Everything You Wanted to Know About Lifestyle Spending Accounts
In an era where attracting and retaining employees is paramount to an organization’s success, a Lifestyle Spending Account (LSA) is a valuable addition to employee benefits. LSAs can significantly boost employee engagement by providing flexibility and control over their benefits. LSAs are a creative way to build a supportive culture and to attract, engage, and retain top talent. With a wide range of spending categories, from home office goods to fitness to education, or even pet care, employers can offer a benefit that is tailored to its unique workforce and business needs.
How Does a Lifestyle Spending Account Work?
Lifestyle Spending Accounts are a way for an employer to offer yearly, monthly, or other periodic post-tax dollars to its eligible employees to use for spending beyond traditional consumer directed healthcare (CDH) accounts, such as Medical Flexible Spending Accounts (FSAs) or Healthcare Savings Accounts (HSAs).
LSAs allow employers to tailor contributions and eligible expenses, encompassing various wellness and health-related costs that conventional accounts might not cover, such as spending accounts like FSAs and HSAs. The employer designates the amount it wants to contribute per employee and determines any limits it would like to set for specific service types within the available spending categories. Its employees can then access the funds in the form of a convenient debit card.
Benefits of Offering a Lifestyle Spending Account to Employees
Many employers are most likely considering a Lifestyle Spending Account because they are looking for additional benefit options for a changing and varied workforce. LSAs provide various lifestyle benefits that cater to individual employee needs. LSAs help to support both mental health and physical health by offering funds for wellness-related expenses. Offering a Lifestyle Spending Account is a way for employers to reinforce and promote its organization’s culture, meet the market demand, and round out its benefits package with an account that delivers personalized spending opportunities for the things that matter most to each employee.
Frequent Questions About Lifestyle Spending Accounts
Why Not Just Provide Employees with a Gift Card or Cash?
Offering funds via a Lifestyle Spending Account gives the employer added flexibility and protections compared to cash or gift cards.
- Funding flexibility. The employer can offer funds up-front, prorated, or on a desired frequency, and can set limits for specific types of purchases. Should employees’ needs change, the employer can easily add more dollars to the account.
- Easy to manage. Lifestyle Spending Accounts decrease the administrative burden placed on the employer’s HR team to manually administer perk programs.
- Preservation of Unused Funds. Unlike cash or some gift cards, the employer only pays for what employees use. Any account funds not spent will be returned to the employer at the end of the plan year.
- Fund Utilization Reporting. LSAs allow you to gain insight into how and where employees are spending.
Are LSAs Tax-Advantaged Accounts?
Lifestyle Spending Accounts are funded exclusively by the employer, after taxes have been taken out. Because they are post-tax accounts, the IRS does not mandate eligible expenses. Rather, the employer has more control over what types of expenses the employer would like to cover and how employees can spend their funds.
Do These Accounts Represent Taxable Income for Employees?
Lifestyle Spending Accounts are funded by the employer, on a post-tax basis, and are considered a taxable benefit for employees, meaning used funds are classified as taxable income.
What Are the Eligibility Requirements?
Typically, all employees are eligible to participate in an LSA, but an employer can specify a class of employees such as salaried versus hourly, nonunion versus unionized, or other categories.
What Types of Purchases Can be Made with a Lifestyle Spending Account?
The spending categories available offer a wide range of options, from home office goods to fitness to education, or even pet care. LSAs can be used for various wellness expenses, providing employees with the flexibility to choose what best suits their individual needs. For instance, gym memberships, student loans, and professional development are some of the options available for employees to use their LSA funds. An LSA is usually designed so that it best meets the employer’s unique workforce and business needs.
Is This an Account with a Debit Card?
The Lifestyle Spending Account is carded, giving employees easy access to spending via a convenient debit card. However, depending on the employer’s unique benefit program requirements and plan design, an employer can choose a debit card stacked on the same card as the employer’s other health benefit accounts or a unique debit card just for the Lifestyle Spending Account.
Where is the Debit Card Accepted?
The debit card can be used anywhere Mastercard is accepted, as long as the merchant category codes align with the spending parameters the employer establishes for the employer program.
Are There Any Funding Limits or Minimums?
There are no funding limits or minimums associated with the Lifestyle Spending Account. Any limits are established by the employer.
Does an Employer Have to Offer the Same Amount to All Employees?
No. The employer can use a tiered approach when it comes to their Lifestyle Spending Account and offer different amounts to different groups of employees. For example, the employer could offer a higher dollar amount to full-time employees as compared to part-time employees.
What Information Should an Employer Communicate the LSA to Its Employees?
Employee benefit communication is vital to both the employer organization and its employees. LSAs complement traditional benefits by addressing gaps and providing additional options that cater to individual employee needs. The employer will want to ensure the employees not only know about the LSA but also understand how to use it and appreciate it. Consider communicating the following information prior to launching the program:
- Purpose of the program
- Amount each employee will receive
- Spending parameters (include examples of merchants where funds can be used)
- How employees can access their funds
- How employees can access information about their Lifestyle Spending Account
- Who employees should contact with questions