Health & WellnessFor EmployeesLifestyle Spending Accounts for Employees in Canada: A Complete Guide

Lifestyle Spending Accounts for Employees in Canada: A Complete Guide

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A Lifestyle spending account (LSA) has emerged recently as an innovative new employee benefit that is gaining popularity among employers and employees.

Lifestyle spending accounts allow employees to spend on a wide range of products and services that support their overall lifestyle, wellbeing and personal development. Unlike health savings accounts that can only be used for medical expenses, Lifestyle spending accounts offer much more flexibility and can cover everything from gym memberships to childcare.

According to a recent study by Mercer, 70% of companies are now considering adding Lifestyle spending accounts to their benefits packages (Source). This is unsurprising, as Lifestyle spending accounts provide a compelling range of advantages for employers and employees. They can boost employee engagement, improve retention, attract top talent, and allow employers to provide personalized, meaningful benefits.

In this comprehensive guide, we’ll explain everything you need to know about Lifestyle spending accounts, including what they are, their key benefits, how they work, the types of expenses covered, and considerations for employers looking to implement them.

Unlocking Employee Benefits: The A to Z of Lifestyle Spending Accounts! IDC
Unlocking Employee Benefits: The A to Z of Lifestyle Spending Accounts!

What are Lifestyle Spending Accounts?

A lifestyle spending account (LSA) is an employer-funded benefit program that allows employees to spend on a wide range of products and services that support their overall wellbeing and lifestyle needs.

Lifestyle spending accounts are also sometimes referred to as perk allowances, lifestyle benefits, specialty benefits, or personal allowances.

They function similarly to flexible spending accounts (FSAs) and health savings accounts (HSAs). The critical difference is that LSA funds are not limited to medical expenses. Employees can spend the funds across diverse categories like fitness, childcare, pet care, professional development, public transit, and more.

Employers determine all aspects of their LSA program, including:

  • The annual allowance amount per employee (typically $500 – $2000) (Source)
  • The frequency of allowances (monthly, annually, etc.)
  • Which products and services are eligible expenses
  • Whether unused funds can roll over or are forfeited
  • Reimbursement processes
  • Participation requirements

This high degree of customization allows employers to craft an LSA tailored to their goals, culture and employees’ needs. It provides employees with a flexible, personalized benefit.

How Do Lifestyle Spending Accounts Work?

The first step in setting up an LSA is for an employer to determine the details of their program, including:

Allowance amount

The employer decides on an annual or monthly allowance for each participating employee. This is typically in the range of $500 – $2000 annually. Higher allowances give employees more flexibility.

Expense eligibility

Next, the employer defines which categories or specific products and services are eligible for reimbursement under the LSA. Some common categories include wellness, fitness, training, public transit, and childcare.

Distribution frequency

The employer chooses how often to distribute LSA funds to employees. This may be one annual deposit, monthly, or per expense submission. Monthly allowances provide employees with more consistent funds.

Participation and dependents

The employer sets any participation requirements. Lifestyle spending accounts often extend eligibility to employees’ spouses and dependents.

Rollover or forfeiture

A critical decision is whether unused LSA funds will roll over at year-end or be forfeited. Rollover allows employees to accumulate funds for larger purchases. Forfeiture encourages full utilization.

Once the LSA is designed, employees can request reimbursements up to their available allowance amount for eligible expenses.

Employees make purchases out of pocket and then submit proof of payment to be reimbursed by the employer. Reimbursement can be handled in-house or through a specialized benefits platform. Most Lifestyle spending accounts are reimbursed, meaning funds stay with the employer until an expense is approved.

Some critical pointers on LSA reimbursements

  • Employees submit expenses with evidence of payment, such as an itemized receipt.
  • Expenses get reviewed for eligibility based on the LSA criteria.
  • The employee receives reimbursement up to their remaining allowance.
  • Any ineligible expenses are denied.
  • Submitted expenses reduce the employee’s available LSA balance.

The flexibility of LSA funds empowers employees to select benefits tailored to their individual lifestyle needs and priorities. This drives higher engagement and satisfaction with the benefit.

Why Offer Lifestyle Spending Accounts?

There are many compelling reasons for employers to consider offering an LSA, including:

Attracting and retaining top talent

Lifestyle spending accounts help attract and retain talented employees in a competitive hiring environment. Surveys show that 78% of employees say attractive benefits make them more likely to stay with their employer. Lifestyle spending accounts also support recruitment by providing a personalized benefit that job seekers value.

Boosting engagement and morale

The freedom and flexibility of Lifestyle spending accounts increase employee appreciation and morale. Instead of one-size-fits-all benefits, employees get spending power to address their unique needs, showing them that the organization values their individuality. This drives more robust engagement.

Supporting overall wellbeing

Lifestyle spending accounts recognize that employee needs span many aspects of lifestyle, health and wellbeing. Employees can proactively invest in their physical, mental and financial wellness with LSA funds in personalized ways unmatched by other benefits.

