What is a Lifestyle Spending Account and how does it work?
Today's employees appreciate (and many expect) non-cash incentives or bonuses as an added benefit. Enter the Lifestyle Spending Account (LSA), a trending alternative to the traditional employee benefits package. An LSA is an excellent way to promote a healthy lifestyle, as well as help employees to take charge of their own well-being.
And unlike an HSA (Healthcare Spending Account), a Lifestyle Spending Account is more about preventative health measures and life-enhancing options versus disease treatment.
LSAs are a blossoming trend in the benefits world and funding your employees’ Lifestyle Spending Accounts is almost as flexible as the account itself. It is relatively simple to set up and one of the best practices is to follow your industry standard, thus keeping things competitive.
Set a budget.
Decide how much you will contribute to each employee’s account and how to manage those funds. You can also divide your available budget by the number of employees, thus keeping things fair.
Whatever your approach, ask yourself these key questions:
- Will you deposit the full amount on January 1st of each year and give employees the option to spend all the money immediately. Or, will you spread out contributions on a monthly or quarterly basis?
- What happens to unused LSA amounts at the end of the year or when an employee leaves the company? Will employees be able to roll over unused LSA funds, or will adopt a use it or lose it policy?
What expenses can be included in a Lifestyle Spending Account?
Think of a Lifestyle Spending Account as a betterment account, covering anything that improves your employees’ overall quality of life.
While mental and physical health spending is well defined, quality of life spending can cover a range of out-of-the-box eligible expenses. Employers set the terms for what the LSA will cover.
Employers may choose to be specific, limiting LSA funds to expenses directly related to health and wellness, such as gym memberships, weight-loss programs, yoga classes, exercise equipment, and so on.
Other employers might define an LSA more broadly, including anything that enhances an employee’s well-being. In these cases, an employee may be able to use a Lifestyle Spending Account to purchase an ergonomic chair for their home office, for example.
Popular Eligible Expenses
Health & Wellness
Eligible expenses go far beyond traditional health coverage and include therapy, mental health coaching, and spa treatments. Health & wellness covers anything that improves your employees’ health overall. So, while gym memberships are an easy option to include, you could also consider nutrition and lifestyle coaches as eligible expenses.
Parking passes, rideshare, and public transit costs add up quickly. In big city areas, where vehicle ownership is low, covering commuter costs will show your employees that you care about the little things. Even if they use their own vehicle, you can still cover the gas.
Student Loan Repayment
The average federal student loan debt is just north of $36,000. Student loan repayment also enjoys a tax-advantaged situation which we’ll cover later.
These entail costs for pets and children. Anything from daycare and food for both. Private tutors, after-school programs, and babysitters are also eligible expenses. So, yes, your kid’s minor league baseball bat is covered.
Further education isn’t restricted to collegiate-level courses. Cooking, art, and music classes are all covered, as are business-related courses, such as public speaking.
Is a Lifestyle Spending Account worth the investment?
Offering an LSA demonstrates to your employees that you care about their lives beyond the office. You understand the subtle (and not so subtle) differences between them, and you’re there to support them in the best way you can. While it may not seem beneficial in the short term, the long-term impact of a happy workforce is priceless.
A healthy workforce can save you time and money down the road. Your employees’ mental and physical health predicates how much you could save on insurance premiums or sick days in the future.
A flexible Lifestyle Spending Account will keep your current workforce happy while also attracting top talent to your company. The competitive nature of the labor market often boils down to the better benefits package.
In fact, a 2020 survey found that over 62% of employees would accept a lower salary in exchange for better workplace perks.
Know how LSA taxes and reimbursement work.
Unlike HSAs, FSAs, and HRAs, LSA funds are taxed, but exempt from the statutory or regulatory restrictions imposed on tax-advantaged accounts. Since employers fund LSAs with post-tax dollars, the IRS considers money spent as taxable income.
However, many employers believe that ONLY the money reimbursed to employees should fall under the taxable income umbrella. Treasury, though, sees it differently. Under the doctrine of constructive receipt, money made available to an employee is considered taxable income, regardless of whether or not they spend it.
There are a handful of tax-advantaged situations you should be aware of when setting up and funding LSAs:
Student Loan Reimbursement
Per the CARES act, employers can provide upwards of $5,250 tax-free dollars towards tuition reimbursement.
As of 2021, you can exclude upwards of $14,440 (adjusted yearly for inflation) from taxable income for adoption expenses.
Employers can provide upwards of $270/month in tax-free commuter assistance. These include transit passes, carpools, and parking.
Remember, if you’re spending pre-tax dollars on eligible expenses, you must set up a separate pre-tax benefit plan. These will be separate from the traditional LSA, allowing employers and employees to take advantage of pre-tax benefits.
Get started with a Lifestyle Spending Account
Forma offers an easy 3-step process to get you started with a Lifestyle Spending Account in the current hybrid work climate.
- Step 1: Determine your company’s hybrid workforce model. Are you returning to a 100% in-office model, or are you remaining remote? Perhaps you’re combining the two (a hybrid model) with in-office and remote employees/hours.
- Step 2: Determine the financial support needed for different employees. Understanding your employees’ needs makes determining eligible expenses more manageable.
- Step 3: Determine your eligible expenses and how much you’d like to allocate towards LSAs. How are your remote employees’ needs different than your in-office ones?
Designing and delivering a benefits program isn’t easy. The Forma team will guide you through all your employee spending account needs, helping you turn programs into a cohesive strategy with virtually no administration. With 20% more purchasing power, the Forma Marketplace and vendor network offer an instant budget boost while the Forma debit card makes it easy to track eligible expenses wherever your employees are operating from. Find out more about Forma's life benefits here.