Lifestyle Spending Accounts: A Guide for Employee Wellness

The past few years have been characterized by employers desperately searching for sustainable, realistic ways to retain and attract employees. A new benefit is gaining traction in the HR industry, and it’s one that’s not difficult to implement or administer:

Lifestyle Spending Accounts (LSAs).

LSAs are accounts that give employees some extra cash that they can spend toward their personal, everyday wellness needs (needs that aren’t covered by traditional health plans). Unlike HSAs or FSA, a Lifestyle Spending Account allows employees to spend the extra money on a wide range of wellness expenses, determined by employer guidelines.

Read on to learn everything you need to know about LSAs; what they are, how they work, and what the benefits are.

Key Takeaways

LSAs are employer-sponsored accounts that employees can use to cover health and wellness costs that aren’t covered by traditional health plans.
Employers tailor the program to include possible expenses—employees choose how to use their money within the program
LSAs are easy to implement, easy to administer, and easy to use for employees.
LSAs boost traditional benefit plans to attract new employees and retain existing ones.

What Is A Lifestyle Spending Account

Lifestyle Spending Accounts are employer-funded accounts that allow organizations to help their employees cover qualified health or wellness expenses. Unlike a traditional healthcare plan, however, LSAs don’t have many rules or restrictions regarding spending—in fact, employers can set what is deemed an eligible expense.

Usually, this means anything related to wellness: physical wellness expenses, mental wellness expenses, and financial wellness expenses are some good examples. Employers decide how much to give each employees’ account and which expenses are eligible, and employees decide how to spend that money in a way that means the most to them.

Lifestyle Spending Account Eligible Expenses

LSAs are so popular because the eligible expenses aren’t defined by the IRS or government—eligible spending is up to each company, which means it can be either narrow or broad, depending. Common spending opportunities through LSAs include:

Gym memberships
Fitness equipment/classes
Groceries
Daycare services
Life coaching
Therapy sessions
Financial education courses
Continuing education
Professional development
Home office equipment
Pet care

Eligible expenses are typically wellness-centric, and best practice says to be as flexible in your restrictions as possible because every employee is different—everyone will want to increase their wellness in different ways.

The goal of an LSA is to empower employees to be healthier and happier by giving them extra money to spend on the wellness items they may not be able to afford otherwise.

What’s the Typical Setup for an LSA?

Because it’s up to employers to design what works best for them, there isn’t really a typical setup. Each LSA program has its own:

Eligible population
Dollar amounts/limits
Funding frequency
Spending time frame

As with any benefit, you should be as accepting and open in your LSA design as possible. Try to allow employees to use the funds in any way that will be fulfilling to them—that way, the benefits will be much more far-reaching and exciting.

How Do Taxes Work For a Lifestyle Spending Account?

Taxes for Lifestyle Spending Accounts (LSAs) can be a nuanced topic, as they depend on how the account is structured and how the funds are used. Here's a breakdown to help you navigate the key tax considerations:

Taxable Income for Employees:
In most cases, funds in an LSA are considered taxable income when they are spent by employees. This means that while the employer provides the funds, employees will need to report the amount used as income on their taxes. This can slightly increase the employee’s tax liability, so clear communication about this aspect is essential.
Employer Tax Benefits:
LSAs may qualify as a business expense, making them tax-deductible for employers. To ensure compliance, the expenses must align with business goals, such as improving employee wellness or productivity. Employers should work with a tax advisor to determine the deductibility of these expenses and ensure proper documentation.
When LSAs Are Tax-Advantaged:
Certain LSAs that reimburse for specific expenses—such as professional development or gym memberships—might be eligible for tax benefits under specific circumstances.
Consider State Tax Laws:
Taxation of LSAs may vary by state. For instance, some states may not tax the funds in the same way as federal guidelines. Employers should familiarize themselves with the state-specific tax rules where their business and employees are located.
Customizability and Its Tax Implications:
The flexibility of LSAs means employers can tailor them to meet employee needs. However, the more customized the plan, the more complex the tax implications may become. For example, broad usage allowances may result in higher taxable income for employees, while narrowly defined programs may reduce this burden but limit flexibility.
Reporting Requirements:
Employers need to ensure proper reporting of LSA benefits. Typically, the value of funds spent is included in the employee’s W-2 form under taxable wages. Employers should maintain clear records of funds disbursed and reimbursed to avoid compliance issues.

Best Practices for Managing LSA Taxes

Consult a Tax Professional: Because LSAs are highly customizable, the tax implications can vary significantly. A tax professional can provide guidance tailored to your specific program setup.
Clear Employee Communication: Educate employees on the tax treatment of LSAs, including any potential impacts on their paycheck or annual tax filings.
Leverage Pre-Tax Options Where Possible: For certain expenses, such as commuter benefits or health-related costs, consider whether they can be integrated into pre-tax programs alongside LSAs for additional savings.
Document and Audit: Maintain thorough records of all transactions and reimbursements to ensure compliance and maximize potential tax advantages.

While LSAs offer incredible flexibility and value to employees, understanding their tax implications is crucial for both employers and employees. Proper planning and expert advice will ensure your LSA program is both impactful and compliant with tax regulations.

Benefits Of a Lifestyle Spending Account

When you enhance your benefit offerings with an LSA, some key benefits will come along with it. These benefits include:

Flexible spending for employee-centric wellness. Some employees need childcare, some want to go to the gym more often, and others want to eat healthier. An LSA program allows each employee to spend their extra cash on what is most meaningful for them. This customizable benefit helps employees feel valued and recognized, which can improve turnover and happiness.
Enhanced benefits without breaking the bank. Employers can offer better, more far-reaching benefits without increasing everyone’s base pay or spending an arm and a leg on bonuses. Instead, they can fund LSA accounts in manageable, affordable ways while still making a big difference in employees’ lives.
Further diversity, equity, inclusion, and belonging initiatives. LSAs are a great opportunity to pursue DEIB objectives and close the benefits gap between different groups of employees.
Only pay for reimbursed funds. While you may budget for $500 for each employee, you only have to cover the money that employees spend. Obviously, the goal is for every employee to take advantage of this benefit—but if some don’t, you don’t waste any money.
Show employees that you care. In today’s world, employees need to know that their employers care about them on an individual level. Wellness is very important to over 60% of employees, and when you offer personalized wellness benefits, such as an LSA, you show that you’re willing to invest in your employee happiness.

What To Consider When Implementing an LSA?

You should consider the following best practices when you decide to implement an LSA:

Develop program goals and set a realistic budget
Clearly define eligible expenses and keep funding, spending, and reimbursement (if applicable) processes simple
Communicate clearly and frequently to employees about this new benefit
Run reports to optimize your program performance

It’s as simple as that. For such a simple program, the benefits you’ll see are pretty impactful.

Unlock Wellness Potential with a Lifestyle Spending Account

We admit, "LSA" might not be our flashiest acronym, but the results speak for themselves. Lifestyle Spending Accounts are a simple, impactful way to elevate your wellness benefits. Flexible, far-reaching, and loved by employees, LSAs are the logical next step in fostering a happier, healthier workforce.

Awardco offers a unique Lifestyle Spending Account on our platform. Create customized programs that reward employees with points they can use on wellness rewards. Schedule a demo to learn more.