Tax Implications of Lifestyle Spending Accounts

December 20, 2023

Lifestyle Spending Accounts (LSAs) are a relatively new type of benefit that allows employers a great deal of flexibility, allowing employers to give their employees money to spend on products and services that will enhance their lives, but LSAs should not include expenses covered under any other insurance programs or pre-tax benefits.

Employers have an almost unlimited number of things that they could allow their employees to use their LSA accounts for. Employers may want to offer items that promote physical, financial or emotional wellness. The most common items that participants choose to use their funds for are: apparel, gym memberships, workout equipment, apps/activity trackers, and watches.

Employers should be careful when designing their program to make sure they are not including items that are medical in nature. Including medical products and services could  result in the LSA being categorized as a type of medical or group health plan and subject to additional regulations like ERISA, HIPAA, and COBRA. It is also good practice not to include items like childcare or tuition reimbursement that could be offered through a tax-advantaged benefit plan.

Since the items allowed by an LSA are taxable, employers are required to include the benefits in gross income (subject to withholding and payroll taxes). Employers should work with their tax and payroll advisors to determine the best way to treat LSA benefits.