A lifestyle spending account (LSA) is an employer-funded allowance employees can use on well-being expenses the employer defines, such as fitness, mental health apps, home office gear, or family support. Unlike HSAs, FSAs and HRAs, LSAs are not tax-advantaged, so reimbursements are generally taxable income to employees. That trade-off buys flexibility: employers set the categories, amounts and rules, which makes an LSA one of the easiest ways to personalize a wellness benefit.
What is a lifestyle spending account?
An LSA is a flexible stipend, usually a fixed amount per employee per year or quarter, paid for expenses within categories the employer chooses. Employees buy what they need, submit a receipt, and get reimbursed. Some administrators also offer cards or marketplaces so employees can spend the allowance directly.
LSAs were more common in Canada before gaining traction in the US. A WTW survey reported by SHRM found that 7% of employers offered an LSA, with another 7% planning to add one and 31% considering it. The same article notes that employers contributed about $850 per employee annually on average, though amounts vary widely.
The appeal is simple. One employee wants a gym membership, another wants a meditation app, and a third wants help with child care costs. A single LSA can support all three without the employer contracting with three vendors.
How an LSA works
- The employer sets the policy. It defines eligible categories, the allowance amount, the funding frequency and whether funds roll over.
- Employees spend. They purchase eligible items or services, using their own money or an LSA card if one is offered.
- Employees submit a claim. Receipts go through an app or portal.
- The administrator reviews. Claims are checked against the policy and approved or denied.
- Reimbursement is paid. Usually via payroll or direct deposit, with the amount reported as taxable wages.
How LSAs are taxed
At a high level, LSA reimbursements are generally treated as taxable income for employees. SHRM describes LSAs as funded by employers “with money that is taxable as income to employees when they spend it.” In practice this means:
- Reimbursements are typically added to the employee’s wages and subject to income and payroll tax withholding.
- The employer generally pays its share of payroll taxes on the amount.
- Some employers “gross up” payments to offset the employee’s tax, which increases cost.
Tax rules have nuances, for example around specific expense types or employees outside the US. This guide is not tax advice. Work with your tax advisor, payroll provider and benefits counsel to confirm how your LSA should be handled.
LSA vs. HSA vs. FSA vs. HRA
The four accounts are often confused. The biggest differences are tax treatment, what they can pay for, and who funds them. The basics below follow the National Library of Medicine’s MedlinePlus overview of HSAs, FSAs and HRAs; your plan documents govern the specifics.
| Feature | LSA | HSA | FSA (health) | HRA |
|---|---|---|---|---|
| Who funds it | Employer only | Employee and/or employer | Mostly employee pre-tax salary; employer may add | Employer only |
| Eligibility | Any employee the employer chooses | Must be enrolled in a qualifying high-deductible health plan | Offered through employer health benefits | Offered through employer health benefits |
| Tax treatment | Generally taxable to employee | Tax-advantaged for qualified medical expenses | Tax-advantaged for qualified medical expenses | Generally tax-free reimbursement for qualified medical expenses |
| What it covers | Lifestyle and well-being categories set by employer | Qualified medical expenses | Qualified medical expenses | Qualified medical expenses defined by the plan |
| Rollover | Employer decides | Unused funds carry over | Generally use-it-or-lose-it, with limited exceptions plans may allow | Employer decides within plan rules |
| Portable if employee leaves | Typically no | Yes, employee owns it | Typically no | Typically no |
| Contribution limits | None set by law; employer chooses | Annual IRS limits | Annual IRS limits | Depends on HRA type |
The short version: HSAs, FSAs and HRAs pay for medical care with tax advantages and federal rules. LSAs pay for everything else that supports well-being, with no tax advantage and far fewer rules. They complement each other rather than compete.
Eligible expense categories: examples
Employers define the list. Common categories include:
Physical wellness
- Gym, studio or climbing memberships
- Fitness classes, personal training and race fees
- Exercise equipment, bikes and athletic wear
- Fitness trackers and wearables
Mental and emotional wellness
- Meditation and mindfulness apps
- Life coaching
- Hobby classes such as art, music or cooking
Nutrition
- Meal kits and healthy food delivery
- Nutrition coaching or cooking classes
Financial wellness
- Financial planning or budgeting tools
- Student loan payments
- Tax preparation services
Family and caregiving
- Child care and summer camps
- Elder care support
- Pet care and pet insurance
Work environment
- Home office furniture and equipment
- Internet or phone costs
- Coworking memberships
Learning, community and purpose
- Books, courses and certifications not covered by tuition benefits
- Charitable donations
- Travel and outdoor recreation
Typical exclusions include alcohol and tobacco, firearms, gambling, and medical expenses that belong in an HSA, FSA or HRA. Keeping medical care out of the LSA also helps keep it clearly separate from your group health plan, a design point worth confirming with counsel.
