Lifestyle Spending Accounts? 5 Facts Employees Often Miss

Employees may not understand lifestyle spending accounts (LSAs) as well as you think. That can lead to questions or just confusion.

This relatively new, customizable fringe benefit allows companies to give employees a set amount of spending money, with at least some parameters in place.

Typically, an LSA will provide funds that employees can use for day-to-day physical, financial and/or emotional expenses.

So for example, if a business wants to focus on promoting the physical well-being of its workforce, it might require that employees use their funds for a gym membership. Meanwhile, another company might let employees essentially call the shots on how they use the perk.

Understanding These Accounts

LSAs are sometimes referred to as lifestyle benefits, wellness wallets or perk allowances — or a variety of other names.

No matter what you call it, one advantage of an LSA program is its flexibility. Given this, an LSA might replace several other fringe benefits that have low participation levels, saving employers time and resources.

Some employers make all the funds available at the beginning of the year — for example, by issuing debit cards to employees. Other employers may reimburse expenses as they’re incurred.

Either way, the program’s positive effects hinge on good communication.

Chances are, employees didn’t read the promotional material thoroughly enough, and once they head out to make purchases, uncertainty will inevitably arise.

Here are five facts about LSAs that employees might not understand:  

What to Explain to Employees

#1. Taxable income. Having to pay taxes on fringe benefits is tough, but being caught off guard at the time taxes are withheld is even tougher. Make sure employees realize that when they see “LSA” or a similar description as a line item on their paystubs, the amount must be taxed according to the law. That includes federal income, Social Security and Medicare taxes. Explain that employees’ regular withholding rate for income tax will apply.

#2. Allowed expenditures. Ensure that employees understand the degree of flexibility your LSA program offers. After all, some programs have more flexibility than others. Regardless of the level of freedom, make sure employees know what will fly and what won’t. Note: To play it safe from a compliance perspective, you may want to exclude medical expenses that can be covered by tax-advantaged accounts.

#3. Available amounts. Share with employees that they don’t make contributions to LSAs — employers do. Of note, this type of account doesn’t have contribution limits set by the IRS in the same way that flexible spending accounts or health savings accounts do. So, one company might choose to offer a $1,000-per-year LSA, a second company may give employees $250 per year and a third company might provide $2,500 annually.

#4. Unused funds. In some cases, employees may not spend all their money in their accounts before the end of the year. If the terms of your LSA state that unused funds will be forfeited, point that out to employees. Tip: Allowing employees to share money in the account with specified family members will make it less likely that someone will have to forfeit unused funds. Give employees reminders throughout the year to use their LSAs. At a minimum, this should be done as year-end approaches. But other times may make sense. For example, perhaps your LSA covers financial perks. If so, then during April — which is Financial Literacy Month — a reminder would be timely.

#5. Established procedures. For employers that issue a debit card at the start of the year, having an FAQ available to employees might help head off some questions about their accounts. For example, you might address what happens if someone loses his or her card or if an expense is declined by the vendor. For employers that reimburse as the year goes along, clearly explain the steps employees need to take to submit receipts.