fringe benefits. With our WorkPerks stipend administration software, we help organizations like yours to easily offer reimbursable perks for health, wellness, and remote work expenses without the hassle.

Schedule a call with our benefits advisors today, and we’ll help get you started.

This blog post was originally published on February 8, 2023. It was last updated on January 23, 2024.