What is the difference between an HSA and an LSA?

Health savings accounts (HSAs) and Lifestyle Spending Accounts (LSAs) both help employees manage expenses, but they serve very different purposes.

While HSAs are tax-advantaged accounts designed specifically for medical expenses, LSAs offer greater flexibility, allowing employees to spend funds on a variety of wellness and lifestyle benefits. 

Understanding the key differences between these accounts is essential for employers looking to build a competitive benefits package that meets the diverse needs of their workforce. 

In this article, we’ll summarize how each account works, their eligibility requirements, tax implications, and how they can complement each other within a total rewards strategy.

Key takeaways

• HSAs are tax-advantaged accounts for medical expenses, while LSAs offer post-tax funds for wellness and lifestyle benefits.
• HSA contributions roll over annually and are employee-owned, while LSA funds are employer-owned and typically expire if unused.
• HSAs offer triple tax benefits, including tax-free contributions, growth, and withdrawals for medical expenses; LSAs are taxable for employees.
• HSAs require enrollment in a high-deductible health plan (HDHP), whereas LSAs have no eligibility restrictions and can cover diverse expenses.
• Employers can offer both HSAs and LSAs to create a balanced benefits package, supporting both financial security and personal wellness.
• Simplify HSA and LSA management with Forma, the third-party administrator used by Honda, lululemon, and Tripadvisor — <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">schedule a demo today</span>

What is an HSA?

An HSA is a health savings account that allows employees to save pre-tax money for qualified medical expenses. Contributions to an HSA are made before taxes are deducted from an employee's paycheck, reducing their taxable income.

One key advantage of an HSA is that the funds roll over year-to-year, meaning there's no "use it or lose it" policy. This allows employees to accumulate savings over time to cover future healthcare costs. Additionally, the HSA is owned by the employee, so they can take it with them if they change jobs or retire.

Both employers and employees can contribute to an HSA, providing a way for both parties to invest in the employee's long-term health and financial well-being. Employers may choose to make contributions as part of their benefits package, while employees can elect to have a portion of their paycheck deposited into their HSA.

To be eligible for an HSA, an employee must be enrolled in a high-deductible health plan (HDHP). HDHPs typically have lower monthly premiums but higher deductibles than traditional health plans. The IRS sets specific guidelines for what constitutes an HDHP and the maximum contribution limits for HSAs each year.

What is an LSA?

An LSA, or Lifestyle Spending Account, is a post-tax benefit funded entirely by the employer. Unlike an HSA, which is designed specifically for medical expenses, an LSA allows employees to spend money on a wide range of wellness and lifestyle expenses.

The employer determines which expenses are eligible for reimbursement through the LSA. These may include fitness memberships, mental health apps, financial planning services, professional development courses, and more. This flexibility enables employers to tailor the benefit to their unique company culture and values.

One major difference between an LSA and an HSA is that LSA funds typically do not roll over from year to year. If an employee doesn't use their allocated funds within the designated time frame, they lose access to that money. Additionally, the LSA is owned by the employer, not the employee, meaning the account does not follow the employee if they leave the company.

While an LSA doesn't offer the same tax advantages as an HSA, it provides a way for employers to support their employees' overall well-being and work-life balance. When considering an LSA for your organization, think about which lifestyle expenses align with your company's mission and would be most valuable to your employees. 

By offering an LSA, you can demonstrate your commitment to employee wellness and differentiate yourself as an employer of choice.

Key differences between HSAs and LSAs

Now that you understand the basics of HSAs and LSAs, let's discuss the key differences between these two types of accounts.

Funding and ownership

One of the biggest distinctions between HSAs and LSAs is how they are funded and who owns the account. 

HSAs can be funded by both the employer and employee, with the employee owning the account and taking it with them if they leave the company. In contrast, LSAs are funded solely by the employer and are owned by the company, meaning the employee loses access to the account if they change jobs.

Tax implications

Another significant difference lies in the tax treatment of these accounts. HSA contributions are made with pre-tax dollars, which can reduce an employee's taxable income. Additionally, funds in an HSA grow tax-free, and withdrawals for qualified medical expenses are not subject to taxes. 

On the other hand, LSAs are funded with post-tax dollars, and while the employer may deduct contributions as a business expense, the employee must pay taxes on any funds they use from the account.

