Benefits and Compensation

Have You Heard of Lifestyle Spending Accounts?

In a highly competitive hiring landscape, employers are looking for ways to differentiate themselves to prospective employees. One option is to provide a more attractive or unique benefits package by including new and interesting benefit options.

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One benefit option that could become trendy: lifestyle spending accounts. If you’ve never heard of this benefit, you’re not alone. It’s relatively new in the United States, though it has been in use in other countries for years. These accounts are also sometimes called wellness accounts or personal spending accounts.

A lifestyle spending account (LSA) is an account-based benefit in which an employer allows employees to make specific types of purchases and get reimbursed from the amount that has accrued in their LSA. It’s most similar to health savings accounts (HSAs) or flexible spending accounts (FSAs), because LSAs are often restricted to use for health-related items. Lifestyle spending accounts are often set up by employers that want to encourage healthy behaviors.

Some of the most common types of expenses employers opt to cover with these accounts are things like gym memberships, fitness classes, sports or exercise equipment, weight-loss programs, nutritional coaching, or other items that are intended to promote health. One way to look at it is this: HSAs are used for medical treatment-related items, while LSA funds are used for more preventive measures.

Lifestyle Spending Accounts Versus Other Health-Related Account Benefits: Key Differences

Like an HSA, an LSA has funds that are to be used for specific types of purchases—typically purchases related to health and wellness. But beyond that, there are a lot of differences. Let’s take a look at a few ways they differ:

  • No tax benefit. Unlike standard HSAs, lifestyle spending accounts don’t currently have any tax advantage. They’re funded by the employer, and the funds are considered taxable income.
  • Restrictions are controlled by the employer. With HSAs, there are restrictions on the use of the funds, but those restrictions are not usually set by the employer. With LSAs, however, the employer can create its own parameters. Employers can restrict the use as they see fit, or leave it wide open.
  • Rollover is optional. With HSAs, the full amount contributed to the account belongs to the employee after the contribution is made, even if the employee doesn’t immediately use it. With LSAs, however, this is optional. LSAs can be administered with a “use it or lose it” component. This means that the benefit that is unused at the end of the period disappears and the employee does not retain or roll over any unused balance. Opting to implement it this way can make LSAs more affordable for employers.

Lifestyle Spending Account Setup Options

When establishing an LSA, the employer has choices to make. Since the funds are not tax advantaged, there are fewer legal implications tied up in creating such a benefit. So employers have a lot of leeway in how the benefit is set up and how they decide it can be used. Here are some examples:

  • Employers can opt to allow the employee to keep (roll over) unused funds at the end of the year, or not, if that is better for their budget.
  • The employer has control over how frequently funds are distributed into the LSA account.
  • The employer can control how reimbursements from the fund are handled and can opt to work with third parties on the administration if they choose to do so.
  • Employers have leeway over what types of purchases to allow with the funds—it can be open or restricted.

Employees tend to like this type of benefit because they also get some control over what specific items they would like to use it for. Since they get more control over how they take advantage of it, they may be more likely to do so.

Many employers view this type of account as a great compliment to HSAs, as they offer flexibility and focus more on the illness/injury prevention side of health and wellness.