Lifestyle Spending Accounts: Everything You Need to Know

With the Great Resignation still afoot, employers are prioritizing talent attraction and retention. Competitive benefits have proven highly effective for both of these objectives.

It’s important to note that “competitive” doesn’t mean just offering core benefits, such as health insurance, 401(k) plans, and paid time off.

It’s also about providing other benefits that can incentivize qualified candidates and employees to work for you, instead of another employer.

To be able to offer competitive benefits, you need to be aware of current and emerging benefits trends, including new products and services.

We’ll shed light on lifestyle spending accounts (LSAs) — a health and wellness benefit that’s been floating under employers’ radar, until recently.

What are lifestyle spending accounts and how do they work?

A lifestyle spending account is a taxable, employer-funded benefit designed to support employee health and wellness.

According to Mercer, “These accounts don’t have an official name, so you may know them as life accounts, lifestyle accounts, or life planning accounts, and employers and vendors have given them custom names like Choice Account and Benefits Your Way.”

Key components of LSAs:

• Funded entirely by the employer. Employees do not make any contributions.
• Taxable to employees. An LSA is an account-based benefit, like health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). However, employees must pay federal payroll taxes on their used LSA funds, unlike with an HSA, FSA, or HRA.
• The employer decides which lifestyle expenses to cover. The Internal Revenue Service (IRS) does not mandate eligible expenses for LSAs. This is because the LSA is an after-tax benefit, unlike HSAs, FSAs, and HRAs — which are pre-tax and therefore heavily regulated by the IRS. The employer, as well, determines how employees can spend their LSA funds.

How can lifestyle spending accounts benefit employees?

LSAs can help employees make better lifestyle choices. In doing so, employees become happier and more productive at work.

The reality is that people do not always make positive lifestyle choices, and this can result in various consequences.

For example, smoking, poor diet, physical inactivity, inadequate sleep, etc. can cause serious health problems, such as:

• Obesity
• Heart disease
• Stroke
• Diabetes
• Chronic obstructive pulmonary disease
• Metabolic syndrome
• Certain types of cancer

On the workplace front, unhealthy lifestyle choices can lead to:

• Absenteeism
• Presenteeism
• Unsatisfactory work performance
• Mental health conditions that can (among other things) adversely impact relationships with coworkers

Another aspect of lifestyle is financial health. The bottom line here is that bad financial choices often trigger stress and anxiety.

Lifestyle spending accounts are tailored to meet not only employees’ physical and emotional wellness needs but also their financial ones.

As such, lifestyle spending accounts are tailored to meet not only employees’ physical and emotional wellness needs but also their financial ones. Note that employees can also add eligible family members to their LSA plan.

What are the benefits of offering LSAs for employers?

Industry experts agree that flexibility is a top benefit of LSAs for employers. As mentioned, the employer decides what to cover and how the LSA funds should be spent.

According to SHRM, “Many employers see this ability to limit and direct employee spending of employer-provided money as a compelling reason to offer LSAs.”

Other benefits of LSAs for employers:

• Employers can choose from a range of lifestyle products and services to personalize each employee’s health and wellness needs.
• An employee’s LSA allowance may help satisfy their desire for higher compensation.
• Employers can use LSAs to strengthen their diversity, equity, and inclusion efforts — such as to address benefit gaps for people of color, marginalized groups, and individuals with special lifestyle needs.
• Because LSAs do not have pre-tax implications, employers can offer them to a broad range of workers, including full-time, part-time, and contract workers.

What are some common lifestyle spending account expenses?

The LSA expenses below can help support employees’ physical, emotional, and financial wellness needs.

