Lifestyle spending accounts (LSAs) are reimbursement accounts in which employers deposit a set amount of money for employees to spend on certain benefits that are determined by the employer. These accounts generally allow for the reimbursement of various wellness activities such as fitness classes, gym memberships, nutritional coaching, and workout equipment, or other items or activities that will promote health and wellness amongst their employees. Some employers even include other non-wellness benefits such as pet or childcare benefits, financial services, and travel or entertainment.
Keep in mind, though, that the nature of the LSA will determine the compliance aspects of such a program. LSA reimbursements are typically taxable to the employee. As a reminder, any benefit provided to employees would be included in their taxable income unless the tax code provides an exclusion. Notable exclusions are in place for benefits provided through a Section 125 plan, transportation plan, or education plan. However, LSAs generally don’t include benefits that would be excluded from gross income under any of those exceptions (in fact, employers sponsoring LSAs likely have other plans in place that provide pre-tax benefits under those exclusions). Therefore, it is likely that employees would be taxed on the benefits provided through an LSA.
Additionally, most employers take the position that LSA benefits are taxable to employees upon reimbursement, and amounts made available to employees but not reimbursed (i.e., carried over or forfeited) are not included in the employee’s taxable income. However, under the doctrine of constructive receipt, there is an argument that the full value of the amount made available in (as opposed to reimbursed from) the LSA to employees should be included in taxable income. Since the IRS has not specifically addressed this issue with LSAs, it is advisable for employers to consult with their tax counsel or advisor for guidance.
Another compliance concern is the application of ERISA. LSAs are generally not subject to ERISA for the same reason that they are taxable — they do not reimburse medical care. If the employer wants to offer the benefit without it being subject to ERISA, which is the common approach, then the employer would need to make sure that it does not allow reimbursement for medical treatment that would make the LSA an ERISA-covered plan. For example, offering mental health/psychiatry services or reimbursement of medication would likely be considered medical care and make the plan one that would be subject to ERISA. This is important because many employers do not want to have to meet ERISA’s requirements (Form 5500 filing, SPD, COBRA, etc.) for these types of plans. Employers should work with counsel to ensure that the allowable expenses under the LSA would not create an ERISA-covered benefit.
One final compliance consideration is whether the LSA would impact employees’ HSA eligibility. As long as the LSA does not offer first-dollar reimbursement for medical care, it would not affect HSA eligibility. This is another example of why it is important to prohibit reimbursement of medical care under the LSA.
LSAs can be a useful way to promote health and wellness initiatives for employees. Compliance concerns can generally be avoided as long as the plan does not reimburse medical care. Employers with an LSA, or those considering implementing one for the first time, should consult with their vendor or legal counsel to ensure the plan is designed and implemented to avoid compliance issues.