The years since the pandemic began have brought constant change. From remote working to mass resignations, from not enough workers to mass layoffs. Employees have been asking for better health insurance with more flexible options, more robust mental healthcare, and support in accessing care and procedures that may not be available in their geographic area. They have also been asking for help with coping with increasing financial stress, support for working remotely, and benefits that support a healthy lifestyle.

In the current, ever-changing environment, a rigid benefits package is insufficient. One of the best ways to ensure your benefits package has the flexibility to meet the needs of both the business and the workforce, regardless of the external challenges you face as a company, is to offer a Lifestyle Spending Account (LSA). These post-tax accounts are customizable to fit your budget and company culture, and allow you to specifically target your employees’ needs so that your benefits package delivers maximum impact.

An LSA can help increase your employees’ engagement in company benefits, it can create a healthier, more productive workforce, it can help save you money, and it can improve your recruitment and retention efforts. Here’s how.

What is an LSA?

LSAs are employer-funded accounts that provide a taxable cash benefit to employees to pay for everyday, non-medical, lifestyle and wellness expenses as defined by your employer. Since these accounts are taxable, the IRS does not mandate what expenses can be covered like they can with pre-tax accounts like HSAs and FSAs. Therefore, employers can choose whether they want to offer one LSA or multiple, the amount employees can spend and the cadence at which that amount renews (e.g. monthly, quarterly, or yearly) and the expenses for which the money can be used. Employers can even choose the employee demographic that qualifies to participate in the LSA(s) as long as those policies aren’t discriminatory in nature. Employers can also choose to reabsorb any money leftover at the end of the plan term, or make it available to employees in the following plan year.

The money employees reimburse from their LSA is subject to the appropriate income tax rate. The types of expenses that can be included in an LSA are wide ranging and support many everyday costs employees might already be paying for out-of-pocket. These could include:

• Physical health improvement: gym memberships and fitness classes, home gym equipment, personal training, fitness trackers and apps, race entry fees, and more.

• Mental health improvement: meditation apps, personal development classes, life coaching and retreats.

• Financial health improvement: financial advisory services and coaching, estate planning help, student loan consulting services, and more.

• Home office expenses such as desks and chairs, headphones, computer, and accessories.

When designing an LSA, an employer should be mindful that the eligible expenses do not create a group health plan as that is subject to additional regulation or include an expense that qualifies as a pre-tax benefit, like medical care or student loan repayment.

LSAs are not eligible for participation through COBRA.

What are the benefits?

The benefits to offering employees an LSA are wide ranging and will vary depending on the demographic makeup of your workforce. These accounts help to support remote workers, employees from different socioeconomic backgrounds, and employees at different life stages, such as starting their career or starting a family.

LSAs benefit the business by giving your company a recruiting and retention tool that can be molded to its needs on a year-to-year basis and even in the face of a crisis like the Covid-19 pandemic or persistently high inflation.

More flexibility

One of the most powerful features of the LSA is its flexibility. Employers can design their plan however it best suits their business and budget and the moment they’re operating in. For example, a company with a largely remote workforce could offer a Lifestyle Spending Account to cover work from home expenses.

You can design your plan to target the specific needs of a specific group of employees or you can design it to meet a wide range of needs for the whole company, or you can have multiple LSAs, some targeted, some broad in focus, as long as these offerings are not discriminatory. As the needs of your workforce changes year-to-year and as budgets fluctuate, you can shift the focus and allowance levels of the LSA(s) to meet the current moment.

This enables employers to meet the ever-changing needs of their workforce in an impactful way and empowers employees to choose how best to utilize their benefit.

Increased employee satisfaction and retention

A recent Mercer study found that across the board, employees want better benefits. In fact, 54% of jobseekers recently said they would consider accepting lower pay if it meant a better benefits package. Now, “better” is a qualitative term and it’s hard to discern what employees (current or prospective) might consider “better” than what they currently have. That’s why flexible benefits like an LSA are becoming more popular.

When you give employees the power to spend their benefit however is most impactful to them, you increase the value of that benefit as well as the likelihood that they will engage with it. Ask any benefits professional, the more engaged employees are with their benefits package, the more likely they are to feel satisfied with the company’s offerings. And the more satisfied they are with their benefits, the more likely they are to stay. Which means you save money on recruitment.

