If your employer offers a Lifestyle Spending Account (LSA), which can also be called different names like: Life Account, Life Planning Account, Choice Account, and other names, you’re in luck! You can possibly use this account to pay for a wide range of everyday expenses from gym memberships to charitable donations. The amount you have to spend and the expenses for which you can use your LSA money will depend on your employer and how they’ve set up your account.
One thing you should be aware of is that LSAs are a taxable benefit. That means you might have to pay income taxes on the total amount your employer allocates to your account or just the amount you spend, depending (again) on how they’ve set up their benefit. In this post, we’ll walk you through what an LSA is, what you can use it for and how it can get the most out of this benefit. Let’s dig in.
A brief overview
Lifestyle Spending Accounts (LSAs) are employer-funded accounts that provide a taxable cash benefit to employees. Only employers can add money to this account and since the range of benefits for which you are legally allowed to reimburse for through an LSA is large, it is considered by the IRS a taxable benefit.
Typically, employers offer this benefit as a way to help employees pay for everyday life expenses like gym memberships and wellness apps by reimbursing them up to a pre-designated amount. If your employer offers this benefit, they will choose how much they will reimburse (e.g. $500), for what they will reimburse (e.g. home office equipment) and how often they will reimburse this amount (e.g. you can reimburse for up to $150 in expenses per month).
Since employers have flexibility in terms of how they construct their LSAs, there isn’t a typical way this benefit is designed. For instance, your employer might offer one LSA that can be used for a wide range of eligible expenses and fund the account on an annual basis. In this instance, your employer might offer you $2,000 per year to pay for physical and mental wellness expenses like meditation apps and massage, home office equipment, gym memberships, and financial planning services. Alternatively, your employer could offer an LSA that is singularly focused on family growing services like adoption or surrogacy. Or, your employer could offer multiple LSAs, each with a different purpose.
How does it work?
If your employer offers an LSA, you will typically have to choose whether or not you want to participate during open enrollment. Some employers auto-enroll their employees in their LSAs, some require that employees “elect” to participate, so make sure you know how your employer treats employee election for this benefit prior to the close of open enrollment. During open enrollment your employer should communicate the core details of how their LSA(s) is set up, such as:
- How much is available to employees. According to the Benepass Benchmarking Guide, the average funding amount varies by company size. Large companies fund their LSAs at an average of $177 per month, medium-sized companies fund their LSAs at an average of $151 per month and small companies fund their accounts at an average of $133 per month.
- How often that money will be replenished. Do you get a certain amount per month or a lump sum to spend throughout the year?
- The expenses for which you can use the money. These are the only expenses for which you can reimburse through your LSA. See the eligible expenses section for more information below.
- The process for reimbursing for these expenses, including what is considered acceptable documentation.
- Who is eligible to participate. Since LSAs are a taxable benefit, they’re not subject to IRS non-discrimination laws. As such, employers can offer them to certain classes of employees and not to others as long as they don't offer the benefit in a discriminatory manner.
- How the benefit will be taxed. If your LSA is set up as a general reimbursement account for which there is a lump sum available for the year, it might be subject to the constructive receipt principle which means you’ll pay income taxes on the total available amount, regardless of whether or not you spend it. If it’s a monthly allowance or meant for a more targeted list of expenses like student debt repayment, you might only pay taxes on the amount for which you’re reimbursed.
- What happens to unused funds at the end of the applicable time period. Typically, employers will absorb any unused funds but they might allow some or all of the unused funds to roll over to the following allowance period. An example of this would be: your LSA allows you to reimburse up to $150 per month for fitness related expenses and you can roll over up to $300 at a time, so your account doesn’t exceed $450.
If you elect to participate in the LSA during open enrollment, you should receive information on how to access your account from your HR Department before or shortly after the benefit is active.
The list of eligible expenses for which an LSA can be used is long, but will depend on your employer and what they allow. They can potentially include:
- Fitness expenses: gyms, fitness classes, fitness equipment, fitness app subscriptions, etc.
- Mental Health expenses: meditation apps, online chat therapy, massage, etc.
- Student debt repayment.
- Home office equipment: standing desks, chairs, computers, etc.
- Work from home expenses: internet, office supplies, etc.
- Professional development: continuing education, conferences, etc.
- Return to office incentives: gas, meals, car maintenance, etc.
- Convenience services: grocery delivery, laundry services, dry cleaning, etc.
- Financial services: financial planning, home budgeting help, tax preparation service, etc.
- Pet care: dog walker, pet day care, grooming, insurance, etc.
- Work uniforms and equipment.
- Charitable donations.
The list of eligible expenses for which you can use your specific LSA will depend on your employer and what they allow. If you have any questions about eligible expenses, you should reach out to your HR department or the LSA administrator.
What isn’t covered?
You can only spend your LSA allowance on the expenses allowed by your employer. Typically, your employer won’t reimburse expenses through an LSA that are covered elsewhere. That means if your health insurance covers mental health services in the form of therapy, your LSA might not also cover this service. If you have questions about what is or isn’t considered an eligible expense, reach out to your HR Department or LSA administrator.
How to get the most out of your LSA
To get the most out of your employer’s benefits offerings, you’ll want to participate in both tax-deductible and taxable accounts since they will typically pay for different types of expenses. Distributions from your Health Savings Account (HSA) or Flexible Spending Account (FSA) are tax-free, as are the contributions, so use these funds to save up to 30% (depending on your tax bracket) on qualified medical expenses.
Then use your LSA to pay for the lifestyle expenses that will improve your physical, mental and financial health but that your HSA or FSA don’t cover. If there is overlap in what your benefit accounts cover, use your tax-deductible money first, then reimburse for the remaining expenses through your LSA.
Make the most of your healthcare savings with Lively today
Lively offers three tax-advantaged and post-tax accounts that help employees save and pay for health related expenses. Our HSA, FSA, HRA, and LSA accounts give employers the flexibility to build the best benefits package for their employees and their budget while giving participants more control over how their healthcare dollars are spent. If you want to learn more about our benefits solutions, reach out to us today.
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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.