Although popular in countries such as Canada, Lifestyle Spending Accounts (LSAs) are relatively new in the U.S. and attracting a lot of attention. So, what is an LSA?
LSAs are employer-funded accounts that employees use to pay for products, services, and activities that help support employee well-being. Qualified expenses may relate to physical, mental/emotional, or financial health and wellness.
Because LSAs do not provide tax advantages, there are few rules or restrictions, making them an incredibly versatile and attractive benefits option. Most LSA accounts begin and end on the same timeline as other benefit accounts, but that’s by choice, not mandate. LSAs can start and end at any point during the calendar year.
As with Flexible Spending Accounts, the sponsoring employer owns the Lifestyle Spending Account – but unlike FSAs, the funding comes from the employer, not the employee. Any unused funds at the end of the year (or in the case of job termination) belong to the employer.
For employers, there is no annual funding limit. Mercer reports that the typical employer LSA contribution in 2022 was between $500 to $2,000 per employee. Mercer notes that LSAs funded at $250 or less don’t provide much value as a benefit and that funding of $3,500 or more is usually intended to help the employee cover high-cost expenses like starting a family.
LSAs Mean Eligible Expense Freedom
Employers find LSAs attractive partly because they offer the freedom to choose eligible expenses. Beyond avoiding Section 223 expenses so as not to trigger ERISA., there are few restrictions or considerations. Commonly eligible expenses include physical fitness, non-traditional healthcare, education, remote work expenses, financial literacy, household management, and more. Here are some examples.
- Mental and emotional health – Marital counseling, meditation apps, yoga classes, travel, entertainment, and more.
- Financial literacy – Personal financial management classes, budgeting assistance tools, and more.
- Physical fitness – Recreational sports fees, gym memberships, personal training fees, athletic gear, and more.
- Education, home, household – Skill-building classes, hobbies, home office expenses, food delivery services, and more.
LSA Implementation Considerations
Once the employer decides to offer an LSA, initial decisions include the following:
- Parameters – Setting a program budget and choosing the eligible expenses/categories.
- Funding frequency – Determining whether to fund employee accounts per pay period, monthly, quarterly, annually, or in response to claims.
- Debit card – Deciding whether to offer a debit card (with receipts required after the purchase) or to require manual claims with documentation before reimbursement.
Ready to start?
With labor market conditions making quality employees ever more challenging to attract and retain, LSAs can be an important tool for companies of any size. Employers can use LSAs to help build an effective benefits program for employees with very different generational and cultural influences. The flexibility of Lifestyle Spending Accounts makes them ideal for diverse workforces.
DataPath Administrative Services has provided Arkansas employers with comprehensive third-party employee benefits administration and compliance services since 1996. Please enter your email (above right) to receive notifications about new blog articles as they are published.