Lifestyle Spending Accounts: pros and cons

As businesses seek innovative ways to enhance employee satisfaction and retention, Over the last few years, Lifestyle Spending Accounts have become an increasingly popular option for businesses looking to optimize their employee benefits programs. Designed to offer employees the freedom to allocate funds toward personalized needs — ranging from wellness programs to professional development — LSAs represent a shift away from one-size-fits-all programs toward flexible and inclusive benefits that are personalizable for employees. 

While LSAs offer clear advantages, such as boosting employee engagement and cost efficiency, implementing any new benefits program requires thoughtful planning. Ensuring administrative efficiency, maintaining compliance, and aligning the program with organizational goals are key factors in determining the long-term success of LSAs.

Key takeaways

• Lifestyle Spending Accounts offer employees flexible, employer-funded benefits for expenses like fitness, financial wellness, professional development, caregiving, and many more.
• Pros of LSAs are that they can improve employee well-being, engagement, and retention by empowering individuals to personalize their benefits and prioritize their needs.
• LSAs can cover diverse categories and expenses that align with modern work-life balance priorities, such as gym memberships, therapy, financial planning, caregiving, and more.
• While LSAs offer several benefits, administrators need specific plans to avoid potential misuse, costs, and tax implications, and need to list clear guidelines and work with reliable providers to manage effectively.
• Forma is a flexible benefits platform that simplifies LSA administration with customizable plans, automated compliance, and a seamless experience for both HR teams and employees.

What is a Lifestyle Spending Account (LSA)?

A Lifestyle Spending Account is an employer-funded benefit that allows employees to use funds for personal well-being expenses.

Unlike traditional benefits that only cover specific areas, LSAs provide flexibility, letting employees choose how to use the funds for physical, mental, emotional, and financial well-being.

The employer sets the contribution amount, defines eligible expenses, and establishes rollover policies. This flexibility allows organizations to customize the benefit to meet their workforce's needs while maintaining control over the budget. Additionally, companies can optimize costs through notional spending, where funds are only spent when employees utilize their benefits. 

Unlike traditional models that lock money into subscriptions or gift card programs, this approach ensures resources are allocated efficiently and avoids waste. By combining customization with notional funding, organizations can expand their benefits offerings while streamlining administration and maximizing budget impact.

Providing an LSA empowers employees to spend on what matters most to them. This flexibility can improve engagement, job satisfaction, and loyalty.

Examples of LSA expenses

An LSA can cover a broad range of well-being expenses. Here are some common examples, although every organization’s LSA is unique:

• Gym memberships and fitness classes: Employees can use the funds to support their physical health, whether that’s through gym memberships, yoga classes, or fitness challenges.
• Mental health services: Therapy, counseling, meditation apps, or mindfulness workshops are common choices. These services help employees improve their mental health, contributing to a more balanced and productive work environment.
• Financial planning and education: Employees can access financial literacy programs or one-on-one sessions with financial planners to improve their financial well-being.
• Child and elder care: Some LSAs also cover expenses related to caring for dependents, such as childcare or eldercare, which can help employees manage their work-life balance and support the well-being of the entire family.
• Professional development and education: LSAs can also cover costs related to courses, certifications, and other career development opportunities, fostering personal and professional growth.

Pros of Lifestyle Spending Accounts

While traditional benefits and point solutions have been the norm for decades, LSAs offer unique benefits that make them ideal for organizations looking to improve employee wellness, engagement, and retention.

Flexibility and customization of LSAs

A standout advantage of Lifestyle Spending Accounts is their unparalleled flexibility and customization. Unlike traditional benefits programs and point solutions, LSAs empower employers to control the types of expenses covered while giving employees the autonomy to decide how they use their funds. Whether for gym memberships, professional development courses, mental health services, and more, employees can tailor their LSA benefits to suit their unique needs.

This flexibility also benefits employers, who can design programs that align with their organizational culture and budget. From setting contribution amounts to defining eligible expenses, LSAs allow companies to create benefits that reflect their values while addressing diverse employee needs and circumstances. 

This approach not only increases employee satisfaction but also fosters a deeper sense of engagement as employees feel their individual needs are understood and prioritized.

Improved employee well-being and engagement through LSAs

By implementing an LSA, employers signal a strong commitment to their employees' well-being. These accounts provide a platform for employees to focus on their health, happiness, and personal priorities, contributing to a more resilient and motivated workforce.

