What is a lifestyle spending account?

Many employers are familiar with account-based benefits like health savings accounts (HSAs) and flexible spending accounts (FSAs). But many haven’t heard of lifestyle spending accounts (LSAs), which are rising in popularity.

An LSA is a flexible, defined contribution benefit that enables employers to help pay for various expenses that employees encounter in their daily lives. Because they can cover a wide array of expenses, an LSA can positively impact recruitment efforts, improve employee engagement, and boost productivity. But before you sign up for an LSA, you need to understand how it works.

In this blog post, you’ll learn:

• What LSAs are and how they differ from other account-based benefits.
• How to fund an LSA, its tax implications, and the wide range of eligible expenses.
• Insights into the advantages and challenges of offering an LSA.

What is a lifestyle spending account?

A lifestyle spending account—also known as a lifestyle benefit or perk allowance—is an employer-funded account that supports employees’ physical, mental, and financial health.

Unlike FSAs and HSAs, the IRS classifies most LSAs as a post-tax benefit. This means that distributed LSA funds are likely taxable income for employees.

Employers can custom design several aspects of their LSA, including:

• How and when employers can contribute the account
• Allowance amount
• Participation requirements (including if dependents are eligible to use the benefit
• Eligible expenses
• What happens to unused funds at the end of the year (if reimbursing employees)

LSAs are easier to self-administer than other employee benefits. But you can have a third-party administrator or use software to manage your LSA if you or your HR team wants to outsource the task.

How does a lifestyle spending account work?

Many employers choose to set up their LSA as a reimbursable benefit. While LSAs work similarly to other account-based benefits, they’re much more customizable.

Let’s start with how you fund the account:

• Only an employer can contribute to an LSA.
  • According to SHRM, most employers contribute an average of $850 annually toward each employee’s LSA¹. But you can contribute more if you want to fund more expensive benefits like adoption assistance, fertility assistance, or caregiving support.
• There are no minimum or maximum contribution limits. You can offer as much as your budget allows.
• You can offer contributions upfront or reimburse employees for incurred expenses. If you reimburse employees, you can allow unused LSA funds to roll over annually or use a “use it or lose it” system.
  • Unused LSA funds will stay with you if you're using a reimbursement model. This will help you remain as cost-effective as possible while providing employees great benefits.

If you are offering an LSA through a reimbursement model, you’ll choose which expenses are eligible under the account. Then, your employees make purchases and receive reimbursements up to their set allowance amount.

Some examples of LSA expense categories are:

• Physical health, such as:
  • Gym memberships
  • Workout apps and fitness classes
  • Exercise equipment
  • Nutritional supplements
  • Wellness programs
  • Athletic clothes
  • Personal trainers
• Mental health services, such as:
  • Meditation apps
  • Online talk therapy and counseling services
  • Massages
  • Annual park passes
• Remote work costs like office equipment, cell phone, and internet service
• Virtual care, like telehealth and telemedicine services
• Professional development, including continuing education courses and training
• Family support like child care, elder care, and pet care
• Grocery and meal delivery services
• Charitable donations
• Financial planning services
• Commuter benefits
• Student loan repayment and tuition assistance

Only some LSA benefits qualify for tax-advantaged treatment under IRS guidelines. For example, you can offer tax-free tuition assistance up to an annual IRS cap. For most categories, your employees must pay income tax on the money they spend from their LSA each year. Any amount rolled over or forfeited isn’t taxable gross income—only the spent money is subject to income taxes.

What are the pros of a lifestyle spending account?

There are many advantages to having an LSA. Let’s review a few below so you can see how they can help your company stand out as a top organization.

1. They’re inclusive and flexible

Roughly 38% of employers plan to or are considering adding an LSA to their benefits package in 2025¹. This is because having inclusive and diverse perks like LSAs promotes a positive company culture and shows that your company prioritizes the health and well-being of your employees.

LSAs aren’t a “one-size-fits-all” traditional benefit, so they’re great at equally supporting all types of employees. Women, remote employees, LGBTQ+ workers, and parents can receive benefits to pay for their preferred services and items.

Additionally, you can vary allowance amounts by certain groups of workers. For example, you can offer a higher allowance to people with disabilities. Or, to make things simple, you can give all employees the same amount. Whatever your decision, your staff will appreciate choosing how to spend their money.

2. They help you attract and retain talent

It’s challenging to stand out among your competitors without a benefits package that includes a broad range of perks. Companies that offer LSAs have an easier time attracting candidates and retaining them as employees because it shows they care about their well-being.

A Gallup poll found that only 24% of employees feel their company cares about their well-being². Those who believe their employer cares are 69% less likely to look for a new job, 71% less likely to experience burnout, and five times more likely to be an advocate³.

