Realize the advantages of employee spending accounts.
Competitive benefits are often the deciding factor for employees torn between two companies. According to Metlife, 69% of employees believe having a wider range of benefits would increase loyalty to their employer. Not only are you getting top talent in the door by offering employee spending account-based benefits options, but you’re also minimizing attrition.
Employees want to feel empowered regarding their benefits options and providing optimal flexibility for meeting employees’ unique needs is ideal. Let’s dive into the three primary types of employee spending accounts to learn what they have to offer.
What are employee spending accounts?
Employee spending accounts are offered by employers as part of benefits packages. There are three primary types of employee spending accounts:
- Lifestyle Spending Account (LSA),
- Flexible Spending Account (FSA), and
- Health Spending Account (HSA).
For LSAs, employers typically offer a set amount of funds for the employee’s account each month or year, that employees can then spend within the parameters set by the employer.
Employees can use their LSA funds to pay for services such as gym membership discounts, nutritionists, personal trainers, mindfulness therapy, home office equipment, food delivery, and so much more.
Plans can be set up to allow unused funds to roll over each month if the employer chooses. So, if you’re looking to stay competitive, rollover LSAs may be an attractive option. Wondering how much to deposit into an employee LSA?
In certain ways, LSA expenses can provide health and wellness programs that aren’t usually covered under a traditional medical or healthcare plan. For example, health insurance will not typically cover gym memberships or other preventative or alternative care. However, an LSA is a perfect opportunity to offer employees gym membership options or discounts for massage or chiropractic treatments, and even home office equipment reimbursement. Ultimately, an LSA empowers employees to spend on programs they deem most important for their individual lifestyles.
However, LSAs go far beyond preventative health and wellness.
What’s covered in a Lifestyle Spending Account?
Since employers decide what’s considered as an “eligible expense,” they cover only programs of their choosing and don’t pay for anything that’s not. And for employees, LSAs make it easy for them to understand what’s covered and what isn’t.
So you’ve gone the route of setting up LSAs for your new and current employees. What are some eligible expenses you can cover with the money? Health and wellness aside, here are some categories to consider with a few examples in each.
- Public transit
- Student loans
- Skill development (i.e., public speaking, language learning)
Dependent Care (Children and Pets)
- Daycare (for both!)
- After school programs
- Pet food
- Movie tickets
- Vacation time
- Music lessons
What's the difference between a Flexible Spending Account and Health Spending Account?
Aside from LSAs, Flexible Spending Accounts (FSAs) and Health Spending Accounts (HSAs) are two other health-focused employee spending accounts. Let’s break these down.
Flexible Spending Account (FSA)
FSA funds are not subject to income tax, as they come out of the employee’s paycheck before taxes are applied. Since FSA money can only be spent on medical expenses and dependent care, they are less flexible than the name suggests. The IRS also limits the amount of money that can be deposited in each.
FSA money is forfeited to the employer if it goes unspent. While some plans offer a grace period or a static $550 rollover, the better option is to spend the money before it’s gone.
Health Spending Account (HSA)
Health Spending Accounts are only applicable to those enrolled in a High Deductible Health Plan (HDHP). Money in an HSA is not subject to income tax, but can only be used to pay for medical expenses. If you withdraw money from your HSA for anything other than a medical expense, you’re subject to income tax and a 20% penalty.
HSAs are advantageous for healthy individuals who require little to no medical care. They can afford to gamble on an HDHP to save a maximum of $3600 in their HSA, while families can save an IRS allotted maximum of $7200. Anybody, from their employer to grandmother, can contribute to an employee’s HSA.
HSA money can also be invested, and any gains made from HSA investments are tax-exempt. So, if you’re a healthy individual with an eye for smart investments, HSAs can act as a legal tax shelter for your investments. Because of this greater financial freedom, HSA funds will always roll over.
Coverage of other Employee Spending Accounts
While LSAs are technically the most flexible of your three options.
FSAs and HSAs do cover more costly medical expenses, acting more like traditional health benefits.
Funds in either type of FSA or HSA account can cover the cost of doctors, dentists, and prescription drugs. They’ll also cover preventive measures and scans like MRIs. Your insurance may not cover expenses on medical supplies like hearing aids, chiropractors, glasses, and physical theory. Thankfully, money in your HSA or FSA can cover the out-of-pocket expenses.
Dependent Care FSAs offer another dimension, allowing funds to be spent — tax-free — on child care and qualifying adult care (i.e. a spouse or elder relative unable to care for themselves.)
Why offer employee spending accounts?
Employee Spending Accounts, especially LSAs, promote your company culture. The great thing about LSAs is that they don’t have to be health-focused either. Your employees have relative financial freedom when it comes to spending. With LSAs, they can cover the cost of child care, skills development, and even entertainment.
You can also think of LSAs as a means to balance your employee’s health insurance costs. While they’re still paying for their health insurance, you’re covering other living expenses that add up over time.
Competitive employee spending accounts benefits packages show your current staff that you care about their life outside of work, and new candidates gravitate towards companies that are in touch with the needs of their employees.
Provide the best LSA for employee spending accounts.
Benefits are complicated, we know, and want to help. Forma makes it easy for your employees to know how much is in their spending accounts and what expenses are eligible for coverage.
The platform offers reimbursement claims support, includes spending/utilization reports and analytics, ensures automated tax compliance, as well as access to 100+ products in the Forma store. The Forma Marketplace provides access to vendors with discount pricing and a streamlined checkout process. Finally, the Twic Card takes the headache out of submitting claims, keeping all your expense account receipts in one place.