For years, we’ve seen that traditional benefits like health insurance and retirement plans were the main pillars of employee compensation. It was the 101 of employee benefits. And yes, they’re still essential, but today’s workforce is looking for more flexible and personalized options. That’s where the Lifestyle Spending Account (LSA) comes in, a benefit that adapts to diverse workforce demographics while also creating tax advantages for employers.
It’s a huge deal. This is how a Lifestyle Spending Account can reduce payroll taxes, and why employees value it as one of the most modern perks available.
What is a Lifestyle Spending Account (LSA)?
A Lifestyle Spending Account is an employer-funded benefit that gives employees a set allowance to spend on wellness, personal development, and lifestyle expenses. Unlike HSAs (Health Savings Accounts) or FSAs (Flexible Spending Accounts), LSAs are not tied strictly to healthcare or medical costs.
In other words, LSAs are essentially a fund to be spent by employees on their wellbeing as they please, depending only on their lifestyle and everyday life.
Instead, they’re designed to support a broader view of wellbeing, covering areas like:
- Gym memberships and fitness classes (Hot yoga, pilates, or Taekwondo, you name it).
- Childcare or eldercare services
- Therapy, coaching, and holistic care like acupuncture or Traditional Chinese Medicine
- Mental health apps
- Professional development or education
- Healthy meal delivery or wellness programs
This flexibility makes LSAs stand out. Rather than restricting funds to medical bills, they empower employees to choose what best supports their overall quality of life.
The Tax Advantage of a Lifestyle Spending Account
From a financial perspective, LSAs are more than just a nice-to-have perk. They can actually lower employer costs through payroll tax savings.
Here’s how it works:
- Contributions employers make into LSAs are not counted as taxable wages.
- This reduces the total payroll on which Social Security and Medicare taxes are calculated.
Example of how LSAs works:
Imagine a company of 100 employees. Each receives $1,000 annually in their LSA.
- Total contributions: $100,000
- Payroll tax savings (at 7.65% FICA): $7,650
That’s money the employer keeps—while employees get access to a benefit that feels meaningful and personal. This is a great way to navigate the rising costs of healthcare.
For employees, this is equally powerful. Because LSAs are employer-funded and tax-free, the money stretches further than if it were simply added to their paycheck.
Why Employees Love LSAs
Lifestyle Spending Accounts are gaining popularity among the workforce. According to a SHRM article, one of the main reasons why employees love LSAs is that they allow them “to really personalize their benefits”.
“The same benefit works differently for everyone, and they can choose how to use it.”
These kinds of benefits are:
- Flexible: One person might use their funds for a gym membership, while another pays for childcare. The same benefit works differently for everyone, and they can choose how to use it.
- Relevant to modern lifestyles: Gen Z and Millennials, for example, who make up a growing share of the workforce, want perks that support their mental health, personal growth, and life balance. Other generations might be more interested in holistic medicine, volunteering, etc.
- Retention-friendly: When employees feel supported beyond the basics, they’re more likely to stay with their company. An LSA signals that the employer cares about their overall wellbeing and interests, not just their job performance.
In short, LSAs help companies stand out in a competitive job market while keeping costs efficient and tax-smart.
Pros and Cons of Lifestyle Spending Accounts
Like any benefit program, a Lifestyle Spending Account (LSA) comes with strengths, but it also has its limitations. Understanding both helps employers decide if it’s the right fit for their workforce.
| Pros | Cons |
| Tax savings for employers | Not tax-advantaged in all categories (varies by IRS rules). A few categories can be non-taxable if set up right:
|
| Flexibility for employees | Requires clear communication to avoid confusion (employees may try to spend it in things that are not eligible, for example).
They may overlap with other benefits that the company already offers. |
| Boosts retention and engagement | Some admin setup needed |
| Covers wellness, mental health, fitness | Employers must decide eligible categories |
A key takeaway: The benefits often outweigh the drawbacks, especially when paired with good communication and clear eligibility guidelines.
Lifestyle Spending Account vs. Other Benefits
When comparing LSAs to other benefit options, their versatility stands out.
- Some traditional perks like gym memberships or lunch stipends are limited in scope. An LSA, on the other hand, can cover multiple wellness and lifestyle areas, giving employees choice instead of a one-size-fits-all perk.
- HSA/FSA accounts are highly valuable for healthcare expenses but restrictive, as they only cover qualified medical costs. LSAs go beyond that, supporting fitness, childcare, mental health, and personal development.
- LSAs as a complement: Employers don’t have to choose between traditional benefits like HSAs/FSAs, and LSAs. Instead, a Lifestyle Spending Account can complement the existing package, modernizing benefits without eliminating core offerings.
It’s not about leaving traditional healthcare options: is about balance and strategy to get the best out of the investment. This combination makes LSAs a strategic advantage for companies competing for top talent.
Is a Lifestyle Spending Account Right for Your Company?
Before launching an LSA, leaders should ask their brokers:
- Do we want to improve employee satisfaction and retention?
- Are our current benefits too rigid or outdated for a modern workforce?
- Can we handle light administrative setup in exchange for long-term engagement gains?
LSAs are a great fit for:
- Growing companies and startups: LSAs allow scalable, flexible benefits without locking into costly, one-dimensional programs. It’s cost effective.
- Industries with high talent competition: Tech, biotech, and professional services companies often use LSAs to stand out from competitors.
- California companies: According to The Economic Times, in 2025 California is among the states with higher quit rates in the United States. In a competitive job market, California-based employers can use LSAs as a retention tool. Employees are more likely to stay with companies that invest in their overall wellbeing and lifestyle.
Final Thoughts
A Lifestyle Spending Account is more than a trendy perk, it’s a benefit that meets today’s workforce where they are. With the ability to boost retention, support wellness, and create payroll tax savings, LSAs give both employers and employees a reason to value them.
For HR leaders and CEOs, the question isn’t whether LSAs are worth exploring—it’s whether you’re ready to modernize your benefits strategy to match the expectations of the next generation of employees.
