What is it commonly used for?
Employers typically use LSAs to augment their existing benefits such as their group health benefits and the other tax-advantaged accounts they offer. The expenses they choose to support often reflect the company values and aim to address challenges that employees are facing in their personal lives.
If the company values physical and mental health, it’s common for them to offer a monthly allowance for gym memberships, fitness classes, home gym equipment, healthy eating apps, and meditation apps. If the company aims to support their employees’ financial wellness, they could cover a financial advisor or financial planning services, or personal finance classes or apps.
What are the eligible expenses?
The list of expenses that are eligible for reimbursement through an LSA is not mandated by the IRS and is up to the discretion of the employer, so it can be long and varied, but cannot be a medical expense. As long as the expense doesn’t run afoul of ERISA rules and isn’t something that would typically be covered under a group health plan, it may be eligible for reimbursement via an LSA.
Therefore, when designing your plan, it’s important to think about the challenges your employees face and their lifestyles so that you can offer an impactful benefit. Here are some common expenses that are eligible for reimbursement through an LSA:
- Financial advisor and planning service.
- Personal finance and budgeting seminars and classes.
- Estate planning costs.
- Tax-preparation services.
- Purchasing a home. You can use your LSA to help employees pay for costs associated with buying a home including their downpayment and closing costs.
- Student loan consulting services.
Fitness and physical wellbeing
- Fitness classes and gym, health club and spa memberships.
- Healthy eating apps.
- Athletic equipment and accessories.
- Exercise equipment.
- Sports lessons like golf or tennis.
- Personal trainers.
- Fitness trackers.
- Nutritional supplements.
- Race entry fees.
- Sports league costs.
- Passes for things like skiing and snowboarding, and national parks.
- Massage therapy and equipment.
- Meditation classes and apps.
- Non-medical counseling services like couples therapy, life coaching and parenting skills workshops.
- Leadership and spiritual retreats.
- Desks and chairs.
- Computer and accessories.
- Desk equipment.
- Personal development classes like art or cooking. But these should not be traditional education classes otherwise the expense could be considered “tuition assistance”. See the ineligible expenses section below for more information.
- Class materials and supplies.
- Testing fees.
- Industry events.
- Parental coaching.
- Child services platforms.
- Baby equipment and accessories.
- Child care that is ineligible for reimbursement under an FSA.
Which expenses are ineligible?
Since LSAs are a post-tax benefit, they should not reimburse for anything that could be covered as a tax-advantaged benefit. The reason being, they want to ensure employees receive the tax breaks on those tax-advantaged expenses. Examples of tax-advantaged expenses are:
- Medical care costs like copays, health insurance premiums and anything that’s considered a qualified medical expense for the purposes of an HSA or FSA. That includes acupuncture, smoking cessation programs, and chiropractic care.
- Dependent care expenses. Since the IRS allows for employers to offer employees a dependent care FSA into which employees can deposit pre-tax money to pay for dependent care expenses that allow them to work, these same expenses aren’t eligible for reimbursement through a post-tax account like an LSA.
- Student loan reimbursement. Due to the CARES Act, employers can offer employees up to $5,250 per year in student loan repayment assistance, tax-free, through 2025.
- Tuition assistance. Employers can also offer employees up to $5,250 per year in qualified education cost assistance on a tax-free basis.
- Identity theft protection. IRS allows employers to provide employees with credit and identity monitoring services and exclude said services from their gross income.
What are the tax implications of an LSA?
LSAs are post-tax benefits for employees and tax-deductible business expenses for employers, so they will affect each party’s taxes differently.
Employees must pay income taxes on their LSAs, but employers can choose how these taxes are calculated. Employers can choose to withhold taxes based on the total amount available via the LSA even if employees don’t use it all, or they can withhold based on the amounts employees actually reimburse.