Lifestyle Spending Accounts: Not Your Basic Welfare Benefit

December 13, 2021

While adoption of tax-advantaged savings plans like Health Savings Accounts (HSAs) continues to rise, Lifestyle Spending Accounts (LSAs) are also gaining in popularity. Compliance for these employer-sponsored account-based offerings are relatively simple compared with other benefits such as HSAs, HRAs, and FSAs. An employer’s main considerations when offering an LSA includes taxation of the plan and avoiding the triggers for group health plans and other legal requirements.

Offering an LSA allows employers to help employees with costs of common everyday life expenses.  Employers are allowed full discretion regarding what expenses will be eligible to reimburse from LSA funds, because there is no set definition of how or for what the funds must be used. Generally, an employer will choose to offer a set annual LSA amount to cover non-medical wellness benefits.

Examples of Common LSA-eligible Expenses

Physical Wellness

  • Exercise equipment
  • Gym, health club, spa, fitness studio memberships
  • Fitness class expenses such as yoga, Pilates, cycling
  • Sports lesson expenses such as golf, swimming, tennis, dance
  • Fitness trackers
  • Nutritional supplements
  • Entry fees for races or sports leagues

Financial Wellness

  • Financial advisor and planning services
  • Financial seminars and classes
  • Estate planning costs

Emotional Wellness

  • Non-medical counseling services such as marital counseling, life coaching, parental skill counseling, executive coaching
  • Retreats such as leadership and spiritual retreats
  • Pet care such as walkers, day care, grooming
  • Park passes

Employer Considerations

Many employers offer a variety of wellness programs for their employees. However, these benefits should avoid reimbursement of health expenses as defined in various regulations such as ERISA, HIPAA, and IRS laws. These expenses commonly referred to as §213(d) expenses should not be offered outside of a group health plan or an HRA or wellness program integrated with a health plan. Reimbursement under an LSA should be a taxable non-group health benefit, that excludes certain expenses such as mental health therapy and smoking cessation programs.

Employers must also consider communication of the plan benefits, avoiding qualification on medical health status, and other benefits offered. It generally does not make sense for employers to include in an LSA any expense that could otherwise be provided on a tax-free basis by the employer. Examples of potentially tax-advantaged expenses (in addition to medical expenses) that employers would want to exclude from an LSA would include dependent care expenses, tuition and student loan reimbursement, commuter benefits, and identity theft protection.

Because LSAs are not designed to be tax-advantaged accounts, employees do not enjoy an exclusion from income with an LSA as they would for other account-based offerings such as HSAs, FSAs, and HRAs.  Employers must include in the employee’s gross income subject to withholding and payroll taxes the benefit amount made available in a taxable year, or alternatively for each LSA reimbursement.

Advantages & Disadvantages

LSAs offer both advantages and disadvantages when compared to traditional tax-advantaged account-based employer offerings.

Advantages

  • Very few compliance rules because LSAs are not tax-advantaged or subject to group health plan laws
  • Flexibility for employers to include virtually any non-medical expense as eligible for reimbursement
  • No limits on the amount of employer funds made available for reimbursement
  • Employers can use very simple communication pieces to describe the program
  • Plan can be customized to fit the employer’s specific wellness and employee culture goals

Disadvantages

  • LSAs are not tax-advantaged
  • Employers need to exclude any §213(d) medical expenses from the LSA (e.g., smoking cessation programs, mental health therapy, acupuncture, and chiropractic treatment) to avoid inadvertently triggering the vast array of group health plan laws
  • Employers will generally want to exclude any other form of potentially tax-advantaged benefit (e.g., dependent care expenses, student loan reimbursement, tuition assistance, commuter benefits, identity theft protection) to utilize the exemption from income in a separate offering
  • LSAs are exclusively employer-funded, which means they add cost to the employer’s budget

Employers looking for another benefit to offer in support of their employee wellness program would be wise to consider an LSA. Depending on plan design, it could be another item in their benefits toolkit to retain and attract top talent.

For more information, see IRS Publication 502, which provides a useful summary of expenses that qualify as §213(d) medical expenses.