The impact of LSAs can even extend beyond individual well-being. Employees who use these accounts to reduce stress or improve their physical health often experience enhanced focus, increased energy, and improved overall performance at work. This creates a positive feedback loop, where healthier and happier employees contribute to a stronger, more cohesive company culture.

Talent attraction and retention with LSAs

In today’s competitive job market, offering an LSA can differentiate a company from others vying for top talent. These accounts showcase a company’s dedication to supporting employees’ well-being in ways that go beyond table stakes benefits like healthcare and retirement plans. This level of care and flexibility appeals to candidates who prioritize personalized and modern benefits.

LSAs are also a powerful tool for retention. Employees who perceive that their personal growth, health, and lifestyle needs are valued are more likely to remain with their employer. This reduces turnover-related costs and contributes to workforce stability, ensuring that the company retains its most valuable asset — its people.

LSAs support employee autonomy and satisfaction

LSAs are unique in the autonomy they provide to employees. Unlike standardized benefits that often limit employees to a narrow set of choices, LSAs let employees decide how to use their funds based on their individual preferences and circumstances. This sense of control fosters greater satisfaction, as employees feel their needs are not just acknowledged but actively supported.

For instance, one employee may use their LSA for fitness memberships, while another may allocate funds toward financial planning or wellness services. This adaptability caters to a workforce with diverse priorities, fostering a sense of appreciation and inclusion. The result is a more engaged, satisfied, and loyal workforce, where employees are empowered to thrive both professionally and personally.

Cons of Lifestyle Spending Accounts

While Lifestyle Spending Accounts offer significant advantages, they may present challenges that employers must carefully consider to ensure successful implementation and ongoing management.

Potential for misuse

Without robust guidelines and clear communication, there is a risk that employees may misuse their LSA funds. For instance, employees might inadvertently use their accounts for non-eligible expenses, leading to frustration and potential disputes. Misuse does not necessarily mean mal-intent; this often stems from a lack of understanding about what qualifies for reimbursement.

Partnering with a third-party administrator can help mitigate this risk. A TPA can provide comprehensive training, resources, and materials for HR, benefits teams, and employees. In addition, ongoing education, such as training sessions and written guides, can help employees maximize their LSA benefits. Regular reminders and updates can help ensure that employees remain informed about the program’s rules and stay aligned with the program’s intended use.

Tax implications

Since LSA funds are generally considered taxable income for employees, it's crucial for employers to communicate this clearly to avoid unexpected tax liabilities. Employees must report LSA reimbursements on their tax returns, which can come as a surprise if not effectively explained early and often. Employers should provide detailed guidance on how these funds will impact employees’ tax filings and outline any exceptions that may apply based on the account type or nature of the claims.

To minimize tax-related issues and to ensure regulatory compliance, many organizations choose to consult a tax professional during program setup. This step can help structure the program correctly and address potential tax challenges and complexities. Thoughtful planning and clear communication foster trust in the program, ensuring employees feel confident and informed.

Choosing the right LSA provider

Selecting the right Lifestyle Spending Account provider for your flexible spending program, tailored employee perks, or workplace benefit offerings is crucial to ensuring that the program runs smoothly and delivers value to both the company and its employees. When evaluating potential providers, look for:

• Customizable plans: The provider should offer flexibility in designing the LSA to meet and evolve with your organization’s needs.
• Ease of administration: The provider should offer an intuitive platform that simplifies the reimbursement process.
• Employee education: The provider should offer clear resources to help employees understand how to use their LSA benefits effectively.
• Support and compliance: The provider should assist with compliance and ensure the program aligns with tax and legal regulations.

Partnering with an experienced LSA provider like Forma can help streamline the process, reduce administrative burden, and improve employee satisfaction.

How to implement a Lifestyle Spending Account

Introducing a Lifestyle Spending Account into your benefits program can greatly enhance employee satisfaction and flexibility, but successful implementation requires careful planning. Here’s a step-by-step guide to ensure a smooth and effective rollout.

1. Define program goals and objectives

Begin by identifying what you want to achieve with your LSA program. Are you aiming to increase employee engagement, attract top talent, or reduce administrative burdens? Clear goals will guide every decision, from budget allocation to eligible expenses. Align these objectives with your company’s culture and values to create a program that resonates with employees.

