Attracting and retaining high-quality employees is a priority for most businesses and requires a strategy that goes beyond offering attractive compensation. Employees often choose work based on whether an organization’s culture aligns with their own values, career development opportunities, or the presence of benefit options that empower them to make choices based on their personal lifestyles. Robust benefits packages today frequently include self-directed options that help plan participants stretch their budgets in a variety of ways.
Many employers are already offering or are familiar with health savings accounts (HSA) and flexible spending accounts (FSAs), both of which help employees and their families cover qualified medical costs that are not covered by a sponsored medical plan. Far fewer employers are familiar with Lifestyle Spending Accounts, or LSAs, which are employer-funded accounts that allow employees to pay for services that may fall outside the traditional definition of healthcare or wellness. As with all benefit options, there are advantages and disadvantages to LSAs that plan sponsors must understand before deciding whether offering one supports their overall benefit goals.
In this blog post, Eastern Benefits Group will present a broad definition of Lifestyle Spending Accounts and how they work, common expenses they cover, and a few pros and cons that may be of interest to plan sponsors. When it’s time to explore whether LSAs make sense for your company as part of your employee benefit offerings, contact your EBG representative.
What is a Lifestyle Spending Account?
An LSA is a taxable, employer-funded benefit meant to support employee physical, mental, emotional, and financial health and wellness. Employers determine their contribution amount and how employees may spend their LSA funds. They place parameters on acceptable products, services and expenses and frequently cover costs not associated with a group plan.
Companies may also choose when to replenish the LSA funds. Some employers may elect to allocate funds on a monthly “use it or lose it” basis—meaning all funds not used by employees at the end of each month are returned to the plan. Other employers allow funds to roll over annually, enabling employees greater purchase flexibility.
What expenses may be covered by LSAs?
Employers determine which expenses will be covered by their unique LSA. Some plan sponsors are highly prescriptive while others offer their employee’s broad latitude to use the fund for anything they feel promotes their personal wellness.
Common LSA expenses employers may elect for their plan:
- Adult and childcare services
- Pet daycare and grooming
- Financial planning and education programs
- Mental health services, including mindfulness or meditation apps, and life coaching
- Gym memberships, fitness classes, athletic apparel, and exercise equipment
- Professional development expenses such as continuing education courses, certificates, and industry conferences
- Grocery and food delivery, food supplements, and nutrition counseling
- Work-from-home expenses including home office equipment and supplies
The Pros of LSAs
First and foremost, LSAs can help employees make better lifestyle choices. In turn, employees may be healthier, happier, more engaged, and productive at work. Since LSA’s do not have pre-tax implications, employers can offer this benefit to various workers, including full-time, part-time and contract employees.
Other advantages to offering LSAs include:
Attraction and retention—Offering an LSA conveys a message to employees and candidates that your organization fosters a culture that prioritizes their wellbeing.
Budget optimization—Employers only pay for the actual amounts that employees spend. Because the plan retains any unused funds, LSAs can be a generous yet cost-effective benefit.
Control—Organizations can limit and guide the spending of employer-provided money based on their unique budgets and business goals.
Support for diversity, equity and inclusion (DEI) initiatives—LSAs can strengthen DEI efforts by addressing benefit gaps for marginalized groups and employees with special lifestyle needs.
Ease of implementation—An LSA adds flexibility to employer benefit plans and is relatively simple to implement and manage. Compliance for LSAs is also less involved when compared with tax-advantaged accounts, such as HSAs and FSAs.
Employee personalization—Once a plan is defined, employees have the freedom and flexibility to use LSA funds for their unique wellness-related expenses eligible under the plan.
The Cons of LSAs
Employers considering LSAs should also weigh potential disadvantages to ensure the offering is a good fit for the organization:
No tax advantage - LSAs are provided to employees post-tax, meaning the benefit is given by the employer and received by employees as taxable income. There is currently ambiguity around whether the amount received by the employee, or the benefit amount offered to the employee, should be considered the taxable amount. Because the IRS has not issued specific rules around LSAs, employers are encouraged to work with their tax advisors to discuss the tax implications for them and their employees.
Employer-funded - Since LSAs are exclusively employer-funded, this offering does add to the organization’s annual budget.
Is an LSA right for your plan?
An LSA is an increasingly popular offering that goes above and beyond traditional health plans, providing employees with a flexible option to support their everyday needs. More employers are offering LSAs as they continue to search for ways to make their benefits relevant and valuable to employees and job candidates. As with all benefit offerings, employers should consider the advantages and disadvantages of LSAs within the context of their unique benefits strategy. When you’re ready to talk about the possibilities, we’ll be here to help. Contact your Eastern Benefit Group representative at [email protected].