Learn pros, cons of employee lifestyle spending accounts

What is an LSA?

Employee LSAs are relatively new, so not all HR leaders are familiar with them.

An LSA is an account set up by an employer that contains a specific dollar amount for an employee to spend during a predetermined period, said Seth Safra, leader of the employee benefits and executive compensation group at Proskauer Rose LLP, a law firm located in New York. Employees can only use these accounts for certain expenses.

Approved LSA expenses are usually in health and wellness categories.

An LSA usually covers the following spending types, said Augustus Vickery, director at the HR practice at Gartner:

• Childcare.
• Financial planning services.
• Gym equipment.
• Gym memberships.
• Mental health services.
• Pet care.
• Pet insurance.

3 pros of employee lifestyle spending accounts

Employee LSAs can benefit organizations in a few ways. Learn about the pros.

1. They acknowledge differing employee wishes

Today's workforce is comprised of multiple generations of employees with different needs.

LSAs offer a company the flexibility to design a program that addresses people of all ages, Vickery said. For example, a young professional entering the workforce might not be concerned yet about financial planning, but they might be interested in an LSA that covers their online gaming subscriptions.

"It's really about meeting employees where they're at," Vickery said.

2. They demonstrate an employer's investment in its workforce

Employees might feel like their company cares about their needs if LSAs are somewhat customizable or personalized.

For example, an employee might struggle with work-life balance because of multiple pets that require time and money. An LSA that covers pet care could alleviate some stress.

"They think, 'My company is listening to me,'" said Julie Stich, vice president of content at the International Foundation of Employee Benefit Plans (IFEBP), a nonprofit organization that provides research and education to benefits professionals and is located in Brookfield, Wis.

3. They can result in money back for companies

Organizations might receive some funds back at the end of the set period.

Employees often don't use all of their LSA budget, Stich said.

"If an employee doesn't use everything, the employer retains that money and can use it for next year or for something else," she said.

4 cons of employee lifestyle spending accounts

Employee LSAs can lead to potential issues as well, so HR leaders should be aware of those possible problems before implementing the program. Learn more.

1. They might not account for employees' wishes

Companies might be pressured by a vendor to add on certain LSA offerings.

LSA vendors sometimes push clients toward specific offerings because they have established relationships with their own set of suppliers, Vickery said. However, those benefits might not be relevant to every workforce.

HR leaders must also make sure they and other leaders are aware of what employees want from an LSA program. Surveying workers can help.

"It's about making sure that [an LSA program] is based on good data [about] what … people need and want from us," Vickery said.

2. They are categorized as taxable income

Employees who are used to flexible spending accounts for healthcare might be confused by the fact that LSAs are taxable.

LSAs are taxable because they are considered income, Stich said.

"Here in the United States, we have flexible spending accounts where it's pretax money that is set aside for employees," Stich said. "[An LSA] is not the employee's money, but if they do go ahead and use it and get the reimbursement, they are going to get taxed on it."

3. Vendor contracts can be complex

HR leaders must carefully evaluate any third-party vendors that would potentially manage their companies' LSA programs.

When considering an LSA vendor, Safra encourages organizations to ask about the following:

• The number of clients that the vendor serves.
• The size of the employers that they work with.
• References from the vendor's customers.
• Indemnification requirements if a problem arises with the vendor.

HR leaders should also find out how the vendor will access the funds they're funneling into the LSA program, Safra said. Will the vendors hold the funds? If so, some safeguards should be part of the agreement. For example, a company should avoid having its funds be subject to claims from the vendor's creditors if the vendor goes bankrupt.

Fees are another important negotiation point.

Direct fees are those that the employer is paying per employee, per month for the LSAs, Safra said. But if the employer is prefunding these accounts and the vendor is holding the money, the vendor might also be earning interest on that bank account as part of its compensation.

"It's really [about] understanding the economics of the deal, understanding the vendor's qualifications, and understanding how much responsibility the vendor is taking on," Safra said.

4. The tax laws can be complicated

In addition to LSAs being taxable income, some expenses are best addressed outside of a lifestyle spending account program.

Some LSA offerings are no longer best suited for a lifestyle spending account program because of changes in tax law, Safra said.

For example, student loan reimbursement was one benefit that was traditionally linked to LSAs.

"Now there are ways to provide student loan reimbursement benefits on a pretax or tax-favored basis, whether through your 401k or through [a] section 127 plan," Safra said.

More tax-efficient ways to address benefits like elder care, long-term care and even pet care may arise in the future, he said.

"You definitely want to be staying on top of the developments," Safra said.

Carolyn Heinze is a Paris-based freelance writer. She covers several technology and business areas, including HR software and sustainability.