Lifestyle Spending Account - What It Is + How It Works

In a world where flexibility is essential to the workplace, lifestyle spending accounts are a key retention and recruitment tool to boost employee wellness, happiness, and productivity. A recent Mercer Insights Survey found that 70% of companies are considering adding a lifestyle spending account to their benefits package.

This guide covers the ins and outs of lifestyle spending accounts (LSAs), including how they work, examples of eligible lifestyle expenses, and how to set one up. 

What is an LSA?

A lifestyle spending account (LSA) is an employer-sponsored benefit that provides post-tax funds for employees’ everyday needs. Employers can customize LSAs to include a variety of eligible spending categories, including wellness, fitness, childcare, WFH equipment, professional development, and more. The flexibility of these accounts allows employees to spend the benefit on items and services that best match their wants and needs.

How does a lifestyle spending account work?

When it comes to incorporating choice and flexibility in your employee benefits strategy, there is no better option than an LSA benefit. This account is similar to other spending accounts but usually provides more customization for both employees and employers. 

Employers design program parameters by deciding how much they want to contribute to the LSA and which products or services they want to allow employees to spend their funds on. Most employers cover expense categories such as wellness, fitness, nutrition, and mental health, but the sky is the limit. 

Companies also choose how often they replenish accounts and when funds expire. Many employers make contributions every month, with funds expiring at the end of the month under a “use it or lose it” system. This can lead to significant cost savings for the company since not every employee will spend 100% of the benefit each month. On the other hand, some companies allow funds to roll over with a yearly expiration date so employees can purchase big-ticket items with their LSA. 

Whatever expiration schedule you decide on, it’s important to benchmark your contributions against companies of similar size and industry to ensure you’re offering competitive benefits. Along with your estimated budget, this is the largest factor in determining the benefit amount. 

The 2023 Benepass Benchmarking Guide leveraged our internal customer data to uncover LSA trends. The report found that over half of companies (51%) include an LSA in their benefits package, providing an average of $169. We also analyzed employee benefits trends by company size:

• 75% of large companies offer LSAs at an average of $160
• 63% of medium-size companies offer LSAs at an average of $143
• 45% of small companies offer LSAs at an average of $130

LSAs were particularly popular in the tech and healthcare/life sciences industries:

• 56% of tech companies offer LSAs at an average of $159
• 54% of healthcare and life sciences companies offer LSAs at an average of $182

To dig into more LSA trends, download the full benchmarking guide. 

The benefits of providing a lifestyle spending account

Not all benefits are created equal. Companies often offer benefits that don’t truly feel like benefits because they don’t apply to an employee’s lifestyle or individual preferences. Lifestyle spending accounts are the best of both worlds—as a cost-effective benefit that’s easy to set up and flexible enough to adapt to every employee’s wants and needs, they’re a win-win for both employers and employees. 

Employee benefits

If you want to create a flexible benefits plan that leaves employees feeling excited and cared for, a lifestyle spending account is a great bet. Here are a few benefits of LSAs from an employee’s perspective: 

1. They’re incredibly flexible

An LSA gives employees tons of options for supporting their wellness. That might mean a yoga class one month and a massage the next. While many point solutions limit employees to one type of wellness activity or merchant, an LSA allows employees to switch things up whenever the mood strikes.

2. They’re a guilt-free avenue for wellness spending

We often hear from employees that they appreciate having a carved-out bucket for wellness expenses. While everyone enjoys a nice massage, it’s the kind of thing that someone might feel guilty for spending money on when they could be purchasing more “practical” items. But with an LSA, employees know their employer has designated the funds to help them prioritize wellness activities. This encourages them to buy items or services that are crucial to their wellness but that they might not otherwise purchase. 

As one employee put it in a G2 review of Benepass: 

“This encourages me to spend more for higher quality food, which is something I used to always feel guilty about.”

Another employee said: 

“At times it can be difficult to dedicate money to specific areas where they’re helpful but not always top of mind (such as health and fitness) so having a benefit with a monthly expiration dedicated to this area in my life helps me better prioritize my spending for each month.” 

3. They’re easy to understand and use

Benefits engagement often suffers because it’s too challenging to understand what benefits are available to you and how to access them. With a lifestyle spending account, employees don’t have to navigate multiple point solutions or platforms to access their benefits. Instead, they use a single account for a variety of spending needs. With a card-first approach like Benepass, employees also don’t have to go through the confusing and burdensome process of uploading receipts and waiting for reimbursements. 

Download our Introduction to Lifestyle Spending Accounts eBook for more information on this type of account, or schedule a consultation with Benepass to explore how LSAs can improve your benefit goals.

Employer benefits

Lifestyle spending accounts offer many advantages for employers, too. Compared to other types of programs, LSAs are more effective in helping companies meet their benefits goals. Here are a few reasons why: 

1. They help attract and retain talent 

To compete for top talent today, companies need to offer strong benefits and perks that demonstrate a commitment to employee well-being. In fact, 87% of employees consider health and wellness programs when choosing an employer, according to a study by Virgin HealthMiles/Workforce Magazine. A 2023 MetLife study found that since 2020, there’s been a 2x increase in the proportion of employees who consider these programs “must haves” for a new role. 

Lifestyle benefits like wellness stipends or travel stipends show employees that you care about their wellness. When employees feel cared for, you’ll see employee engagement and productivity improve and enjoy lower rates of absenteeism and turnover. 

2. They cater to a diverse, multigenerational workforce

The modern workforce comprises five generations logging in from remote, hybrid, and global locations. That reality makes it difficult to adequately serve all employees with hyperlocal perks or point solutions. Lifestyle spending accounts allow employees to spend on a broad range of wellness needs regardless of where they live, making them a great option for supporting a diverse workforce. 

