What benefit offering gives employees flexibility and freedom of choice while still allowing employers to decide the scope and stay true to their values? Meet Lifestyle Spending Accounts (LSAs).
Given the fierce competition for talent in the current tight labor market, organizations are investing heavily in developing sound recruitment and retention strategies. Compensation continues to be an important lever, but flexibility is becoming an increasingly crucial tool to attract workers. This is perhaps why even though LSAs have been around for over half a decade, they only started to gain traction since the start of the pandemic.
In a recent Mercer Insights Survey, 70% of employers said they are considering adding an LSA to their benefits package. However, only 10% of employers have an LSA in place today. Why the mismatch?
What Is A Lifestyle Spending Account?
An LSA is a flexible benefits fund that employees can use to spend on health and wellness services or products. Some companies take a more liberal approach to the LSA and define lifestyle as anything that promotes an employee’s wellness and can include entertainment, pet care, cleaning services, traveling, and more.
Benefits Of A Lifestyle Spending Account
LSAs offer flexibility for both employers and employees. Instead of being tied to one benefit or solution that might not be relevant to everyone, employees can use their funds in the LSA to meet their individual needs. For example, employees who like to invest in their physical well-being can use their LSAs to purchase workout equipment, while others who focus on mental well-being might prefer to get a massage or book a staycation on Airbnb.
For employers, LSA solution eases administrative burden while still being a “sticky” benefit directly tied to an employee’s day-to-day life. If, without LSAs, an organization would have to manage six different benefit vendors to get the same level of diversity, LSA can be a one-stop-shop for everything reward-related.
Example Of A Lifestyle Spending Account Setup
Typical contributions to LSAs generally range from $500 to $2,000. Contribution below $250 might not add value when considering the time and expense to administer the accounts. On the high end, LSAs with $3,500 or more might be used to address big-ticket but less utilized expenses, such as surrogacy or adoption.
Typical expenses can include:
- Gym memberships
- Fitness classes
- Athletic gear
- Health coaching
- Home office equipment
- Pet care
- Traveling credits (Airbnb, etc.)
The most important criterion to consider when choosing an LSA is how relevant the marketplace and reimbursement options are to your population. For example, Wellable offers an LSA through ThrivePass because of its diverse options and ease of use. On top of traditional offerings such as discounts on athletic wear or wearable devices, ThrivePass also gives its members access to family care options such as UrbanSitter, or traveling opportunities like U.S. Park Pass with access to over 2,000 federal recreation sites.
Potential Areas Of Concern
LSAs are relatively simple to administer compared to HSAs, FSAs, and HRAs. However, employers may want to exclude medical benefits that would trigger health plan laws (e.g., tobacco cessation programs, mental health therapy, etc.) and tax-advantaged benefits (commuter benefits, dependent care expenses, etc.).
There are also disagreements over how and when LSA funds are taxed. According to the “constructive receipt” concept, the full amount an employer contributes to the LSA would be treated as taxable income when first made available to the employee, regardless of whether they choose to reimburse it, unless receipt or access to the funds is subject to “substantial limitations or restrictions.” Others believe that LSAs are taxable only when the employee gets the reimbursement.
To address this, some employers allow employees to opt out of the LSA before the tax year begins to avoid ambiguity. Others choose to set multiple LSAs with set dollars for specific purposes (e.g., $200 for home office, $500 for gym membership, etc.), which exempt them from constructive receipt. Thus, funds are taxable to employees only if/when actually reimbursed.
Cost And Ease Of Use
If 70% of employers are interested in LSAs, why have only 10% implemented the solution? Firstly, LSAs can be expensive. They can also be yet another vendor to work with and another benefit option for employees to use.
A survey indicated that over a third (35%) of employees—including 54% of millennials—do not fully understand any of the benefits they’ve selected. Adding another option to the table might lead to decision overload. If this is a concern, choosing an LSA that is integrated with a holistic wellness platform like Wellable might be a good option.