How to set allowance amounts and policies
Decide the purpose first
An LSA built to support fitness and mental health looks different from one built to help a distributed workforce stay connected and productive. Write one sentence on what the LSA is for, then pick categories that serve it. Our guide to the dimensions of wellness in the workplace is a useful lens for choosing categories that cover more than physical health.
Set the amount
There is no required minimum. Practical ways to set it:
- Start from budget. Divide what you can sustainably spend by headcount and an expected utilization rate.
- Replace existing perks. If you already reimburse gyms, home office stipends or wellness incentives separately, consolidating them into one LSA can fund a meaningful allowance.
- Account for taxes. Remember employer payroll taxes and any gross-up.
- Keep it equitable. The same allowance for every eligible employee is simplest. If you vary it, for example by full-time vs. part-time status, apply clear and consistent rules.
Choose funding frequency and rollover
- Annual: simplest, but employees may wait to spend and budgets can spike late in the year.
- Quarterly or monthly: steadier spending and a regular reminder that the benefit exists.
- Rollover: Allowing limited rollover (for example, within the plan year) reduces “use it or lose it” pressure; resetting at year-end keeps costs predictable.
Write a clear policy
Your LSA policy should cover:
- Who is eligible and when eligibility starts (for example, after 30 days)
- Eligible and excluded categories, with examples
- Allowance amount, funding schedule and rollover rules
- How to submit claims and the submission deadline
- What happens to balances when someone leaves
- Tax treatment, stated plainly so employees are not surprised by withholding
Consider earned funding
Some employers fund all or part of the LSA through participation in wellness activities, so employees earn credits by joining challenges or completing check-ins. This ties the LSA to engagement, but make sure the base allowance stays accessible to everyone so the benefit does not reward only those who already participate.
Administration options
Self-administered
Employees submit receipts to HR, and payroll adds approved amounts to paychecks. This can work for very small teams, but it consumes HR time, exposes HR to employees’ personal purchases, and gets harder as categories grow.
Dedicated LSA administrator
Third-party administrators review claims against your policy, pay reimbursements, handle receipts and send payroll files. Many offer mobile claims, cards and reporting on how funds are used.
Wellness platform with a built-in LSA
Some wellness platforms bundle an LSA with challenges and rewards, letting employers offer a one-time or recurring stipend, connect it to wellness program engagement, and route claims through a partner administrator. Bundling can simplify vendor management and reporting.
When comparing options, ask about:
- Claim review turnaround and who handles employee questions
- Payroll integration and tax reporting support
- Support for international employees and currencies
- Reporting on utilization and spending by category
- Data privacy practices
How LSAs fit a holistic wellness program
An LSA is not a program by itself. It is a flexible funding layer that makes the rest of your program more personal.
- It fills gaps. Your health plan covers medical care and your EAP covers counseling. An LSA covers the gym, the cooking class, or the child care that helps someone actually make time for their health.
- It respects different needs. A 25-year-old and a 55-year-old caregiver rarely want the same perk. Choice makes the benefit relevant to both.
- It pairs well with challenges and education. Run a sleep challenge, then remind employees the LSA covers items in that category. Run a financial wellness month, then point to eligible budgeting tools.
- It generates useful data. Aggregate category spending shows what employees value, which can inform the rest of your holistic wellness program.
Track utilization alongside your other metrics, as outlined in our guide to wellness program ROI. If most employees are not using the allowance, the problem is usually communication or category fit, not demand.
For more ways to round out the benefit, browse our employee wellness program ideas.
Frequently asked questions
Is a lifestyle spending account taxable?
Generally, yes. LSA reimbursements and stipends are typically treated as taxable income to the employee and run through payroll, because LSAs are not one of the tax-advantaged account types defined in the tax code. Rules can vary by situation, so confirm your setup with a tax advisor or benefits counsel.
Do unused LSA funds roll over?
It depends on the employer's policy. Many employers reset balances each plan year or quarter, while others let unused funds roll over for a limited period. Because there is no federal rollover rule for LSAs, the employer decides and should state it clearly in the policy.
Can employees contribute to an LSA?
LSAs are typically funded only by the employer. Unlike an FSA or HSA, employees do not make pre-tax payroll contributions to an LSA.
Can an LSA be used for medical expenses?
Employers usually exclude medical expenses that are eligible for an HSA, FSA or HRA and instead focus the LSA on lifestyle and well-being purchases like fitness, mental wellness apps, or family support. Keeping categories clearly separate from medical care also helps avoid creating something that could be treated as a group health plan. Check plan design with benefits counsel.
Do LSAs work for international or remote employees?
Yes, which is one reason they are popular with distributed workforces. Because the employer sets the categories, an LSA can cover expenses employees can actually access wherever they live. Some administrators support local currency reimbursement, but tax and payroll treatment differs by country.
This guide is general information for employers and is not medical, legal or tax advice. See our editorial policy.