Webinar: Understanding Lifestyle Spending Accounts (LSAs) vs HSA, FSA, and HRA

Discover immediate and actionable ways you can create the most wanted new employee program. Watch the virtual forum video and/or read the transcript below.

Understanding Lifestyle Spending Accounts (LSAs) vs HSA, FSA, and HRA, Session One: Transcript

(Modified to remove superfluous language for readability)

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa //

Welcome everyone to our LSA Education Series that we are providing here at Espresa. Today is the first part of four in our LSA Education Micro Series.

What we are going to cover today is first and foremost, what is an LSA? Then we’ll look at LSA versus other more traditional plans that you may be more familiar with. We’ll review the plan design of an LSA and how to administer that plan. And then lastly, to close the loop, we will discuss how we integrate with your core HR system and connect with payroll for any taxation purposes.

What is an LSA?

So to kick it off, what is an LSA? It’s a Lifestyle Spending Account. It can be used for a wide array of things. Now, LSA is a vernacular that a lot of our clients use to refer to these accounts, but certainly is not the only term that can be used. Oftentimes they’re called reimbursements, allowances, stipends, wellness, or wellbeing wallet, or something as broad as a perks program. The key to these programs, regardless of what you call them, is that you’re going to have a predetermined amount for employees based on the plan design. And we’re going to review that plan design here in a moment, but that plan design is going to be unique and flexible to each specific company. And oftentimes even with companies, you’re going to see different plans across the workforce for things like part-time versus full-time employees, different plans by location.

LSA vs HSA, FSA & HRA

This is a very unique plan. And that’s what makes them very different from those traditional plans like an FSA. Flexible Spending Account is strictly pre-tax. An employee elects the amount that they’re going to put in there up to $2,500. This can be used for specific expenses only, things like medical expenses. You can also do a Childcare FSA, but it’s deducted from your paycheck throughout the year. And you can only use it for the purpose that it is deducted for, you can’t use it for other things.

Next, we’ll review the HSA, the Health Spending Account. Again, this is pre-tax, a hundred percent pre-tax. This is defined by the government, how this is administered. It’s either going to be for an individual or a family.

And again, this is for specifically determined expenses that are medical-related. This is deducted from a paycheck throughout the year. You can only utilize what’s in it at the time of reimbursement. Then lastly, a health reimbursement account or an HRA. Again, this is a pre-tax account, completely defined by the U.S. government. And this is contributed by the employer instead of the employee, making it more like the LSA accounts that we’re going to get into in a brief moment. But again, the government’s defined what medical-related expenses this can be used for. And you can use this for medical expenses that may not be covered by your traditional insurance companies. Now comparing those three traditional plans to LSAs, I may mention that they’re government-defined plans. And what that means is for every company in the U.S., they’re going to be the exact same based on U.S. tax laws.

LSAs are incredibly customizable for your company. Employers are able to define their offerings.

That’s very, very different from the LSA where you could have a variety of offerings within an LSA. Things like a wellness LSA that focuses on gym reimbursements, peloton reimbursement, maybe Les Mills reimbursement. So a wide array of wellness offerings, financial wellbeing, or fitness, stipends for work from home. And you can actually define what in that work from home budget can be given based on what you want to offer to your employees. So incredibly customized for a company. Now, traditional programs, those are U.S. only, based on U.S. tax laws. LSAs for global companies, typically are offered worldwide. And there’s specific accommodations that have to be taken into account when you’re building out that purpose-built LSA. Traditional programs are strictly pre-taxed. Some of them have tried to offer LSA-type offerings. One of the challenges you oftentimes run into is that they don’t have the capability to do post-tax type of programs.

So you have to do it manually at the end of the year, which is incredibly burdensome for your administrators. LSAs are built to do both post-tax and pre-tax. And we’ll get into that here in a few slides. The adjudication is outsourced in either scenario, meaning that traditional programs, as well as LSA programs, have individuals that are going to review all of the receipts and approve or deny them.

The challenge with the traditional programs is when they try and do other programs, their adjudicators are only trained based on U.S. tax law. They’re not going to be trained on the unique plans that an LSA provider will. So again, if you want to offer in your wellness program, something unique like a healthy meal delivery service, they’re not going to be prepared to do that for your particular company. Both are voluntary benefits that people can take advantage of. And you’re going to see the participation here in a moment, but traditional programs tend to have very, very low participation. Well-built LSAs are going to have very high participation, 80% plus is very, very common.

