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A lifestyle spending account is an employer-funded, post-tax allowance employees can spend on wellness and personal expenses the employer chooses to cover, such as gym memberships, fitness gear, hobbies, or pet care. Reimbursements are taxable wages, which distinguishes an LSA from an FSA or HSA.
An LSA is a flexible benefit rather than a tax-advantaged health account. The employer defines an annual or monthly allowance, publishes an eligible expense list, and reimburses claims through a card or a claims platform. Because the expenses are personal rather than qualified medical care under the tax code, reimbursements are treated as taxable compensation under IRS Publication 15-B, subject to income tax withholding and payroll taxes, and reported on the employee's Form W-2.
Employers use LSAs to cover things traditional plans cannot, including fitness, nutrition, financial coaching, child care, commuting, professional development, travel, and family support. The design flexibility is the point: you decide the categories, the funding level, whether unused amounts carry over, and whether balances forfeit at termination.
The design has to stay clear of expenses that would turn the account into a group health plan. If the eligible expense list includes medical care such as copays, prescriptions, or premiums, the arrangement can be recharacterized as a health plan subject to ERISA, COBRA, and ACA market reform rules, which an unfunded post-tax account with no ERISA plan document cannot satisfy. Keep medical expenses out of the list, run the reimbursements through payroll so taxes are withheld correctly, and document the program in writing.
Yes. Because the expenses are personal rather than qualified medical care under the tax code, reimbursements count as taxable compensation. They are subject to income tax withholding and payroll taxes and appear on the employee's Form W-2, which is why the program should be run through payroll rather than accounts payable.
Whatever the employer decides to put on the eligible expense list. Common categories include fitness, nutrition, financial coaching, child care, commuting, professional development, travel, and family support. The employer also sets the allowance amount, whether unused amounts carry over, and whether balances are forfeited at termination.
Because including them can turn the account into a group health plan. Once copays, prescriptions, or premiums are reimbursable, the arrangement may be recharacterized as health coverage subject to ERISA, COBRA, and ACA market reform requirements that an unfunded post-tax account cannot satisfy. Keep the list free of medical care and document the program in writing.