Lifestyle Spending Account (LSA) vs. FSA vs. HSA: Differences and how to choose
Know the difference between a Lifestyle Spending Account (LSA), Flexible Spending Account (FSA), and Health Spending Account (HSA).
Choosing the best employee spending account for your team
Every lifestyle is different so employee benefit needs will be vastly different from person to person, and from family to family. Post-grads are likely more interested in student-loan payoff benefits, where new mothers are probably looking for competitive dependent-care packages.
Cookie-cutter benefits don't hold up to today's standards.
Allowing your employees to pick and choose (or refuse) their benefits can help boost morale and productivity in many facets of your business. Happy employees result in loyal, hard-working employees — which can equal far less attrition in the long run.
Employee spending accounts such as a Lifestyle Spending Account (LSA), a Flexible Spending Account (FSA), or a Health Spending Account (HSA)] all have different purposes for the employee, so understanding the three types is crucial in making LSA selections best suited to your employees’ individual (and often changing) needs.
Here, we’ll discuss the differences between the three types of employee spending accounts, weigh the pros and cons of each, and how to choose the best Lifestyle Spending Account plan for your company.
What is a Lifestyle Spending Account (LSA)?
According to a MetLife employee benefits trend study, 72% of workers indicated that a customized benefits package increases their loyalty to their employer. That’s to say, when your competitors come knocking, you won’t lose your best employees to a better benefits package.
The most versatile employee benefits package option you can offer is a Lifestyle Spending Account (LSA).
LSAs are pre-determined funds set up by an employer that can be used for a variety of employee expenses such as child-care, mindfulness and wellness programs, transportation, or even home office equipment. And the list goes on and on.
Some companies refer to LSAs simply as wellness accounts — where many employers offer discounts on gym memberships, vitamin supplements, or alternative therapy. However, LSAs are fully customizable so the list of offerings can go well beyond gym membership discounts.
They put the purchasing power back into the hands of the employee to help them feel empowered by giving them freedom of choice to select benefits best suited for their individualized lifestyles.
The purchasing power of an LSA
Employers set the parameters for how employees can spend LSA funds, from what the offerings entail to how much funding is allocated to how often the funds are available to employees.
However, the more options you offer, the more talent you’ll attract as well as increasing employee satisfaction. Better yet, get them involved in having a say about those options and watch the company morale skyrocket!
Remember, every one of your employees has different needs. Some may already have a suitable home gym and don’t want or need a gym membership. For example, younger employees in good health probably won’t opt for health or nutrition coaching.
It’s best to choose offerings that offer a balanced lifestyle as well. Promoting work-life balance is highly important. LSA options geared towards boosting productivity are great, but focusing on some options that promote downtime and relaxation is important too.
An employee that might not want to spend their paycheck earnings on a full-price ticket for the ballet or theatre might think twice if their employer offers discounts for concerts, museums, or performing arts through their LSA. A night out to appreciate the arts could be exactly what they wanted and needed to feel fulfilled in their life.
A few other out-of-the-box lifestyle spending account ideas include:
- Pet care (adoption fees, training, food, doggie daycare or boarding)
- Child tutoring and after school programs
- Lunch delivery (at work or at home)
- Music or sporting event tickets
- Music or language lessons
- Golf lessons
- Vacation specials
- Transportation or gas discounts
- Online courses or ebooks
While these out-of-the-box lifestyle spending account options will make your business stand out in the crowd, you’ll want to hit on a handful of LSA-must-haves to stay competitive. Here are a few benefits expert recommendations:
- Commuter reimbursement (i.e., public transit, parking passes, fuel)
- Student loan pay off plans
- Training and further professional education
- Health and wellness (gym memberships, sports programs, massage therapy, alternative treatment, nutritionists)
- Counseling, behavioral therapy, mindfulness
For all these reasons, offering a personalized and customizable LSA for your employees is a smart way to attract the best and brightest, retain your current talent, increase productivity, boost morale, and promote work-life balance whether within the workplace or for hybrid remote workers.
What is a Flexible Spending Account (FSA)?
In contrast to the open freedom of Lifestyle Spending Account, FSAs are typically government regulated and limited specifically to child care or health/medical care.
FSAs can be broken down into two different types, Healthcare FSAs and Dependent Care FSAs.
FSAs are funded by the employee, with a predetermined amount coming out of their paycheck every pay period. However, that amount is taken before taxes, and the money in an FSA is not subject to income tax. As long as the money in your FSA is spent on qualifying medical expenses, it is not subject to income tax.
Tax-exemptions are what make FSAs and Health Spending Accounts (HSAs) similar. However, HSAs do differ in a handful of ways that we’ll touch on later on.
Since money in an FSA isn’t subject to income tax, the IRS limits how much someone can contribute to a single FSA in one year.
For Health FSAs, employees can contribute $2,750. Additionally, the spouse of employees can contribute another $2,750 through their employer into the same account. For Dependent FSAs, the IRS limits the amount to $5,000 per household, or $2,500 if a married couple files individually (thus contributing $2,500 each.)
An essential nuance to remember about an FSA is that the money contributed is forfeited if not spent within the plan year. Most accounts offer a grace period, and some plans allow a roll-over of $550 per year.
However, it’s safest to assume employees will lose the money if they don’t spend it. Unspent FSA funds are turned over to the employer once the plan-year lapses.
What is a Health Spending Account (HSA)?
Like FSAs, contributions to an HSA account are not subject to income tax, and the money must be spent on qualifying medical expenses. Anybody can contribute to their HSA account; however, the IRS sets a $3600 limit for individuals and a $7200 limit for families.
Those 55 and older may also contribute an additional $1,000. Unlike FSAs, funds in their HSA will roll over year-to-year, so employees never have to worry about losing it. They can also invest the money in their HSA account, and any gains earned are untaxed.
What’s the catch?
To qualify for an HSA, employees must be enrolled in a High-Deductible Health Plan (HDHP), which is a health plan with a higher deductible than most health insurance options. While they’ll pay a lower monthly premium, out-of-pocket expenses will be exponentially higher.
The advantages and disadvantages of HSAs
HSAs are beneficial for those who believe they’ll need little to no medical attention in the coming future. Young and healthy individuals can take advantage of lower premiums and tax-exempt savings and investments.
However, HSAs do come with their share of disadvantages.
First off, those with more medical needs will end up spending more than they have to on medical expenses. This may cause people to forgo necessary medical treatment to save money. Money is subject to income tax and penalties if withdrawn from the HSA for non-medically/qualified purchases. For example, if employees use money in their HSA as a down payment on a new car, they’ll be subject to income tax and a 20% penalty.
In short, don’t touch the money in the account if it isn’t for medical reasons.
Modern employee-directed benefits
With so many options available when it comes to employee benefits, partnering with Forma means your company won’t have to worry about making the wrong decisions with Lifestyle Spending Accounts.
Forma will help you determine the best benefits package for your employees based on what is best for them, not just what saves money. Our team will guide you to make sure your business attracts and retains its most talented employees by providing them with an array of benefit options for their Lifestyle Spending Account to suit their unique needs.