Better inclusion and diversity

Diversity powers innovation. If you only have opinions, ideas and insight from one group of people, your company may miss out on opportunities to serve or attract a wider customer base. That’s why it’s important to have representatives from multiple backgrounds and life experiences in the room. If you want a diverse workforce, you have to show that you support them in their diversity. That means offering benefits that target their specific needs.

For instance, 1.1 million women left the workforce from February 2020 to January 2022 because they were the primary caretakers in their family units. And while men have largely recouped the jobs they lost during the pandemic, women have not because child care continues to be an issue. An LSA that helps to support child services platforms or childcare that is ineligible under a Dependent Care FSA could help ensure employees who are also parents are able to stay and contribute to your company.

Gallup recently began asking job seekers about how highly they value diversity and inclusivity at their companies, and 42% responded they value it highly. People want to work at a company that supports its workforce. An LSA shows that you do.

What are the disadvantages?

When putting together your benefits package, there are many factors you have to weigh when you decide what you’re going to include. One of those things is cost and the other is employee utilization. An LSA isn’t going to be right for every organization. There are two disadvantages to offering an LSA: no tax advantage for the employee participants and these accounts can only be funded by the employer.

No tax advantage for the employee participants

Unlike the tax-advantaged HSA and FSA, the LSA does not afford employees a tax break on their income taxes. In fact, they will be charged the appropriate income tax rate on their LSA reimbursements. The reason for this is that LSAs can be used to pay for a wide range of expenses. Tax-advantaged accounts, on the other hand, are tightly regulated by the IRS and have strict rules about what the money can and cannot be used for. Tax-advantaged accounts also have strict annual limits, whereas LSAs do not.

The fact that employees must pay income taxes on their reimbursements might dissuade some from participating in the plan. However, if you’ve done your due diligence and targeted your LSA to support expenses employees are already paying for (or would like to pay for) out-of-pocket, then the income tax payment might not be as big of a disincentive.

LSAs also do not offer employers the opportunity to save on taxes. With tax-advantaged accounts, employee contributions are taken before income taxes are assessed which has the added effect of lowering the employer’s payroll taxes. Since the LSA isn’t tax-advantaged (and since employees can’t contribute to the account), the employer’s payroll taxes won’t be affected.

Exclusively funded by the employer

Another disadvantage to offering an LSA is that the employer is 100% responsible for funding the account. According to ADP the median annual reimbursement for LSAs is $600 per employee, but can range widely between $240-$10,000. Since the employer must fund the LSA completely, and should design a plan that adequately meets the needs of its employees, it’s important to look closely at your budget to ensure it makes good business sense to offer this benefit.

Is it right for my business?

To decide whether or not an LSA is right for your business you can take these steps:

1. Identify your objectives and your budget. What do you value as an organization? What are your strategic goals for the coming year? What is your HR strategy? What is your compensation philosophy? When thinking about the answers to these questions, consider your company’s size, location, industry, any applicable collective bargaining agreements, and what your competitors are doing.

2. Conduct a needs assessment. This will help you determine the benefits that are most likely to be most valuable to your current and potential employees. This assessment should use current benefit utilization data, employee interviews and industry data from your benefits broker.

3. Prioritize your current benefits offerings. Using the results of the needs assessment, prioritize your current benefits offerings to see what’s working and what you might want to cut or change. Ask yourself, “Where are the holes?” and, “Can an LSA be used to fill in the gaps of coverage?”

4. Compare your benefits prioritization against your budget. Are there benefits you can cut or ways to reduce costs? Is there a more efficient way to use your money? How much can you allocate per employee to an LSA and would that be impactful and an efficient use of that money?

If, after assessing your current offerings against employee wishes and your budget, you determine that an LSA would be an impactful benefit and an efficient use of the money needed to fund the plan, reach out to your benefits broker for some available options.

How to effectively implement an LSA

Follow these general steps to effectively implement your LSA:

1. Develop program goals and align those goals with your budget.

2. Clearly define the eligible expenses and set the reimbursement cap

3. Determine the reimbursement process (keep this simple).

4. Communicate plan details and benefits clearly and frequently, offering continuing education on how employees can best utilize their LSA.

5. Use analytics and regular reporting to stay on top of program performance.

Get started with Lively today

Lively is your partner in offering the most impactful benefits package for your budget. Our customer-first design, easy process and award-winning customer service help make our benefit accounts beat industry average every year. If you’re ready to level-up your benefits package, including LSA, HSAs, FSAs, Medical Travel Accounts, standard HRAs, and COBRA, reach out today.