Everything You Need to Know about LSAs
Everyone seems to be talking about Lifestyle Spending Accounts or LSAs these days.
While they have been around for five or six years, they have recently gained popularity as employers pay attention to how to attract and retain the people they need.
While Maxwell is much more than an LSA, it is at the core of how we help provide personalized benefits and rewards that make life/work.
This is why on this post we are taking time to answer the most common questions we receive about lifestyle spending accounts.
What are LSAs?
First, it is important to note that life style spending accounts don’t have an official name. They go by many names, from LSA to custom names like “Your Perk” or “Benefits Your Way.” Even Maxwell functions as an LSA at its core, but we rarely refer to it like that.
LSAs are employer-funded accounts that employees use to support their individual needs. Employers can design LSAs to be used for most types of expenses or can target their use for very specific purposes.
The way that employees can spend their funds can also look different. Some options are:
- Employees have to use their personal money and then request reimbursement.
- Employees have access to a marketplace where they can discover benefits and spend the funds that way.
- Employees receive their funds via a debit card that they can use at pre-approved merchants.
In the case of Maxwell, employers can offer ALL of the above, plus the option for employees to use their funds on their team members as a way to thank them, give kudos, or provide support during tough times. This is not a common approach, but we believe that if you are going to offer flexibility, then you should do it all the way.
Why do I keep hearing about them?
LSAs are a hot topic. While today just under 10% of employers have a LSA in place, an incredible 70% are considering adding an LSA to their benefits package according to a recent Mercer survey. It makes sense.
Benefits have been evolving to acknowledge the unique needs of individuals, and the past two years have accelerated the move towards benefits that acknowledge the whole employee. More than ever, employers understand that the wellbeing of their employees correlates to good business results. Add to it a tight labor market, and is only logical that employers are paying attention to LSAs.
LSAs are attractive for a few reasons.
- First, they are incredibly flexible so employers can design the program to best fit their culture.
- Second, LSAs are a great way to address solutions overload. Rather than investing in another well-being initiative or benefit that employees may or may not use, employers can help subsidize a variety of solutions to fit the unique needs of each employee.
- Third, they are a tangible way to support their diversity, equity and inclusion efforts, as we talked about in a previous blog post is a key aspect of any modern benefits program. They can use an LSA as a way to address benefits gaps for female employees, LBGTQ+ individuals, specific racial ethnic groups, or even populations with unique life needs (e.g. employees that cannot work remotely).
- Finally, it is a way to increase compensation without permanently increasing base pay, which can escalate over time.
What is a typical LSA benefit design?
There is no such thing as typical when it comes to LSAs and that is a good thing.
Employers decide how much funds they want to provide and what are eligible expenses. They can make it extremely narrow or broad. Some employers even elect to have several LSAs each with unique funds for unique expenses (e.g. one for adoption, another for work from home).
We said this is a good thing, because that means that an LSA can be tailored to fit the employer culture. However, something to consider is the impact of narrowing too much the eligible expenses and having several wallets with different funds.
At Maxwell our approach is a single LSA that empowers employees to choose how to be supported. We have the flexibility to narrow the type of expenses that are eligible, but most employees choose to keep that broad. When the parent, the non parent, and the pet parent all can use their funds on the support they need, a more inclusive experience is created.
What is the typical dollar amount employers provide via LSA?
Employers have different goals and different budgets, so once again there isn’t a typical amount. However, they tend to range between $360 and $2,000 per year.
The amount is influenced by the structure of the program. Employees can receive the whole amount at the beginning of the year, a monthly amount, or ad-hoc budget. At Maxwell our two most popular choices are:
A monthly amount that accrues over the year but has to be used by the end of the year.
Ad-hoc budget that is tied to rewards, manager and peer recognition, wellness incentives etc. This is a popular way to fun an LSA when budgets are tight.
While there are some offering LSAs with $3,500 or more, these typically are instances in which employees have “earned” the funds via a Wellness program, or they are restricted to big-ticket but less used expenses, like adoption.
Can I offer different dollar amounts by employee?
One aspect that is important to note is that LSAs generally are a taxable benefit, and as such, not subject to nondiscrimination requirements under the Internal Revenue Code. This shouldn’t stop you from considering if your practice as discriminatory.
At Maxwell, employers have the ability to offer different dollar amounts to different employee segments. For example, a larger amount for full-time employees than part-time employees, or more budget for associates and less for partners. This is a practice that can make a lot of sense as long as you have objective ways of segmenting your population.
What are the tax implications?
LSAs, are a taxable benefit. Having said that, there are different opinions on how and when LSA funds are taxed.
Under the tax concept of “constructive receipt”, the full amount an employer contributes to an LSA may be treated as taxable income when first available to the employee, whether or not the employee uses the fund. However, many take the position that LSA funds are taxable only upon actual use of the funds.
Ultimately the way that you want to treat the tax will depend on a variety of factors unique to your business, so it is important to discuss with your tax advisor.
What should I look for when selecting an LSA?
A lifestyle spending account vendor can make or break the success of your program. Here are a few areas you’ll want to explore when you're selecting an LSA partner:
Program design capabilities
Employee experience
HR team admin work savings
Connection to your people strategy
Technology
Cost
If you are not quite sure yet if you need an LSA, a good place to start is checking your current benefits. You can do that using our modern benefits checklist.
LSAs are a hot topic and for good reasons. As we continue to see employers move towards a benefits experience built for the whole employee, it will be interesting to see how lifestyle benefits, or as we called them at Maxwell, life/work benefits, become an essential part of employers’ people strategy.