What are the benefits compliance implications of lifestyle spending accounts?

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, fitness competition entries, nutritional coaching, food supplements, work-out equipment, or other items or activities that will promote health amongst their employees. Some employers even use LSAs to include other non-wellness benefits such as pet or child care benefits, financial services, travel or entertainment.

Keep in mind, though, that the nature of the LSA will determine the compliance aspects of such a program. The first compliance concern to be aware of is that LSA benefits will likely be 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). So it’s most likely that employees would be taxed on the benefits provided through an LSA.

Another big question we get about LSAs is whether these arrangements are subject to ERISA. LSAs are generally not subject to ERISA for the same reason that they are taxable; the fact that they do not offer medical care or any of ERISA’s enumerated benefits would not subject them to ERISA as a health and welfare benefit. Specifically, if the employer wants to offer the benefit without it being subject to ERISA, then the employer would need to make sure that they do not allow reimbursement for medical treatment that would make the wellness plan 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 all the ERISA requirements (Form 5500 filing, SPD, COBRA, etc.) for these types of plans. So in designing the activities that can be reimbursed through the LSA, the employer would want to work with counsel to ensure that none of them would lend the LSA to becoming subject to ERISA.

One final compliance consideration is how the LSA would impact employees’ HSA eligibility. When it comes to offering these accounts and an HSA, it would just be important to make sure that the plan does not offer first-dollar reimbursement for medical care. (Notice the theme here in ensuring that medical care is not offered through the LSA.) The reason for that is that employees who have an HDHP and want to be eligible to contribute to an HSA cannot have impermissible coverage (which is generally any coverage for medical care that pays before the deductible is met). So employers would need to make sure that the employees could not use the LSA to pay for their medical care if they want to preserve their employees’ HSA-eligibility.

Outside of the concepts mentioned above, there would not seemingly be any other compliance issues with providing an LSA to employees. But to be sure that the benefit is designed, implemented and communicated in an appropriate manner, employers should work with an LSA vendor or legal counsel in establishing the LSA.