2. Determine eligibility and budgets

Decide who will be eligible for the LSA—will it include all employees or specific groups? Establish contribution amounts based on your overall budget, keeping in mind that starting modestly allows for adjustments as the program evolves. Learn more about industry benchmarks on budgeting, year-over-year trend, and LSA account setup in the 2024 Lifestyle Spending Account benchmark.

3. Choose a reliable LSA provider

Selecting the right partner to manage your Lifestyle Spending Account is one of the most critical decisions in the implementation process. An effective provider ensures smooth administration, simplifies compliance, and delivers a seamless user experience for employees. This is where Forma stands out as a superior choice.

Forma offers an all-in-one platform that’s designed with both employees and HR professionals in mind. Employees can enjoy unparalleled flexibility with the Forma Visa Card for direct purchases, access discounted options in the Forma Store, or quickly get reimbursed through a world-class claims system. This ensures that your team can personalize their benefits experience while enjoying a user-friendly interface that requires little to no training.

For HR teams, Forma eliminates the administrative headaches that can come with managing LSAs. From fast claims processing and automated compliance to intuitive analytics and reporting tools, Forma handles the heavy lifting so you can focus on strategic priorities. The platform is built to adapt to your organization’s unique needs, allowing you to define eligibility, set contribution limits, and even customize benefits for employees across multiple locations or countries.

Additionally, Forma is trusted by leading brands worldwide, like Honda, lululemon, TripAdvisor, Instacart, and Figma, thanks to our enterprise-grade technology and proven ability to deliver cost-effective, impactful benefits. With stellar customer reviews, a 98% customer satisfaction rate and a track record of helping companies reduce administration time by up to 80%, Forma has set the benchmark for what a modern LSA provider should be.

Partner with Forma to create a tailored LSA program that boosts employee engagement, enhances retention, and simplifies your operations.

4. Communicate the program to employees

A well-communicated rollout ensures employees understand and value the program. Use multiple channels—email, webinars, mailers, and FAQs—to explain how LSAs work, what expenses are eligible, and how to access their funds. Clear instructions help reduce confusion and encourage engagement.

5. Monitor and optimize

Once launched, regularly review program performance. Gather feedback from employees to identify areas for improvement and adjust the program as needed. Monitoring usage trends and satisfaction rates ensures your LSA continues to meet employee needs while aligning with business goals.

Pros vs. cons: Is a Lifestyle Spending Account (LSA) right for your organization?

An LSA can be a transformative addition to your benefits strategy, offering employees unparalleled flexibility and personalization while helping employers ease administrative burdens and retain top talent. If your organization prioritizes employee well-being and work-life balance, an LSA is worth considering as part of your benefits program. By implementing an LSA, you demonstrate your commitment to supporting your workforce’s diverse needs and circumstances, which can lead to higher employee satisfaction and engagement.

Forma is a life benefits platform provider that offers a comprehensive solution to help you manage LSAs seamlessly. With Forma’s LSA platform, you can elevate your benefits program and  support your employees’ well-being, enhance engagement, and improve retention.

Frequently asked questions: Lifestyle Spending Account

How do Lifestyle Spending Accounts work?

Lifestyle Spending Accounts (LSAs) provide employees with a designated sum of money to spend on approved benefits and services tailored to their personal needs. Employers set the contribution amount, define eligible expenses, and administer funds through a provider. 

Employees can use these funds for various wellness, professional development, or lifestyle-related costs, typically through direct purchase, reimbursement, or a benefits card. This flexibility allows employees to personalize their benefits while fostering higher engagement and satisfaction.

Are Lifestyle Spending Accounts taxable?

Yes, Lifestyle Spending Accounts are generally considered taxable income for employees. Funds disbursed through LSAs must be reported on employees' tax returns, and the tax implications vary depending on jurisdiction. It’s incredibly important that a direct channel of communication is established so that employees can understand the tax implications of an LSA and know how to report it in their tax returns.

What expenses are eligible for an LSA?

Eligible expenses for LSAs vary based on the employer’s program design but commonly include wellness initiatives like gym memberships, mental health services, and fitness equipment. Other eligible categories might cover professional development, caregiving, financial planning, or commuting costs. 

Employers determine the scope of coverage, aligning it with their values and goals. Providing employees with clear guidelines and a comprehensive list of eligible expenses ensures they can make informed decisions and maximize the benefit’s value.

*This document is for informational purposes. Forma is not engaged in the practice of law. Nothing contained herein is intended as tax or legal advice nor to replace tax or legal advice from counsel. If you need tax or legal advice, please consult with counsel or a certified tax professional.

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