Lifestyle Spending Accounts (LSAs): The Definitive Guide for 2023

A definition of a lifestyle spending account (LSA), the pros and cons of using them in your workplace, tax implications of LSAs, and how they apply to remote employees.


In 2021, the average employee turnover rate in the United States was 57.3%, and in 2022, the cost of voluntary employee turnover amounted to more than $1 trillion.

In a time that’s been dubbed “The Great Resignation,” when the average cost per hire is about $4,700, we need to think of innovative ways to hold onto our valued employees. That’s where a lifestyle spending account can come into play.

In this guide, we will cover the definition of a lifestyle spending account (LSA’s), the pros and cons of using them in your workplace, tax implications of LSAs, how they apply to remote employees, and much more. At the end of the guide, you’ll have the information you need to decide whether or not a lifestyle spending account is ideal for your company.

Here's what is covered in this guide:

  1. What Is a Lifestyle Spending Account
  2. How Is an LSA Different from an HSA
  3. Benefits of a Lifestyle Spending Account (LSA)
  4. Disadvantages of a Lifestyle Spending Account (LSA)
  5. Tax Implications for an LSA
  6. Lifestyle Spending Account Eligible Expenses

What is a Lifestyle Spending Account?

A lifestyle spending account is an account employees can use to spend on lifestyle perks. These accounts are also referred to as lifestyle benefits, perk allowances, lifestyle reimbursement accounts (LRAs), and specialty accounts. 

Employees can decide what they spend the money on, which increases their engagement with their job and loyalty to their employer. Plus, HR isn’t burdened with the administrative work that comes with managing these benefits. It’s a win-win solution.


A lifestyle spending account is different from other spending accounts like flexible spending accounts (FSAs) and health savings accounts (HSAs). We'll go over the key differences below.

How is an LSA Different from an HSA?

A lifestyle spending account is not the same as a Health Spending Account or an HSA. Unlike an LSA, an HSA is a savings account that allows employees to set aside pre-tax money to pay for covered medical expenses. Employees must be enrolled in a High-Deductible Health Plan (HDHP) to use an HSA. There is a $3,600 limit for individual contributions and a $7,200 contribution limit for families. If employees are 55 or older, they are allowed to contribute an extra $1,000. The funds will roll over from year to year so employees won’t lose them at the end of the year.

What is an FSA?

Another type of healthcare benefit that some employers provide is a flexible spending account (FSA). It’s an account that allows employees to cover copayments, some medications, deductibles, and other healthcare expenses. Employees (and some employers) put money into an FSA and will not pay taxes on their contributions. They will need to submit a claim to the FSA through their employer and show that they had a medical bill that their healthcare provider would not cover. The maximum FSA amount per employee per year is $2,850. The money that employees contribute is forfeited if they don’t spend it within the plan year. 

What is an HRA?

Unlike a lifestyle spending account, an HRA, or Health Reimbursement Arrangement, is only for healthcare expenses. They are employer-funded group health plans that allow employees to pay for qualifying medical bills. Employees need existing healthcare coverage to participate in an HRA. They will not pay taxes on the money in it and unspent money can be rolled over into the next year. However, an employer has the right to determine the maximum amount that can be rolled over.

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Benefits of a Lifestyle Spending Account (LSA)

There are numerous benefits that come with lifestyle spending accounts. 

They Cover a Range of Perks

Unlike healthcare accounts, LSAs are for a wide range of perks. LSAs are more inclusive benefits because employees across generations and states can decide how to use perks that best fit their lifestyle.

For instance, in the health and wellness category, employees can use them for a broad range of purchases:

  • Gym memberships
  • Personal training sessions
  • Nutritionists
  • Meditation apps
  • Coaching
  • Online talk therapy
  • Home gym equipment

Employees can also spend money on various categories like:

  • Learning and development
  • Meals/food
  • Family activities
  • Commuting
  • Pets
  • Charitable giving

Giving employees control over their spending increases loyalty to your company and promotes a healthy work-life balance. Happier employees translate to higher employee engagement and more success within your company. 

They Reduce the Administrative Burden on HR

With LSAs, HR no longer has to designate perks for employees. Instead of spending multiple hours per month on perks for each employee, HR will only spend an average of one hour per month managing them, whether a company has 100, 1,000, or 10,000 employees.

LSAs are fully IRS-compliant and they can easily scale as a company grows or shrinks.

Companies can offer perks that employees really want, which boosts retention. Additionally, remote or hybrid employees are able to get the same LSA benefits as those working in the office. 

Providing inclusive and diverse perks helps companies show they care about their employees and want them to be happy. This promotes a positive company culture and helps attract, retain, and engage top talent.

They Help You Enhance Your Benefits Package

Most employers offer traditional benefits like health insurance and a 401K. LSAs can address benefit gaps and help you attract and retain the best talent.

They Promote Your Culture and Values

For example, if one of your core values is "continuous improvement and learning", you could offer a professional development stipend that allows employees to spend their funds on continuing education courses.