Examples of LSA reimbursements

So here are some of the examples of what we’re seeing is common in the marketplace. Wellbeing fitness, gym reimbursements, very traditional, but over the past 18 months, we’ve seen a wide array of clients offering more than just gym reimbursements. Particularly, when gyms were being shut down or people didn’t feel comfortable going in person, a lot of our clients decided to open it up to online subscription. Things like monthly Peloton subscriptions or the amazing content from companies like Les Mills, where you can go in and get high-intensity interval training or yoga, or really, endless number of fitness courses that can be done from the comfort of your own home. Also, we’re seeing things like childcare, dependent care, pet care, commuter benefits, the work from home as mentioned, and then things like adoption and surrogacy is also something that is commonplace in these plans.

Get the Guide to Global Reimbursements with Five Templates Included

Creating an LSA as a component of a total rewards package

Now, having said that, let’s look at what goes into a plan design. So one plan is going to be one designated bucket of money or one budget. Within that plan, you might have a variety of offerings. So in this scenario, this one plan has four different offerings, personal wellness, financial wellness, the care, and then work from home stipend. And maybe this company wants to have multiple plans. The one being wellness, we’ll call it a wellness wallet that has the $1,000 with the four subcategories. And maybe plan two, or plan B only has one subcategory, strictly tuition. The key here is that those dollars cannot be co-mingled between plans. They’re each a distinct, separate budget that employees either choose to utilize or not utilize.

What type of impact are you trying to drive as part of your employee value proposition?

Some of the things to consider when you’re doing your plan is how much do you want to invest in this plan? What type of impact are you trying to drive as part of your employee value proposition that you’re putting out. Both your existing employees, but also to the marketplace as you try and attract talents. And then the subcategories, how many different things do you want within each plan and how are those going to be impacted from a taxation purpose? Again, LSAs can support both. Pre-tax like an FSA, HSA, et cetera, or post-tax, which is unique to an LSA. You’re going to want to determine the time limit from a budgetary standpoint, but also from an approval standpoint. What type of run-out are you going to have when you partner with a vendor that works specifically with LSA, such as an Espresa. They should be able to share best practices and what they’re seeing at other organizations as well.

As we look across our wide client base, this is typically what we see in a plan amount. This is a breakdown per employee, how much are you investing on a yearly basis? And some of our clients start with as low as $500. We have some clients that are really in a war for talent. They might give as much as $2,500 to their employees, and they may have a variety of plans. You can see the vast majority are somewhere between 750 and the $1,250 range. Which gives a nice offering where employees can really utilize it and really see it as a key benefit in their offering.

Now, continuing with the design and what we’re seeing in the marketplace, most of our clients are either offering one or two programs, over 70% limited to one or two programs. Over 90% are doing three programs or less. And then within those programs, they’re choosing categories to offer those subcategories. Again, that typically is going to be either three or four or five or six. It’s very rare that you give someone seven to 10 choices, it’s just a little bit overwhelming. So going through the four personas that make up the life cycle of an LSA. First and foremost, a company has to choose that they’re going to do this plan, and they’re going to set up a plan. They’re going to partner with a vendor and they’re going to announce this to the employees. They’re going to explain this new benefit that’s being rolled out.

Employees are going to get excited, which leads to the second part. The employee, where they go into the software, they see what plans are available. They see the subcategories in those plans, what’s allowed, what isn’t allowed. And at that point, they can see the budget amount they have. The amount of time they have to utilize that, whether it’s annually, quarterly or monthly. And they can go and spend and start submitting claims. And once an employee submits a claim, it goes to an adjudicator. Now the adjudicator is going to review that claim within the plan, look at the receipt, and then they’re either going to approve, decline or determine that it needs more information.

So another benefit to having a purpose-built LSA platform, as opposed to HSA, FSA type of platform is, within an LSA platform, the adjudicator and employee actually have the capability to have a chain of communication. So let’s say the adjudicator goes in and the employee uploaded the wrong receipt or it’s blurry, or they forgot to upload it. Instead of declining the claim leading to a poor employee experience, the adjudicator has the ability to message that employee. This is different. Where typically HSA, FSA, it’s simply declined, and then the employee has to start the whole process over again. So very good employee experience. And then once the adjudicator approves it, that reimbursement goes through payroll. Any applicable taxation is automatically taken care of and the employee is reimbursed.

