HR professionals know employees like account-based benefits such as health savings accounts (HSAs), flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs). But most haven't heard about―at least not yet―lifestyle spending accounts (LSAs).
Like the more familiar employer-sponsored accounts, LSAs are a means for companies to help employees support the health and wellness activities in their lives. But LSAs differ from other spending accounts in two key ways:
- LSAs are funded by employers with money that is taxable as income to employees when they spend it, unlike the tax advantages of HSAs, FSAs and HRAs, for which withdrawn funds are not taxable.
- Employers decide how employees can spend their LSA funds, and acceptable products and services are managed through the account vendor's system. Many employers see this ability to limit and direct employee spending of employer-provided money as a compelling reason to offer LSAs.
So far, LSAs have been more common in Canada, but U.S. employers are starting to take notice.
"LSAs can help employers emphasize the impact lifestyles can have on employee health and wellness," said Swati Matta, director of health and member engagement for League, a Toronto-based provider of LSA services.
How HSAs and LSAs Differ
|Health Spending Accounts
|Lifestyle Spending Accounts
- A flexible benefit plan that provides funds to pay for a wide range of medical and dental expenses.
- Typical expenses can include:
- Medical, dental and vision care.
- Physical and occupational therapy.
- Nontaxable benefit for employees.
- A flexible benefit plan that provides funds for health and wellness products and services.
- Typical expenses can include:
- Gym memberships.
- Yoga classes.
- Athletic wear.
- Nutrition counseling.
- Food supplements.
- Life coaching.
- Taxable benefit for employees.
A League blog post explains that, unlike funds contributed to an HSA, employers pay for only the amounts employees actually spend, which "makes a huge difference at the end-of-year [budget] review." An LSA adds flexibility to benefits plans and is easy to implement and control, experts at Vancouver-based Finkelstein Financial Services explained.
Shaping a Lifestyle
Like many companies, Seattle-based project management technology firm LiquidPlanner found that only about half of its 50 employees were taking advantage of all their employee benefits. For instance, many employees were overlooking the company's education-related benefits and subsidies for gym memberships. The challenge for the company was to find ways to make these benefits more relevant and valuable to workers.
To achieve this aim, LiquidPlanner decided to eliminate several benefit programs and instead fund LSAs for each employee. With the LSA, workers and their dependents can use the company's $1,000 annual employer contribution for anything that promotes their own wellness, however they define that, except for any type of drug, alcohol or nicotine.
Examples of how employees use the funds include "[purchasing] golf clubs, cookbooks for healthier eating [and] activities that challenge them," said Taja Hanley, LiquidPlanner's director of human resources.
Establishing an LSA
The taxability of LSA funds, while a disadvantage, avoids many of the legal or regulatory constraints placed on tax-advantaged accounts. As a result, LSAs are relatively simple to set up. Steps suggested by employers that have successfully put an LSA in place include the following.
Set a budget. Decide how much the employer will contribute to each employee's account and how to manage those funds. Two key questions to ask:
- How quickly will employees be able to spend employer LSA contributions?
- What happens to unused LSA amounts at the end of the year or when an employee leaves the company?
The answers to these questions are up to the employer. For example, if an employer offers $500 LSAs, the employer could deposit the full amount on Jan. 1 of each year and allow employees to spend that full amount immediately. However, if an employer wants to spread out contributions, it can make LSA deposits throughout the year, such as on a monthly or quarterly basis.
It's important to decide whether employees will be able to roll over unused LSA funds for use in subsequent years, or if the employer will have a "use it or lose it" policy.
LiquidPlanner deposits its $1,000 annual contribution in four equal parts at the beginning of each calendar quarter. Employees who want to spend all or most of their funds at once must wait until the fourth-quarter deposit to access the full $1,000 contribution.
An employee who purchases a big-ticket item, such as a piece of exercise equipment, can submit the receipt for reimbursement at any time but will receive full reimbursement only when those funds become available.
Any unused funds in an employee's LSA goes back to LiquidPlanner at the end of the calendar year or when the employee leaves the company.
Make it relevant. Next, determine how employees can use their funds. Employers may choose to be specific, such as by limiting LSA funds to expenses directly related to physical fitness and wellness, such as weight-loss programs, exercise or yoga classes, exercise equipment and so on.
Other employers might define the account's acceptable uses much more broadly, such as anything that enhances an employee's well-being. In these cases, employees may be able to use LSA funds on, for example, charitable giving or beauty treatments.
Employers that are unsure how to define appropriate use of LSA funds can work with their vendors to identify appropriate categories. "One employer allowed an employee to use LSA funds to purchase an ergonomic chair for his home office," said Matta.
Communicate. LSAs are a new and emerging development in employee benefits, so employees will need time to understand how they work and how to claim the funds in the account.
LSA vendors are likely to provide an app that employees can use to make claims and find out more information. An LSA app from League, for instance, offers a chat feature that employees can use to request information about allowable spending and how to submit LSA claims using receipts for products and services allowed under the LSA plan.
Joanne Sammer is a New Jersey-based business and financial writer.