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A lifestyle spending account (LSA) is an employer-funded account that allows employees to buy anything in the program that the employer believes will contribute to the employee’s well-being. Things like health and wellness products and services can be covered, and the uses are not centered on treatment, like a health savings account (HSA). LSAs are very flexible and provide a way for employers to support a variety of services, products, or experiences for employees.

Employees do not contribute to the account, only employers do. Employer contributions are taxable income to the employee when the funds are spent. It’s not a pre-tax account like an HSA, a health reimbursement arrangement (HRA), or a flexible spending account (FSA). Because there’s no tax advantage, the employer can decide the amount they will contribute for employees and what expenses the funds can cover.  

Considerations for Employers

Like any benefit, employers need to consider several things when deciding to offer an LSA.

• Contributions: The employer will need to decide how much to contribute to each employee’s account and what the funds can be used for. They will also need to decide which employees are eligible for the account. Will the money be contributed annually in one lump sum or on a monthly, quarterly, or per-pay-period basis? There’s no typical contribution amount, and because the money is taxable to the employee, employer contributions are usually over $250 for the year. Employers also need to decide if unused funds will roll over from year to year and whether the funds go with the employee when they leave the organization.

• Use of funds: Employers can choose what expenses qualify for the use of LSA money. Some employers may choose a narrow definition, allowing use for physical fitness and wellness purposes only. Examples of covered items might be gym memberships, athletic attire, nutrition advice, yoga, group classes, personal trainers, meditation, life coaching, and art therapy. Other employers may decide on a broader definition and include, for example, reimbursement for things the employer believes will enhance an employee’s well-being, such as beauty treatments, student loan repayments, charitable giving, pet care costs, and entertainment events. Employers can also set up multiple LSAs, with one that allows broader use of the money and others that are very specific and, for example, limit use to family-building activities like surrogacy or adoption.

• How it works: Employers can choose when to make reimbursement payments, such as once annually or as soon as the money is in the employee’s account and expenses are incurred. If the employer decides not to allow unused funds to roll over from year to year, the unused funds are forfeited back to the employer. That means the employer only pays for the employee’s actual expenditures. The employer may want to work with a vendor to administer LSA reimbursements. If you use a vendor for an FSA, HRA, or HSA account, check to see if they also administer LSAs. Consult with your tax advisor when setting up the LSA, since there could be “constructive receipt” issues with the employer contribution money, on the theory that it’s taxable to employees when it’s made available to them. However, many think the money is taxable only when given to the employee as a reimbursement, so you’ll want to get an opinion on this from a tax expert.

• Communication: Since this benefit is very new, communication to employees about how the LSA works and what costs are reimbursable will be key.

If you have any questions about LSAs or other types of benefits, please email the Employers Council Member Experience Team.