LSA: Lifestyle Spending Account
What exactly is an LSA?
An LSA or Lifestyle Spending Account is a versatile, employer sponsored account that is a useful employee benefit.
The account is only able to be spent on employer-designated, specific categories such as gym memberships, wellness, home office equipment, commute reimbursement, etc.
This account is employer-sponsored and post-tax, meaning that the employer puts money into the account, but the money put in or spent by you is considered income, and is taxed as such.
When and How do I get Taxed?
The income is usually taxed upon reimbursement. This means that if you, for example, paid $100 for a nice gym membership and submitted that to your company’s LSA for reimbursement, you would receive $100 directly from your employer on your next paycheck.
However, your standard payroll deductions would be applied to your total paycheck, including that $100.
So, iIf your personal tax withholding rate was 20%, although your paycheck might list a $100 reimbursement, you would effectively only receive $80 in reimbursement.
When Does an LSA Reset or Get Replenished?
LSAs typically reset annually, meaning that the total amount in the account returns to the original benefit amount, regardless of what was or wasn’t spent the prior year. So, if you had $1,000 in LSA benefit and only spent $200 in a year, your employer would add back $200 at the end of the benefit year.
It is important to note that an employer is under no obligation to roll-over funds or replenish an LSA account, since these accounts have much less IRS oversight than typical employer accounts such as an HSA or FSA.