Lifestyle Spending Account (LSA) vs Flexible Spending Account (FSA): what you need to know

With the increasing demand for flexible benefit packages, two accounts stand out by assisting employees pay for specific needs: Lifestyle Spending Accounts (LSAs) and Flexible Spending Accounts (FSAs).

Since they serve different purposes, employers and employees need to be aware of the differences, the advantages, and how to choose the right one.

Why are LSAs and FSAs in demand?

There’s no such thing as ‘one-size-fits-all’ when it comes to employee benefits.

Individuals and their families have diverse needs that can be materially different depending on their life stages and personal circumstances. For example, a recent college graduate might be interested in benefits designed to assist with student loan repayments. On the other hand, a new parent will be more interested in dependent-care benefit options.

LSAs and FSAs can help employers overcome one-sized solutions, leading to higher levels of employee satisfaction and lower rates of turnover.

What is a Lifestyle Spending Account (LSA)?

An LSA is an employer-funded account that provides employees with a set amount of funds to spend on a wide array of personal expenses that enhance their quality of life. According to a study by MetLife, 72% of employees feel more loyal to their employers when offered a customized benefits package, highlighting the value of LSAs in attracting and retaining talent.

LSAs cover a broad spectrum of expenses, from caregiving expenses and wellness programs to home office equipment and transportation. The flexibility and personalization offered by LSAs not only help attract top talent but also boost employee morale and work-life balance. Employers can tailor the LSA offerings to meet the specific needs of their workforce, making it a versatile option for enhancing employee satisfaction.

Read our blog on Lifestyle Spending Accounts to learn more. 

What is a Flexible Spending Account (FSA)?

FSAs are employee-funded accounts that allow individuals to set aside pre-tax dollars for specific expenses, such as healthcare and dependent care. FSAs come in two varieties: Healthcare FSAs and Dependent Care FSAs. These accounts offer tax advantages, as contributions are made pre-tax, reducing an employee’s taxable income.

However, FSAs have contribution limits set by the IRS, and funds must be used within the plan year, with some plans offering a grace period or allowing a small rollover amount. It’s crucial for employees to plan their FSA contributions carefully to avoid losing unused funds at the end of the year.

Read our blog on Flexible Spending Accounts to learn more. 

Key differences between LSAs and FSAs

The primary distinction between LSAs and FSAs lies in the range of expenses eligible for reimbursement. 

Lifestyle Spending Accounts can be used for a wide range of expenses, while a Flexible Spending Account is typically limited to specific categories. 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.

How to choose the right account

Choosing between an LSA and an FSA depends on the individual's spending habits and financial goals.

Those seeking flexibility for a broad range of personal expenses might find an LSA more appealing. However, individuals with specific healthcare or dependent care expenses may benefit more from an FSA.

If you want to understand your employee's wants and needs from a benefits package, it’s a good idea to conduct an employee benefits survey.

Before creating your benefits package, it’s important to ensure your plan will be helpful to employees. That way, you’ll have happier and better-motivated employees and get a great ROI on your benefits package.

Contact Forma to find the right package for your business

LSAs offer unparalleled flexibility and customization, catering to a wide array of personal needs - both mental and physical. On the other hand, FSAs provide targeted financial relief for healthcare and dependent care expenses, with the added advantage of tax savings.

If you’re unsure which one will benefit your employees - or simply want to learn more about LSAs and FSAs <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a consultation</span> with one of our experts and we’ll help you find the right benefits package.