11 essential FAQs about Lifestyle Spending Accounts (LSAs) in 2024
Discover answers to tax questions, how LSAs differ from pre-tax benefits, and more.
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11 essential FAQs about Lifestyle Spending Accounts (LSAs) in 2024
Benefit leaders are on the lookout for innovative ways to enhance their employee benefits package. Lifestyle Spending Accounts (LSAs) have emerged as a flexible and customizable solution to meet diverse employee needs.
From hosting in-person sessions at conferences to leading small group lunch-and-learns, Forma has been at the forefront of many discussions about LSAs.
We've compiled answers to the most frequently asked questions we've encountered this year.
LSA FAQs: The list
Here’s a list of LSA FAQs to help you better understand LSAs and how they can benefit your organization.
1. Are the dollars put into an LSA tax deductible for an employee like a pre-tax account?
Typically, LSAs are a taxable benefit. Employers include the amount of each LSA reimbursement in the employee’s gross income and apply income and payroll taxes to these amounts at the time of reimbursement. Plan sponsors are familiar with common exclusions for items that may be tax-advantaged (e.g., medical, dependent care, HSA, tuition, and adoption expenses).
2. For employers, are LSA contributions tax-deductible?
Yes. The question of "are stipends taxable" often arises. LSAs are not deductible for employees, but they are deductible for employers. Just like an employer can deduct an employee's salary as a business expense, they can do the same with LSA contributions.
3. Can LSAs include pre-tax components?
LSAs are generally a post-tax benefit. LSAs are designed to provide flexibility for employees to use funds for various expenses. Integrating pre-tax components like HSA contributions directly into an LSA is not advisable due to regulatory considerations. That said, LSAs can be designed to support tax-advantaged use cases when applicable. In addition, employers can offer LSAs alongside pre-tax benefits like HSAs and FSAs to provide well-rounded support to employees.
4. Are any LSA benefits non-taxable to employees?
Only in specific circumstances. Depending on what’s included in the account, a customizable spending account may be set up as tax-advantaged. For example, sometimes employers design their Educational Assistance Spending Accounts as a Section 127 plan so the employer can provide tax-free qualified education assistance to employees. To qualify under the program, the employer must follow the IRS code. Your third-party administrator (TPA) can provide plan design recommendations.
5. Can LSA funds be used for any expense (e.g., groceries, utility bills, etc.)?
As an employer, you define the allowable expenses based on your organization's benefits goals. These may include health and wellness, professional development, or family support. Rather than investing in another well-being initiative that employees may not use, LSAs provide a variety of options that fit each person's unique lifestyle. Employers provide a list of eligible expenses to guide employees so they’re well educated on their company’s policies. Compliance considerations are important, and working with a modern TPA like Forma can ensure proper guidance.
6. Can an LSA cover prescription and healthcare costs?
LSAs should not cover any medical expenses, including prescription and healthcare costs.
7. Can LSA funds be used on items like student loan repayments or charity donations?
Yes, employers can customize their LSA program to include these options. This flexibility allows you to align LSAs with your company's employee engagement and corporate social responsibility goals. Taxability may vary based on how the employer sets up the program.
8. Are there any issues of constructive receipt?
Most employers treat LSA funds as taxable when an employee uses them to reimburse an eligible expense. However, there's some uncertainty due to the "constructive receipt" doctrine, which states that compensation is taxable when it is made available to the employee, even if not yet in their possession. Under this doctrine, funds credited to an employee's account or made available for withdrawal during the taxable year could be taxable whether the employee uses the funds or not, unless there are significant limitations or restrictions on accessing the funds. We encourage LSA sponsors to work with their tax counsel on this topic.
9. Can LSAs be set up as an employee contribution that’s matched by an employer?
No, employees cannot contribute to a Lifestyle Spending Account. LSAs are an employer-sponsored benefit.
10. Are LSAs a US only benefit or can they be issued globally?
LSAs can be implemented worldwide, making them a solution that many companies use to combat global benefits inequities and complex admin given region-specific requirements. LSAs need to comply with local regulations for successful implementation. A modern TPA can help you manage all of the unique customizations and processes that come with global benefits.
11. What is the process from funding to usage for LSAs?
An employer sets up and funds the LSA account. Employees can then use the funds for eligible expenses through various methods such as a dedicated debit card, direct claim reimbursement, or purchases in a marketplace solution like the Forma Store. Your LSA provider should ensure easy tracking and management of funds. If employees pay out of pocket for their expenses, then they’ll either be paid back via payroll or direct deposit based on the employer’s preferences.
Offer LSAs with Forma
With a newfound understanding of LSAs, you can more confidently implement the best customizable spending accounts for your organization and ensure you’re providing maximum value to your employees.
Have more questions? <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">Get in touch</span> with a Forma expert to learn answers today.
