Your workforce likely includes Boomers, Gen Xers, Millennials and Gen Zers, parents, pet parents and those without children – and they all want different things from their employee benefits. As employers search for new benefit strategies to meet the needs of a diverse workforce, a Lifestyle Spending Account benefit program is worth considering.
What are Lifestyle Spending Accounts?
A Lifestyle Spending Account (LSA) is a type of employer-sponsored account with funds that employees can access for certain wellness and lifestyle-related purposes. The employee may pay for the expenses out of pocket and, as long as it is eligible and sufficient funds are available in the LSA, the employee can then request reimbursement. Alternatively, the employer may provide a special debit card that the employee can use to access the account.
According to the Society for Human Resource Management (SHRM), Lifestyle Spending Accounts are more common in Canada, but they’re starting to receive attention in the U.S., especially as employers look at options beyond standard benefits packages to help improve recruitment, retention and turnover.
How are Lifestyle Spending Accounts different from other accounts?
Although Lifestyle Spending Accounts are not common in the U.S. yet, other types of employer-sponsored spending accounts are, such as Health Savings Accounts and Flexible Spending Accounts. These benefits programs differ in key ways.
Flexible Spending Accounts (FSAs) are owned by the employer and function on a “use it or lose it” basis. Health Savings Accounts (HSAs) are owned by the employees, so the funds are portable and unused funds do not expire. Both types of accounts allow employees to use funds without paying taxes on the money, as long as certain rules are met. However, the IRS restricts the allowable expenses. For example, Healthcare.gov says FSA funds can be used to pay deductibles and copays, but not insurance premiums. Other allowable expenses include things like medical equipment, prescription medications and over-the-counter medications.
With Lifestyle Spending Accounts, funds are taxed, but employers have more freedom to dictate how they want the accounts to be used instead of having to follow legally established rules. According to SHRM, employers decide how quickly employees are able to spend contributions, what happens to unused funds and what expenses are considered allowable.
Wellness Expenses and Other Eligible Expenses
Lifestyle Spending Accounts are generally used to pay for well-being-related costs. However, because employers get to establish their own rules, the definition of what counts as “well-being-related” can be quite broad.
According to SHRM, one employer allowed employees to spend a $1,000 annual contribution on anything that promoted wellness (except for drugs, alcohol or nicotine), and some employees spent the money on things like golf clubs, cookbooks and activities that challenged them.
Benefits Pro says Lifestyle Spending Accounts can be used for financial, social, emotional or physical well-being, depending on how the employer structures the benefit. For example, employees could use the benefit to cover costs associated with financial planning, supplies to support a hybrid work arrangement or even childcare.
Lifestyle Spending Accounts and Taxable Income
Compared to HSAs and FSAs, Lifestyle Spending Accounts give employers far more flexibility. Benefits Pro explains that these accounts may provide a business expense tax deduction and increase compensation without increasing base pay, but they are not regulated by the IRS or subject to the Employee Retirement Income Security Act (ERISA).
However, there’s a catch. Bank of America explains that the money from a Lifestyle Spending Account is considered taxable income, meaning employees need to pay income taxes. As such, the benefit should be included on the employee’s payroll stub, and the applicable taxes should be withheld, just like with other forms of income.
Why offer a Lifestyle Spending Account?
Lifestyle Spending Accounts can help employers round out their benefits programs. There are several reasons why employers may want to consider this option.
1. Lifestyle Spending Accounts support wellness.
According to Gallup’s Life Evaluation Index, 56 percent of employees say they are struggling. When asked about how they felt during the prior day, 48 percent reported feeling a lot of stress. Furthermore, only 24 percent of U.S. employees strongly agree that their organizations care about their overall well-being.
Many employees need help achieving work-life balance and reducing stress. A Lifestyle Spending Account is a simple way for employers to support employee wellness. By dedicating funds specifically to wellness, employers are encouraging their employees to think about purchases that could improve their physical, mental or financial health.
Furthermore, these are expenses that might not be prioritized without a dedicated fund. For example, an employee might be interested in riding a bicycle to work instead of taking the bus, but they never take the step of buying a bicycle, helmet and appropriate clothes. A Lifestyle Spending Account could be just the push they need to make this positive change in their lives, especially since the funds may be forfeited if they’re not used by a deadline.
2. Lifestyle Spending Accounts cater to diverse needs.
Some employers offer specific wellness perks like gym membership. While these perks are likely to be appreciated and used by some workers, other workers likely won’t want or use them.
Lifestyle Spending Accounts let workers select the wellness perks that make sense for them. One employee might use the benefit to cover gym membership, while another employee might use the benefit to buy home exercise equipment. The options are endless. As employers search for benefit options that appeal to an increasingly diverse workforce, this level of flexibility is attractive.
3. Lifestyle Spending Accounts can support retention and recruitment.
When workers are considering jobs, compensation is a key motivator. However, it’s not just base pay that matters. Employee benefits that help workers solve the problems in their lives are also important.
For example, if an employee needs help with childcare costs and he or she can use a Lifestyle Spending Account to help with this, the Lifestyle Spending Account benefit will be extremely appealing. A benefit like this can be used during recruitment, and it can also encourage loyalty among current employees.
4. Lifestyle Spending Accounts are relatively simple.
Lifestyle Spending Accounts aren’t typically subject to the same IRS and ERISA regulations as many other employee benefits, and this can make them relatively simple to administer. Employers can decide how much they want to contribute each year, what the funds can be used for, how the funds can be accessed and what happens to funds that aren’t used. All these flexibilities make it incredibly easy for employers to shape a Lifestyle Spending Account program into a benefit that fits their budget, goals and workforce.
Implementing a Lifestyle Spending Account Program
If you’re interested in adding a Lifestyle Spending Account to your employee benefits, first you’ll need to do the following:
- Determine your budget for annual contributions.
- Select a platform to use or engage an outsourced team to manage LSA administration.
- Decide what types of expenses are eligible.
- Finalize the rules, including when funds become available, when they expire and how employees can access funds.
- Verify whether any state or federal regulations apply. Although Lifestyle Spending Accounts are generally exempt from ERISA and IRS regulations, some regulations may apply depending on how you structure the program. Employees will also need to pay taxes on the funds used.
Employers have many choices to make when creating an employee benefits package, including whether they want to offer a Lifestyle Spending Account. Higginbotham can help you create an employee benefits program, including implementing LSAs, that meets the needs of your workforce. Learn more about how Higginbotham can help you take care of your employees and connect or schedule a call with one of our team members to discuss your organization’s needs.