Enhancing benefits packages

Adding an LSA elevates an employer’s benefits offering above competitors. Only 40% of employees feel their workplace benefits their lifestyle needs. Introducing an LSA shows a commitment to progressive benefits.

Learn more: Employee Benefits Packages for Small Businesses

Providing inclusive benefits

The flexibility of Lifestyle spending accounts allows equitable support of diverse employee lifestyles – from working parents to remote workers. Everyone gains spending power to obtain the benefits matching their priorities. This inclusiveness enhances corporate culture.

Incentivizing healthy choices

By covering fitness expenses, mindfulness apps and nutritional supplements, Lifestyle spending accounts give employees financial incentives to make healthy lifestyle choices. This can lead to reduced healthcare costs and higher productivity.

Supporting work-life balance

Lifestyle spending accounts empower employees to pay for services like childcare and eldercare that support their work-life balance. This helps boost their performance by removing barriers to workplace success.

Boosting tax efficiency

While LSA reimbursements are usually taxable, the funds can be applied to tax-advantaged accounts like HSAs and 401(k)s. Employees gain more tax savings opportunities.

Providing financial guidance

With LSA guidance from their employer, employees gain greater awareness of tax preferences, account limits, and how to optimize their household finances.

In summary, the many benefits of lifestyle spending accounts make them appealing for forward-thinking employers aiming to enhance their benefits offerings.

Maximize Your Perks: Navigating Lifestyle Spending Accounts at Work. IDC
Maximize Your Perks: Navigating Lifestyle Spending Accounts at Work.

What Expenses Can Lifestyle Spending Accounts Cover?

One of the most attractive features of lifestyle spending accounts is allowing employees to spend funds across a broad spectrum of lifestyle products and services. Employers have discretion in selecting which expenses will be eligible for reimbursement under their LSA program.

Some of the most popular LSA expense categories include:

Wellness

Covers diverse health and wellbeing expenses like:

  • Alternative/holistic health (acupuncture, naturopathy etc.)
  • Health monitoring devices (Fitbits, blood pressure monitors)
  • Meditation and mindfulness apps
  • Employee wellness programs
  • Nutritional supplements
  • Weight loss programs
  • Fitness and gym memberships
  • Smoking cessation programs
  • Massages and spa treatments

Professional Development

Enables career development through:

  • Conferences, seminars and networking events
  • Training programs
  • Certification courses
  • Educational institution tuition
  • Professional association membership dues
  • Continuing education
  • Skill-building classes
  • Finance

Supports financial goals via:

  • Financial advisor fees
  • Tax preparation services
  • Retirement account contributions
  • College savings contributions
  • Student loan repayments
  • Family Support

Eases family expenses like:

  • Daycare and childcare
  • Babysitting
  • Tutoring and test prep
  • Summer camps
  • Family activities
  • Pet care, pet insurance, veterinary bills
  • Transportation

Lowers commuting costs through:

  • Public transportation passes
  • Parking fees
  • Bicycle purchases
  • Rideshare services
  • Carpool programs
  • Electric vehicle charging

Remote Work

Learn more: The Growing Popularity of Canadian Flexible Work Arrangements

Pays for home office costs:

  • Internet and cell phone bills
  • Computer monitors
  • Printers, scanners, fax
  • Office furniture
  • Co-working space fees
  • Fitness & Recreation

Encourages physical activity via:

  • Health club and gym memberships
  • Exercise equipment and gear
  • Entry fees for sports leagues and races
  • Personal trainers and fitness apps
  • Physical activities like golf, skiing, and more
  • Lifestyle & Entertainment

Enhances work-life balance through:

  • Cultural activities (concerts, shows, etc.)
  • Movie and entertainment tickets
  • Meal delivery services
  • Wine club fees or craft beer subscriptions
  • Vacation activities

As shown above, LSA expense eligibility is extensive. Employers can pick and choose which categories to include based on their goals, culture, and employees’ interests. Standard eligibility requirements are that expenses must:

  • Fall under an approved category
  • Be purchased by the employee for personal use
  • Be substantiated with an itemized receipt or invoice

Employers should survey their workforce during program design to determine which LSA offerings would bring the highest perceived value.

Critical Considerations for Employers Offering Lifestyle Spending Accounts

From Wellness to Workouts: Mastering Lifestyle Spending Accounts 101. IDC
From Wellness to Workouts: Mastering Lifestyle Spending Accounts 101.

While the benefits of lifestyle spending accounts are clear, there are some important considerations for employers looking to implement them:

Tax implications

The IRS considers most LSA funds taxable income for employees if spent on non-medical expenses. Employers must report reimbursements as taxable wages on employees’ annual W-2 forms. Employees are responsible for paying any income tax owed.

The key exceptions are LSA funds applied to tax-advantaged accounts like 401(k)s, HSAs and FSAs. Employees should be informed of potential tax consequences when utilizing their LSA.

