Lifestyle spending accounts poised to soar. What HR needs to know

As workforces continue to become more diversified and employees strive for flexibility and choice throughout their work experience, employers are increasingly turning to personalized benefits. In particular, employers are increasingly leveraging lifestyle spending accounts to meet employees’ diverse benefits needs and their drive for empowerment.

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Lifestyle spending account (LSA) programs are employer-funded accounts that employees can use for everything from gasoline to drive to the office, athletic shoes for exercise or to pay for meal deliveries to make work/life balance easier. A whopping 70% of employers are considering adding lifestyle spending accounts to their benefits package in the future, up from 13% that currently provide them or plan to by next year, according to a Mercer Insights blog post.

The growing popularity of LSAs fits into the larger trend toward personalized benefits, particularly coming out of the pandemic. According to a 2021 survey by WTW, nearly 70% of employers were considering personalized benefit programs—which, experts say, can become a strong recruiting and retention tool.

“The more diverse your workforce is, the more a one-size-fits-all benefits package doesn’t work,” says Chris Byrd, senior vice president of government affairs and benefits at WEX. “That’s why you’re seeing this proliferation of personalized benefits.”

Chris Byrd
Chris Byrd, WEX

What are lifestyle spending accounts?

The scope of an LSA program can vary according to what an employer is looking to accomplish. One employer’s lifestyle spending account program may cover RTO expenses like bridge tolls or contributions to a nonprofit of an employee’s choice under a charity category, for example, while another’s may focus exclusively on wellness.

Wellness is the most commonly offered LSA category, especially related to mental and physical health, says Jaclyn Chen, co-founder and CEO of Benepass, a platform for personalized benefits administration. Remote and hybrid employees’ work-related expenses, such as internet and cell phone costs, are the second-most common area that employers want to cover, Chen adds.

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Jaclyn Chen
Jaclyn Chen, Benepass

Employers fund LSAs with a set amount of money that renews every month, quarter or year and is taxable to the employee. Employers typically fund between $500 to $2,000 yearly for each employee’s LSA, says Sander Domaszewicz, national practice leader for consumerism at Mercer.

Lifestyle spending accounts carry key benefits for employers, experts say.

For instance, an LSA benefit can be attractive to prospective employees, and as a retention incentive, employers can offer to double the size of the LSA funds at the end of an employee’s first year, Domaszewicz says.

Sander Domaszewicz; What the rise of lifestyle spending accounts means for HR
Sander Domaszewicz, Mercer

Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, adds that LSA programs help all employees feel they are being treated equitably.

For example, an employee with student debt may choose to spend a portion or all of their LSA funds toward repaying that debt. Those without such debt could still use the LSA funds for other offerings within the financial wellness category, Copeland says—unlike student loan repayment benefits that typically only apply to employees with student debt.

Craig Copeland, EBRI
Craig Copeland, EBRI

Lifestyle spending accounts can also help HR leaders with logistical issues like budgeting and administering benefits. LSA programs, for example, have a fixed cost, so employers are well aware of their financial liability in offering this benefit, which makes budgeting for it easier, Copeland says.

And as economic and labor market conditions change, adjusting LSA programs accordingly does not require employers to alter existing long-term compensation structures, Copeland says.

Consolidating a variety of stipend programs, such as tuition and newborn stipends, into a single lifestyle spending account program can ease the administration of these benefits, Domaszewicz says.

“One of the pain points we hear from CHROs and CPOs is their benefits teams are overwhelmed with managing so many different vendor point solutions,” Chen tells HRE. “Companies can consolidate these point solutions [with LSA programs], keep tight controls on their budget, increase flexibility for their employees and help their employees understand the dollar value of their benefits.”

How to set up a lifestyle spending account

Developing an overall budget should be a top priority when creating an LSA program, Chen notes. Closing or consolidating underutilized point solution benefits like meditation apps or gym memberships can create an opportunity to redirect those funds to an LSA program, she adds.

Experts say employers may wish to start with a tempered approach in budgeting for an LSA program.

“If you can afford to put in $1,000 per employee, maybe you should hold back and put in $750 to see how it goes. You don’t have to max out and go as far as you can when starting,” says Domaszewicz. “You could make everything under the sun eligible, but maybe you could start with physical, mental and emotional health and then expand the next year into financial health and other things specific to your company.”

Employers can arrange to have employees pay for their eligible LSA expenses upfront and then seek reimbursement or issue employees an LSA debit card for use on the program, experts advise. Most LSA programs are use-it-or-lose-it arrangements, where the funds expire at the end of the month, quarter or year, depending on the program, say experts.

After establishing a budget, employers need to determine which expenses will be eligible under an LSA program.

“Employers need to ask, What is the goal of allowing their employees to spend the money? Is it to allow them to spend it however they want on the categories provided, or use it to achieve certain goals the employer wants?” says Julie Stich, vice president of content at the International Foundation of Employee Benefit Plans (IFEBP).

Julie Stich, International Foundation of Employee Benefit Plans; What the rise of lifestyle spending accounts means for HR
Julie Stich, International Foundation of Employee Benefit Plans

Communication is one of the final and most important steps when creating a lifestyle spending account program, Chen says. Employers need to provide guidance on eligible expenses for LSA accounts, applicable program rules and information on whether the LSA funds are part of an employee’s taxable income or if the program will contain a mix of taxable and pre-tax LSA income. Experts advise creating LSA accounts solely based on taxable funds versus creating a mix of pre-tax and post-tax funds to avoid employee confusion and help HR with administering the program.

Challenges in offering LSAs

Creating a lifestyle spending account program takes time and money, and employers will need to consider the benefits of taking such action, Copeland says.

“If you’re having a hard time attracting and retaining people, this cost may be very well worthwhile,” Copeland says.

He notes, however, that employers should be prepared to re-evaluate their LSA programs every year. Some benefits in the LSA program, for example, incur rising costs relative to other benefits or have waning employee adoption rates, all of which need to be monitored.

Evaluating a return on investment for LSA programs is another challenge, Domaszewicz says.

“If an employer puts money into a diabetes prevention program, you can say, ‘We’re making people healthier, and we’re saving money.’ There’s a direct line of sight there, “Domaszewicz tells HRE. “But if you pay for something like painting classes for an employee’s child, it’s not necessarily something with a huge ROI.”

Measuring success for LSA programs

Gauging the success of a lifestyle spending account program comes down to the rate of employee adoption of the benefits in the program.

“Right off the bat, getting a 70% or 80% adoption rate is pretty much unheard of, whereas a 50% rate would be considered you’re doing quite well,” Copeland says. “A 25% rate means there’s a significant amount of interest in it if you later took it away. You need to get it up to a 25% adoption rate to show something is really happening here.”

For Benepass, its employer customers typically see 85% of their workforce engaging with their lifestyle spending accounts within one year of launching the program, Chen says.

“Because it’s so flexible, employees like it, and it spreads through word of mouth,” Chen says. “And at the end-of-the-year surveys we do, it’s the top-ranked benefit that employees have access to.”

Dawn Kawamoto, Human Resource Executive
Dawn Kawamoto
Dawn Kawamoto is HR Editor of Human Resource Executive. She is an award-winning journalist who has covered technology business news for such publications as CNET and has covered the HR and careers industry for such organizations as Dice and Built In prior to joining HRE. She can be reached at [email protected] and below on social media.