American companies are looking for every possible advantage to recruit and retain top-quality employees in a dramatically changed workplace. Many are finding new value in Lifestyle Spending Accounts.

Two years after the COVID-19 pandemic reached the U.S., life is gradually returning to some level of normal. The workplace, however, has changed immensely and, many believe, permanently. It’s now a job hunter’s market, with record numbers of job openings and workers far more likely to change jobs to suit current interests. Lifestyle Spending Accounts may help employers attract qualified candidates, retain current employees, and better adapt to changing needs.

The pandemic has caused significant shifts in people’s attitudes about life and work. Many companies, particularly those hiring for high-demand positions, find that traditional benefits packages are no longer enough. The hot new employee benefit? Lifestyle Spending Accounts (LSAs).

Lifestyle Spending Accounts are actually not new. Human resources circles in the U.S. have been talking about LSAs for at least the past five years. They have been a popular option in Canada for some time, to the extent that LSAs are almost a staple benefit in some industries.

The reason Lifestyle Spending Accounts are so popular start with the fact that they are so flexible. Just about anything can be eligible for LSA reimbursement. Funded by the employer and taxable to the employee, LSAs are not regulated by government agencies. The list of eligible products, services, and activities can be made so broad that any employee can find something that resonates no matter what their interests or situation.

Add into the mix LSAs can be simple to administer, and one would be hard pressed to find other benefit options that return as much value to the sponsoring employer.

Origination of Lifestyle Spending Accounts

Employers in other countries have been offering LSAs for some time. For example, to the north of us, LSAs have gained so much traction that they are now one of the most sought-after benefits provided by Canadian employers.

Here in the U.S., LSAs remain a relatively new concept, and some HR professionals may not be entirely familiar with them. With their ability to provide effective options for addressing diverse employee groups and to be started at any point in the year, now is a great time to look at LSAs in more detail.

When LSA accounts first came on the scene, the most common perk offered were fitness benefits. They would cover the cost of gym memberships, personal trainers, etc. Over time they have expanded to include more options, and in the U.S., that expansion has been influenced by the COVID-19 pandemic. Gyms and personal trainers were no longer so readily available. Employees felt unsettled, unsafe, and both physically and mentally unwell.

While fitness perks remained an option in many LSAs, more pressing needs came to the fore. Employers began looking for more effective ways to help employees meet their personal goals. As a result, mental wellness activities, child enrichment classes, tutoring, cleaning services, home-based entertainment, adult education, and other similar services became examples of the types of expenses that gained traction for LSA reimbursement.

With the absence of IRS regulations giving employers wide latitude as to how the funds can be used, the range of products and services LSAs can reimburse is almost limitless. Just as sponsoring Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are ways that employers can help support the medical needs of their workers, LSAs can support lifestyle improvements that may be thought of in some ways as preventative care.

In response to the changing priorities of their employees, many companies are sponsoring LSAs for the first time. Other employers who already offered LSAs have expanded the products, services, and activities on which funds can be spent. Eligible expenses now often include various physical activities, household expenses, non-traditional health expenses (those not classified as IRS Section 223 medical expenses), and education/work-related expenses.

Examples of eligible expenses that may be chosen by the sponsoring employer can include costs for:

LSA-Eligible Expenses

Since they are not tax-advantaged accounts, the sponsoring employer has a lot of freedom to choose the products and services that LSA funds can cover. As hours were reduced in many industries, for example, LSA benefits were used to help employees buy groceries and pay for other household expenses. While not an exhaustive list, the chart below includes items that are commonly/frequently purchased with LSA funds.

LSA Taxation Considerations

Employers fund Lifestyle Spending Accounts and LSA benefits are considered taxable income to the employee.

The IRS does not regulate LSAs like other savings or spending accounts. They leave it up to the employer to decide what expenses can be covered and what, if any, usage and restriction limits there are. This makes LSAs easy to administer in comparison to tax-advantaged benefit accounts.

LSA Set-Up Decisions

With fewer legal and regulatory constraints, LSA setup is much more straightforward than other types of benefit accounts. There are four main areas employers need to address:

Budget

How much will be made available to the employee?
How will the accounts be funded – annually, semi-annually, quarterly, monthly, biweekly, or by claim?
If funded less than annually, can an employee receive complete payout for an eligible claim that exceeds the balance of their partially-funded account as long as it falls within their annual reimbursement limit?
If funding by any method other than by claim, how will unused funds in the account be dealt with at the end of the plan period?

Eligible Products/Services/Activities

The employer can be very specific (for example, funds can only be used for a one-year gym membership, fitness class at XYZ Fitness, or a Peloton)
The employer can assign categories (for example, funds can be used for any health or wellness program offered by recognized vendors)
The employer can be very broad and allow anything that helps an employee with their well-being (for example, funds can be used for an ergonomic desk chair, spa day, Netflix subscription, weekend cruise, or something else of the employee’s choosing)

Program Procedures

Once the employer has determined how much each account will hold, when funds are deposited, and what the eligible purchases are, it’s time to decide how reimbursement will work.

Some LSA accounts offer debit cards, with receipts required after the fact to verify the nature of the purchase (policed via payroll deduction for non-documented purchases)
Others allow reimbursement only in response to a claim filed with documentation of the expense
How will reimbursement be issued – added to payroll, or issued separately by direct deposit or check

Employee Communications

If you’re not familiar with LSAs, your employees likely aren’t familiar with it, either. They need to be informed and educated. The good news is that with fewer rules, LSAs are easier to understand than tax-advantaged benefit accounts.

Still, two-thirds of employees would appreciate year-round help understanding and using their benefits, a statistic that jumps to 78% among Millennials. With so many different learning styles in the workforce, regular communication through multiple educational channels can be just as important as what is said in an annual benefits meeting.

When employees understand their benefits better, they can use their benefits more efficiently. The more efficiently they use their benefits, the greater the return on investment experienced by the employer.

Takeaways

As employers continue to deal with labor shortages, a difficult job market, and changing employee priorities, it’s never been more important to ensure all workers feel supported and appreciated.
Employers need to think differently about employee compensation, with salary and standard benefits packages no longer enough.
To win in the hiring arena, employers must demonstrate more support for employee lifestyle concerns and become creative in setting their company apart from other companies hiring out of the same pool of potential employees.
While still a relatively new concept in the U.S., Lifestyle Spending Accounts are seeing great success elsewhere and are likely here to stay due in no small part to their flexibility.
Talk to your third-party administrator about how offering these benefit accounts can help you go beyond your competitors to attract and retain the best possible talent.

Lifestyle Spending Accounts – Giving New Meaning to ‘Flexible’ Benefits