Employee Benefit Trends: What is a Lifestyle Spending Account?

Posted: April 18, 2023  

A Lifestyle Spending Account (LSA) offers employers an opportunity to help fund health and wellness costs that a traditional group health plan won’t cover. LSAs are often used as perks to attract and retain quality employees and could be a desirable piece of the employee benefits puzzle.

What Is a Lifestyle Spending Account?

A Lifestyle Spending Account (also called Personal Spending Accounts or Wellness Spending Accounts) is a relatively new employee perk that is designed to encourage spending on wellness activities.  Many employers already offer Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) to help employees save and cover health-related costs but an LSA opens an entirely different type of spending.

In short, LSAs are flexible after-tax funds to support life’s everyday needs. Lifestyle Spending Accounts allow employers to build an account to fund employees’ everyday needs without the burden of managing additional reimbursements. Each employee is unique and a LSA gives the choice to use after-tax funds on expenses that aren’t covered by traditional benefits. With an LSA, employers create the program parameters by defining how much employees will receive and what the funds can be used for.  Typically, these benefits support the physical, mental, emotional and financial health of employees.

As employees demand customized benefits packages and more employers offer LSAs, it’s important for employers to understand the specifics of this spending account and consider if they are a good fit for their organization and employees.

What Are Some Examples of LSAs?

  • Financial Services (Financial Education, Student Loan Repayment)
  • Care Services (Child and Adult Care, Adoption and IVF Services, Pet Care)
  • Physical Health (Gym Memberships and Fitness Equipment)
  • Work from Home Expenses (Office Supplies and Office Equipment)
  • Professional Development (Continuing Education Courses and Conferences)
  • Mental Health Services (Counseling Services, Virtual Therapy)
  • Wellness (Nutrition Counseling)

How Does a LSA Work?

Employers are the decision-makers when determining what expenses are eligible for reimbursement through a Lifestyle Spending Account.  It’s another potential perk that employers can offer to improve their relationship with employees.  Additionally, the emphasis on health and wellness can help the employer foster a healthy workplace culture.

Let’s say that you have a lifestyle spending account with $1,000 in it for the year.  You spend $500 on a gym membership.  When you are reimbursed by your employer for the $500, you’ll have to report that as income at tax time.  Although you pay income taxes on the funds spent, it’s a way for employers to prioritize your wellness.  You’ll only have to pay taxes on your Lifestyle Spending Account if you actually spend the funds.

While many benefits, like health insurance, are seen as reactive perks for when problems arise, LSAs encourage a more proactive approach. By implementing a LSA, you can encourage your employees to focus on all aspects of wellness by giving them the financial means to build healthy habits and offset costs they’ll face along the way.

Remember, LSAs are entirely employer-funded so it does add to the budget.  If you do decide to offer LSAs, it is important to educate your employees on these additional benefits available to them to increase employee utilization. Employers are uniquely positioned to help employees understand the importance of LSAs and how to best spend and boost their overall well-being.

We are, after all, living in the age of personalization.  Everything in our lives, from our Netflix subscriptions to our Spotify playlists is customized to us and our preferences.  Likewise, lifestyle benefits can be designed in a way that addressed the various needs of your diverse workforce.  For example, a working parent can use their monthly allowance on childcare or work from home expenses while a Gen Z employee can use their allowance for paying down student loans or pet care.  LSAs offer the choice and personalization that your diverse, multi-generational workforce needs and wants.