Eligible expenses

HSAs and LSAs also differ in terms of expenses eligible for reimbursement. HSAs are strictly for qualified medical expenses as defined by the IRS, such as deductibles, copayments, and prescription medications. These expenses can be incurred by the employee, their spouse, or their dependents. 

In comparison, LSAs have more flexibility in eligible expenses, as the employer determines what wellness and lifestyle costs are covered. This can include things like gym memberships, stress management programs, financial planning services, and more. Employers can tailor LSA eligible expenses to their company's unique needs and values.

Rollover and portability

Finally, HSAs and LSAs have different rules when it comes to rolling over unused funds and account portability. 

HSA funds roll over from year to year, allowing employees to accumulate savings for future healthcare costs. Plus, the account is portable, meaning the employee keeps the account even if they change jobs. LSAs typically do not allow rollover of unused funds from year to year, and the account stays with the employer if the employee leaves the company.

Benefits of offering an HSA

An HSA can be a valuable addition to your employee benefits package, providing tax advantages, long-term savings potential, and increased employee engagement in healthcare decisions.

1. Tax advantages for employees

HSAs offer a triple tax advantage for employees. Contributions are made with pre-tax dollars, reducing an employee's taxable income. Funds in the account grow tax-free, and withdrawals for qualified medical expenses are not subject to taxes. This can result in significant tax savings for employees, especially those with high healthcare costs.

2. Long-term savings potential

Unlike other types of spending accounts, such as flexible spending accounts (FSAs), HSA funds roll over from year to year. This allows employees to accumulate savings over time to cover future healthcare expenses, even in retirement. Employees can also invest their HSA funds in various investment options, potentially growing their account balance even further.

3. Increased employee engagement in healthcare decisions

When employees have an HSA, they are more likely to be engaged in their healthcare decisions. Since they are using their own funds to pay for healthcare expenses, employees may be more mindful of the cost of services and more likely to shop around for the best value. This increased engagement can lead to better health outcomes and lower overall healthcare costs for both the employee and the employer.

Benefits of offering an LSA

Offering an LSA can provide numerous benefits for both employees and employers, making it an attractive addition to your benefits package.

1. Flexibility in benefit design

One of the biggest perks of an LSA is the flexibility it offers in benefit design. Employers can tailor the eligible expenses to align with their company culture, values, and employee needs. This customization allows you to create a unique benefits package that sets your organization apart from competitors and appeals to a diverse workforce.

2. Support for employee well-being and lifestyle choices

An LSA demonstrates your commitment to supporting employee well-being beyond just physical health. By covering expenses related to mental health, financial wellness, professional development, and more, you show that you value your employees' overall quality of life. This holistic approach to employee well-being can lead to a happier, more productive workforce.

LSAs can also accommodate your employees' diverse lifestyle choices. For example, some employees may prioritize fitness and healthy eating, while others may value stress management or continuing education. By offering a range of eligible expenses, you empower employees to choose the benefits that best fit their individual needs and preferences.

3. Improved employee satisfaction and retention

Offering an LSA can significantly impact employee satisfaction and retention. When employees feel that their employer cares about their well-being and supports their personal goals, they are more likely to be engaged and loyal to the company.

LSAs can also serve as a differentiator in attracting top talent. In the job market, a comprehensive benefits package that includes an LSA can set your company apart and make it more appealing to potential hires.

Choosing between an HSA and LSA

When deciding between offering an HSA or LSA to your employees, consider several factors to determine which option best aligns with your company's goals and your employees' needs.

Can you offer both an HSA and LSA?

Yes, employers can offer both a HSA and a LSA as part of their benefits package. While HSAs provide tax-advantaged savings for qualified medical expenses, LSAs offer flexibility for wellness and lifestyle perks that enhance overall employee well-being. 

Together, these accounts create a well-rounded benefits strategy that supports both financial security and personal wellness, helping employers attract and retain top talent.

Managing multiple benefits programs doesn’t have to be complicated. If you’re looking to streamline the administration of your HSA and LSA, Forma can help. As a trusted third-party administrator (TPA), Forma simplifies compliance, claims processing, and employee communication — ensuring your benefits run smoothly without adding extra work for your HR team. Our platform consolidates all your flexible spending accounts into one seamless system, giving employees an easy way to access and maximize their benefits.

Trusted by companies like Honda, lululemon, and Tripadvisor, Forma makes it easy to design and manage a total rewards strategy that works for your workforce. 

<span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">Schedule a demo today</span> to see how Forma can help you optimize your benefits program while saving time and resources.

*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.