They Enable Your Employees to Be at Their Best

Having funds for a gym membership can encourage employees to develop healthy habits that positively impact their physical health and work performance. 


Disadvantages of a Lifestyle Spending Account (LSA)

It’s important to note that there are disadvantages to lifestyle spending accounts, too. By learning about the pros as well as the cons, you can decide if LSAs are right for your company.

The Employer Sets Limitations

This is a disadvantage for employees since employers get full discretion when it comes to the limits they set. As an HR professional, it’s crucial to identify a benefit amount that is generous to your employees while still ensuring you’re staying within budget.

They are Taxable Benefits

LSAs are taxable benefits for employees. However, Compt can manage taxable vs. nontaxable stipends and provide the ultimate flexibility due to our reimbursement model.  

More on taxes will be covered in the next section.

compt benefit management taxable and nontaxable categories

Compt Employee Perk Categories

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Tax Implications for an LSA

Some employee benefits aren’t taxed – but LSAs are. Here is some more information on how taxes work.

Employees Pay the Taxes

When employees spend the money from their LSAs they will pay taxes on it. This differs from HSAs, HRAs, and FSAs, which do not tax employees when they make withdrawals. The flip side is that because LSAs are taxed, they allow for much more flexibility when it comes to how employees spend their money.

taxable employee perks

The Employer Includes LSAs in the Gross Income

Come tax time, employers will include the amount of every LSA reimbursement in each employee’s gross income. Any amount that an employee rolled over or gave up would not be included in their taxable income. It’s up to an employer whether or not LSAs would be rolled over from year-to-year or forfeited.


Lifestyle Spending Account Eligible Expenses

Note that an LSA could be subject to ERISA (Employee Retirement Income Security Act of 1974) if employees use it to pay for health/wellness expenses. It’s a good idea to consult with an employment lawyer when creating any sort of benefits program, especially when offering employees LSAs.

Frequently Asked Questions about Lifestyle Spending Accounts

Do you want more information on lifestyle spending accounts? Here are some FAQs that will offer clarity.

What can employees use their LSAs for?

It all depends on what employers say it can be used for, but typically, it will include perks for health/wellness, remote work, and professional development. It’s important for employers to survey employees and find out what kind of perks are most beneficial to them to help them feel healthy and fulfilled.

Some unique uses we've seen include nutritional supplements, financial wellness planning, and more!

How can we avoid ERISA?

Along with hiring an employment lawyer and/or making sure your legal team reviews your LSAs, you should review the rules laid out by ERISA just to be safe. For instance, if the LSA covers medical expenses, it could make it subject to ERISA. This is a problem you’ll want to avoid. 

Are Lifestyle Spending Accounts right for my company?

LSAs are ideal for companies that want to see higher fringe benefits utilization. They are also great for employees who are craving work-life balance and could benefit from the personalization of these perks. You’ll need to ask your employees what kinds of perks they would like to have access to and then decide if it’s worth investing in LSAs. Look at what similar companies in your field are doing before getting started.

most common employee perks

Popular Perk Categories, Compt 2022 Perk Study

Can remote work stipends be included in a Lifestyle Spending Account?

Yes, remote work stipends are a category of lifestyle spending account. A remote work stipend can include:

  • A coworking space membership
  • At-home equipment like a desk or computer stand
  • Home internet
  • Cell phone

If you are interested in learning more about how to build the perfect perks program for your distributed team, visit our guide on remote work stipends.

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Conclusion: How to Get Started With LSAs

Are you interested in setting up your own lifestyle spending account program? Here are the steps you can take.

1) Identify Your Number of Employees and Total Budget for LSAs

Count the number of employees you have and create a total budget for all of the lifestyle spending accounts you’ll be providing. You can look at what other companies in your industry are doing to ensure your benefits package is competitive. 

2) Determine How Much You’d Like to Spend Per Employee and Per Timeframe

Usually, timeframes are monthly, quarterly, semi-annually, or annually. Figure out which one is right for your company.

3) Select Categories for Employees to Spend in

These categories could align with your company goals or values or employees could be given 100% autonomy when it comes to the perks they choose. Many employers will provide health/wellness and remote perks, but it’s up to you and your team to determine what’s best. Remember to take your company culture into consideration when making these decisions.

4) Select an LSA vendor

You could also do it manually, but that’s going to be much more time-consuming. It’s possible to create a spreadsheet where you can manually track individual perk expenses, collect the receipts, track data for your finance department, account for taxes, and note the status of each perk expense. You will also need to include balances for each employee within each time frame.

If you use perk management software like Compt, this will take only 15 minutes.

5) Communicate with Your Team

Once your LSA is officially set up, you should send out a company memo explaining the program to your team.

Make sure you include relevant information like:

  • How much each employee receives in their LSA
  • The timeframe they have to spend their perks and whether or not they will be rolled over
  • The maximum rollover amount, if it applies
  • The date perks will be forfeited, if it applies
  • The perks employees have access to
  • How employees can use their perks
  • The tax ramifications of using perks
  • How they can contact HR if they have any questions

Having open communication with your team when creating your LSAs is key to its success.


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