Learn more: A Comprehensive Guide to Taxable Employee Benefits in Canada

Administrative responsibilities

Lifestyle spending accounts require administrative tracking of allowance balances, expense submissions and reimbursement payments. This is manageable for small organizations but can be outsourced to a benefits provider for larger workforces. Some automation helps streamline the process.

Compliance considerations

Since Lifestyle spending accounts are not group health plans, they need to avoid resembling medical expense reimbursement arrangements subject to healthcare regulations. Employers should be careful about restricting LSA funds to only health and wellness categories or requiring substantiation for personal health purchases.

Budget considerations

As an employer-only funded benefit, Lifestyle spending accounts represent an incremental expense requiring adequate budgeting. Allowance amounts should balance employee value against corporate costs. Employee surveys help determine an optimal allowance level.

Ineligible expenses

Employers must establish clear guidelines on expenses that won’t be reimbursable through the LSA program. Ineligible expenses usually include anything illegal, dangerous, unethical, or that would violate company policies.

Rollover vs forfeiture

With a rollover approach, unused LSA funds accumulate for the employee’s future use. This incentivizes employees to save for large purchases but is costlier for employers. Forfeiture resets balances annually and reduces costs but may discourage utilization and increase spending at year-end.

Withdrawal limits

Employers often limit LSA withdrawal amounts per transaction, day or month to manage cash flow risks from the uninsured benefit. Typical limits range from $200 – $500 per withdrawal or $2,000 – $5,000 monthly.

Communications

Thorough employee communications are vital during launch and on an ongoing basis. Providing LSA education and tips on tax preferences, account limits and reimbursement processes is critical to optimal utilization.

What Are Alternatives to Lifestyle Spending Accounts?

While lifestyle spending accounts offer unmatched flexibility, there are a few alternatives employers may want to consider:

Health savings accounts (HSAs)

HSAs allow tax-advantaged savings and reimbursement for qualified medical, dental and vision costs. In 2022, the annual HSA contribution limit is $3,650 for individuals and $7,300 for families (Source). The account is employee-owned, and balances can accumulate over the long term. HSAs pair well with high-deductible health plans.

Learn more: Health Savings Accounts

Flexible spending accounts (FSAs)

Like HSAs, FSAs allow tax-free reimbursement of eligible healthcare costs. FSAs are employer-owned, and balances are forfeited annually. Employers contribute to FSAs through employee salary reductions. The annual FSA contribution limit for 2022 is $2,850 (Source). FSAs work well alongside traditional health plans.

Employee perk allowances

Perk allowances operate like stipends – the employer provides a lump sum, and the employee chooses how to spend it on a defined selection of benefits. Allowances are taxable but offer maximum flexibility. Employers can rotate eligible perks each quarter to encourage full utilization.

Employee stipends

Stipends offer employees fixed dollar amounts to spend at their discretion, often on remote work, wellness or personal development costs. Stipends are taxable income but valued for their flexibility. The drawback is minimal oversight on how funds are utilized.

Each option has pros and cons compared to Lifestyle spending accounts for employers to evaluate against organizational goals and budget considerations. Many utilize stacked benefits that combine aspects of multiple programs.

Learn more: Employee Stipends in Canada

Closing Insights on Lifestyle Spending Accounts

Elevate Your Lifestyle: The Ultimate Employee Guide to Spending Accounts. IDC
Elevate Your Lifestyle: The Ultimate Employee Guide to Spending Accounts.

As talent competition grows, lifestyle spending accounts are a new benefit employees love. They offer flexibility and freedom.

Employees can get benefits that perfectly fit their lifestyles. This raises satisfaction, engagement, and loyalty and helps attract and keep top talent.

For employers, lifestyle spending accounts have little risk beyond cost. Customization ensures they align with the culture and goals. Good design improves retention, publicity, taxes and health.

Considerations around taxes, admin and expenses take planning. However, the process can work with communication and a partner.
In closing, lifestyle spending accounts are worth considering. They will be key for supporting, retaining and attracting talent as they go mainstream.

Article Sources

At Ebsource, our mission is to empower Canadians to make informed choices about employee benefits. We achieve this by providing comprehensive, truthful information based on insights from veteran financial experts and data from reputable sources like Statistics Canada and industry groups.

Rigorous research into all the major employee benefits providers in Canada allows us to make personalized recommendations tailored to individuals’ specific budgets and needs. We uphold high standards of objectivity, transparency, and independence in our material.

As Canada’s most trusted source for employee benefits news and advice, we derive our guidance only from respected government data and industry statistics. This ensures our counsel aligns with industry best practices and the facts Canadians need to make prudent benefits decisions.

We take pride in producing content readers can trust by following strict editorial principles and referencing authoritative sources. Our goal is simply to equip Canadians with the insights necessary to make optimal benefits choices for their unique situation. We are fully committed to being Canada’s most reliable and unbiased resource for employee benefits information.

What is Lifestyle Spending Account? – garrett.ca
Complete Guide To Lifestyle Spending Accounts – cloudadvisors.ca

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