By offering an LSA and promoting its ability to support your employees financially, you’ll help yourself stand out and retain them for the long haul.

3. They encourage your employees to be proactive

Many employees see benefits like health insurance as reactive perks for when problems arise. But LSAs encourage a more proactive approach. By implementing an LSA, you encourage your employees to focus on all aspects of wellness by giving them the financial means to build healthy habits and offset costs along the way.

For example, physical exercise and improved mental health can help individuals be more productive and happier in their daily lives. With an LSA, your employees may feel motivated and financially able to make healthy changes, like buying a gym membership or getting mental health counseling.

What are the cons of a lifestyle spending account?

Although LSAs have many advantages, you should know the potential disadvantages before getting started.

1. They’re taxable for employees

As mentioned above, money spent from an employee’s LSA is likely taxable income. In contrast, your employee's withdrawals or reimbursements are tax-free if you offer a health reimbursement arrangement (HRA), HSA, or FSA.

If this is your first time offering an LSA, your employees may not want to participate in a taxable benefit that will cost them more money during tax season—even if they like the account's other advantages.

2. There could be potential ERISA complications

While LSAs aren’t usually subject to federal laws, they could be subject to the Employee Retirement Income Security Act of 1974 (ERISA) if your employees use them to pay for specific health or wellness expenses.

Because the IRS doesn’t recognize an LSA as a tax-advantaged health plan, medical expenses covered by an LSA are taxable. Therefore, it’s wise to exclude expenses listed in Section 213 of the Internal Revenue Code from your LSA benefit, as those items could be covered on a tax-free basis through group health plans, HSAs, and HRAs⁴. The IRS doesn’t consider personal expenses beneficial to general health as tax-free medical care⁵.

If you’re unsure how to set up your LSA to avoid a compliance pitfall, consult a lawyer or benefits specialist before offering the benefit to your employees.

3. You may need a good-sized budget to make it worthwhile

LSAs are employer-funded only, so contributing to each employee’s account will add to your annual benefits budget. Because many lifestyle services—like family support, groceries, and student loan repayments—are costly, your employees may not see the value in their LSA unless you provide a large allowance.

For example, the Department of Labor found that the average cost of childcare ranges from $6,552 to $15,600 per year⁶. A small annual LSA allowance may not be valuable enough for an employee to cover anything worthwhile. Plus, administering an LSA may not be worth your time if your employees don’t find it impactful.

Depending on your budget, it can be challenging to balance staying cost-effective and providing a generous benefit to your employees that they will want to use.

How PeopleKeep can help you offer a taxable health stipend

If you want to offer a health benefit for the first time, but want the flexibility and cost-control that an LSA offers, try a health stipend. Health stipends are a fixed amount of money employers offer employees to pay for their individual health insurance premiums and other out-of-pocket medical costs.

Stipends have several advantages. Firstly, any type of worker can receive a stipend, including a 1099 contractor or international worker. They’re most beneficial for organizations with employees who have premium tax credits. Formal benefits like an HRA could cause employees to lose out on their tax credits, while a stipend doesn’t. They’re often easier for small employers to administer and have no minimum or maximum contribution limits.

Lastly, you can offer an employee stipend as a one-time bonus, as regular payments, or use a reimbursement model.

However, stipends do have a few potential downsides, such as the following:

• The IRS considers stipends taxable income for the employee, and employers must pay payroll taxes on reimbursements.
• Stipends don't satisfy the Affordable Care Act's employer mandate. To comply with federal law, employers with 50 or more full-time equivalent employees (FTEs) must offer a traditional group plan or individual coverage HRA (ICHRA).
• You can’t legally require your employees to use their allowance for health expenses. You also can’t request they submit a receipt for individual plan premiums, medical services, or prescriptions.

If you’re new to offering health stipends, PeopleKeep’s WorkPerks software can help. With WorkPerks, businesses of all sizes can administer their healthcare stipend in just a few minutes every month, giving you more time to focus on other vital business operations.

Conclusion

If you want to boost your compensation package, LSAs are an excellent option for supporting employee wellness. But depending on the type of perks you want to offer, they may not meet your exact needs. So, comparing LSAs to other fringe benefits is crucial to ensure you’re crafting the best benefits package for your staff.

With PeopleKeep’s WorkPerks stipend administration software, we help organizations like yours easily offer reimbursable employee perks for healthcare expenses without the hassle. Schedule a call with us today, and we’ll help you get started.

This article was originally published on April 10, 2023. It was last updated on January 17, 2025.

1. SHRM - Growing interest in LSAs

2. Gallup - Employee well-being

3. Gallup - Ignore employee well-being at your own risk

4. 26 U.S. Code § 213

5. IRS - FAQs about medical expenses related to nutrition, wellness, and general health

6. DOL - New childcare data