Physical

• Weight loss programs
• Nutrition counseling
• Gym or health club membership
• Workout apps
• Fitness classes (e.g, yoga, Pilates)
• Athletic wear
• Food supplements

Emotional

• Counseling services (e.g., marital, parental)
• Meditation classes
• Leadership retreats
• Personal development classes (e.g., art, cooking)
• Pet care
• Park passes

Financial

• Home purchase expenses
• Student loan reimbursement
• Identity theft services
• Financial planning services
• Budgetary education classes
• Pet insurance premiums
• Estate planning expenses

Additional LSA expenses include:

• Childcare
• Elder care
• Work uniforms or equipment
• Work from home expenses (e.g., home office equipment, internet bill)
• Return to office incentives (e.g., auto maintenance, gas, meals)
• Adoption or surrogacy

How popular are lifestyle spending accounts?

Back in 2018, an SHRM report said most employers had not yet heard about LSAs. At the time, LSAs were most common in Canada, though U.S. employers were starting to take notice. This interest among U.S. employers has only grown since then.

In May 2022, Mercer reported findings from its recent Insights survey. Specifically, “just under 10% of employers that responded said they have a LSA in place today — but a startling 70% of respondents said that they are considering adding an LSA to their benefits package.”

In other words, a staggering number of employers are planning to include LSAs in their benefits offerings.

Mercer notes that LSAs have been on the market for 5-6 years, but have recently become a hot topic because of today’s low unemployment rates — which are forcing employers to focus on stronger talent attraction and retention.

How much do employers contribute to LSAs?

Because employers have different budgets and unique LSA needs, there’s no set contribution amount for employers. It’s also hard to quantify a “typical” amount.

With that being said, contributions often range from $500 to $2,000, according to Mercer. For example, an employer may offer $1,000 annually to each employee to spend on eligible LSA expenses.

Contributions often range from $500 to $2,000.

LSA contributions below $250 are uncommon and likely wouldn’t be worth it, when you factor in the cost of administering the benefit. Higher contributions of $3,500 or more are normally geared toward pricey benefits like adoption or surrogacy.

Tips for setting up a lifestyle spending account

Because LSAs are taxable, they do not require employers to jump through a lot of regulatory hoops. This makes them quite easy to set up.

To establish an LSA, you will need to determine:

• What types of lifestyle plans to offer (e.g., physical, emotional, and/or financial)
• Which vendor best suits your LSA needs
• The cost of providing and administering the LSA benefits
• How much to contribute to each employee’s LSA
• Employee eligibility requirements
• Eligible LSA expenses
• When eligible employees can start spending their LSA funds
• What happens to unused LSA funds at the end of the year
• How LSA funds are handled for terminated employees

Be clear (to employees) about how the program works

LSAs are still relatively new to those who manage employee benefits, and your employees probably don’t know much about them. And what you don’t want is for them to enroll in your LSA program only to later regret it because it’s not what they expected.

So, if you decide to offer LSA benefits, make sure you thoroughly educate employees on the program — including its purpose, advantages, and products, plus how to sign up and utilize eligible benefits.

Some LSAs are set up as reimbursement accounts. The employee pays for eligible expenses then submits a claim for reimbursement through the vendor’s mobile app or online system.

In other cases, the employer funds the employee’s LSA upfront. The employee receives a funded debit card and uses it to pay for eligible expenses. The employer includes each LSA purchase on the employee’s pay stub as earnings, with applicable taxes withheld.

Regardless of how your program is set up, make sure you properly explain how it works to your employees.

Implement sound policies and procedures

To ensure a smooth-running LSA program, you will need to develop relevant policies and procedures and enforce them in a consistent manner.

Although you have substantial leeway when it comes to establishing LSA rules, it’s important to aim for a structured and equitable program. So, work with your legal team to create solid LSA policies and procedures.

Lifestyle spending accounts are not ideal for every business

LSAs can be a feasible strategy for addressing employees’ physical, emotional, and financial wellness needs. But this benefit might not appeal to every employer or employee. For example, employees might see the taxability of LSAs as a disadvantage.

Furthermore, it may be more prudent for some employers to address employee lifestyle needs through other health and wellness programs.

But if you’re looking to improve talent attraction and retention, you’ll want to give lifestyle spending accounts some consideration.