Shannon Braley, Chief People Officer at Forward Financing, shares why an LSA was the best option for their diverse workforce: 

“Benepass rolls right into how we think about inclusion and equity for employees, and that’s across the board from pay to opportunities for growth at Forward Financing. Having this flexible account where you can use it on what works best for you and your family is key.”

3. They allow companies to live out their values

Many companies have diversity, equity, and inclusion (DEI) initiatives as a core tenet of their corporate values. To truly commit to DEI, companies need to inspect every area of their culture for alignment with those values — including benefits. Providing more flexibility makes it likelier that your benefits programs will be as inclusive as possible. 

Reducing reimbursement claims with a card-first approach creates even more inclusivity because employees can access their benefits without having to front the costs. As Megan Schulze, People Operations Partner at Crisis Text Line, puts it: 

“We have a lot of Justice, Equity, Diversity and Inclusion (JEDI) initiatives, and asking someone to pay $650 upfront for professional development is a big blocker to being able to use their perks.”

4. They save your company time and money

A comprehensive lifestyle spending account eliminates the need to have multiple point solutions for your programs. With an LSA, you can instead bring a variety of programs under one umbrella and reduce your vendor costs. With Benepass, you can also set expiration dates for your LSA funds, meaning that your company will recoup any unused funds. 

A card-first LSA approach also reduces the administrative burden associated with reviewing and approving receipts for reimbursement. Industry metrics indicate that finance teams spend about 20 minutes reviewing an expense report, and that time quickly adds up as your company grows.

5. They allow your benefits program to be adaptable

With the right lifestyle spending account vendor, it’s relatively simple to add new spending categories to lifestyle accounts, which keeps your programs agile and allows your company to respond to current events. For example, when gas prices were at their highest, The Community Group added fuel as an eligible expense category to their LSA. Using an LSA to provide a gas stipend can ease your employees' financial stress during periods of increased economic hardship and provide an incentive to commute into the office. Katie Graham, Chief Strategy Officer, said:

“We want to show that we are aware of current issues. It’s easy to call Benepass and ask, ‘Can we make sure that is covered?’” 

LSA eligible expenses

Lifestyle spending accounts are fully customizable. You can include eligible spending categories across a broad swath of lifestyle pillars, or dedicate your LSA to an individual pillar (such as emotional wellness or physical health). Below are some of the spending categories typically included within LSAs:

• Physical fitness (gym memberships, workout apps, fitness equipment)
• Home office equipment, including cell phone and internet service
• Technology, including laptops, computer monitors, and printers
• Mental health (meditation apps, online talk therapy, massage)
• Professional development and continuing education courses
• Family support (childcare, kids’ activities, pet care)
• Personal development classes and hobbies
• Digital health and virtual care
• Grocery and meal delivery
• Nutritional supplements
• Student debt repayment
• Charitable donations
• Commuter benefits
• Financial wellness

To learn more about how other companies are designing their LSA programs, download our guide Launching a Competitive Lifestyle Spending Account Program: 7 Steps for Success.

When designing your program, remember that giving employees more freedom and flexibility leads to greater employee satisfaction. Angela Blackburn, Chief People Officer at Lead Bank, notes:

“I think oftentimes organizations think of wellness as just gym memberships. We’ve incorporated so many elements of self-care that somebody could use it for things like Botox or acupuncture. Our employees are excited about the flexibility and that they can actually use it for something applicable to them.”

If you need ideas for how to design your program, schedule a personalized consultation with Benepass to learn more about your options.

Are LSAs taxable?

A lifestyle spending account is generally a taxable benefit, meaning that funds are considered taxable income when spent. Any amount that employees forfeit will not be taxed. For example, if an employee receives $1,200 in LSA funds in a year and spends $750, they’ll have to pay income taxes only on that $750. 

However, there are some situations where an LSA may be tax-free. Some stipends and employee perks such as WFH or cell phone and internet accounts that are used for work-related purposes can be non-taxable. What’s important is that you avoid combining taxable and tax-free categories in a single LSA since this can create compliance issues. We recommend that companies consult a benefits specialist or lawyer to discuss compliance as they create their LSA. 

How to get started

Setting up a lifestyle spending account for your employees is a relatively straightforward process compared to tax-advantaged accounts such as health savings accounts (HSAs) and flexible spending accounts (FSAs). These steps will help you create a successful program:

• Budget: First, you’ll want to budget how much you would like to contribute to the account for each employee. Also decide the contribution cadence and what happens to unused LSA funds. 
• Tailor: Next, you’ll want to determine eligible expenses. What matters most to your employees? An employee benefits survey can be incredibly helpful at this stage and provide the feedback you need to address benefit gaps.
• Select a partner: Depending on the size of your company, you’ll want to select a benefits partner that can scale, track, and administer your programs with ease. 
• Educate: Once the program is designed, education is key so that current and prospective employees are aware of the benefit and how to use it. Employee education will increase engagement and reduce administration time by providing answers to frequently asked questions.
• Refine: An adaptable benefits partner will be able to refine and improve the program as you gather feedback from your employees and gather data on how employees are using their LSA. An annual or biannual review ensures the program design meets your current needs and you are effectively measuring ROI.

For an in-depth look at setting up an LSA, including program design tips, vendor checklists, and ROI calculations, download our eBook Launching a Competitive Lifestyle Spending Account: 7 Steps for Success.

Have questions about how your employees might benefit from an LSA they can manage in one central platform and easily access from a web and mobile app? Request a demo or drop us a line at sales@getbenepass.com.