Now, when you’re setting this up, you do have to consider those tax implications. Most LSA offerings are taxable per tax code. For instance, a gym membership is certainly taxed. An online subscription to something like Les Mills certainly is taxed. Now there are areas that are non-taxed and we should support that as well. For instance, some work-from-home things such as ergonomic chairs or a mobile phone that’s reimbursed, internet. Those types of things are typically non-taxable. Additionally, depending on where your employees are, things like commuter benefits or transit benefits also may be non-taxable. And that’s key to when you design the program and key to when you set up that payroll file. And then every single subcategory can be coded for taxation applicably to what your CFO or tax advisor determines they want to do.

How to make LSA seamless with HRIS and payroll connect

And here’s what this looks like in practice. Where you’re going to have the simple file field, it’s going to have all of the information. And what these analytics are going to do is on a global basis, account for the applicable taxes. So you see to the right, we have a few different countries, Australia, Canada, the UK, a number of different subcategories within the LSA plans that have been determined. Then each one is going to be coded appropriately so that when this file is run through your payroll, typically automated through an API. It’s automatically going to take care of that for you, which is something that traditional vendors, HSA, FSA cannot do.

You want this to be a benefit that employees are utilizing. Typically we do see them utilizing it, an 80% utilization is not uncommon.

And that’s incredibly important because you want to have a lot of activity in LSA. You want this to be a benefit that employees are utilizing. And typically we do see them utilizing it, an 80% utilization is not uncommon. Here’s our program participation, very, very good adoption across our user base. And then from a budget utilization standpoint, you see about 84% of people are actually, exactly 84% of people are using 70% to 90% of the budget. And the reason that’s important is when you’re designing a program like this, particularly if you have a large company, you set that dollar amount, let’s say $2,500 a year. People are only going to utilize 70 to 90% of that. So they’re not going to use all of it, and it’s not going to cost you that full dollar amount when you administer this to your workforce.

Now, oftentimes companies say, “can’t we just do this in existing tools, such as an expense reporting system, like a Concur or Expensify?” And what our clients tell us oftentimes is, “Hey, we tried to do this in Concur, it failed. It was a heavy administrative burden.” And here are the reasons why, Concur is made for sales teams. And it’s a good tool for that, but it’s not made for all employees. And it doesn’t have a forward-looking budget, meaning that if you’re investing $2,500 a year in this platform, employees don’t have a way to see that budget. So they actually manual have to track how much of that $2,500 they’ve spent even more complex if you’re doing that on a quarterly basis and breaking that down. Additionally, the approval of flow goes through a manager or a finance team, not an adjudicator.

That person also doesn’t have visibility into where that person sits in the budget. So again, administratively burdensome because they have to track it. Tools like Concur and Expensify, they are not able to do both pre-tax and post-tax, they strictly do non-taxable. If you submit for a $100 in Concur, it’s approved, you’re going to get a $100. It’s not going to take out the appropriate taxes, so that has to be manually typically by someone in HR finance. The larger organization, the larger that burden is. LSAs can do both. And then the participation is typically very low because the user experience is very poor in these other systems. Whereas you saw in the previous, couple slides ago, LSAs typically have 80 plus percent adoption.

Q+A

All right. So with that, we are about 20 minutes in and we wanted to make sure that we had plenty of time for both our poll questions and Q&A. So, folks who want to start typing in questions in the Q&A, either to everyone or to just the administrators, such as myself and Sylvia, we can go through your questions.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // And we have some additional questions that have been sent in from people who were not able to make it on today, which is pretty exciting. So we’re going to get those answered so that when we send over the recording, they can hear what it is that they’re looking for. So maybe we can spur some commentary here with some of these additional questions.

So Kerrigan asks, do you have to have an HRA or HSA to have an LSA?

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Great question from Kerrigan there. No, you do not, is the simple answer. Particularly if you’re global, HSA, FSA, that’s strictly a U.S. concept. Many of our clients are global, so they would just offer LSA. If you are offering both, I highly recommend keeping them separate, non-separate platforms. Otherwise, it gets confusing for employees the way that both are utilized, and it’s really a best practice to have a purpose-built LSA that’s really forward-looking and it shows the company’s investment in that benefit

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // Great. Marine asks, can employees have multiple accounts? HSA, FSA, and LSA? And she’s also got a follow-up question for that.

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Yes, you certainly can if you’re U.S.-based employees, that’s very, very common. The one area, Marine that you can’t do is co-mingle those accounts. So regulatory aspects of the HSA, FSA make those, so those are very distinct. Whereas, LSAs really the sky’s the limit. If you want to offer a certain benefit to your employees through the LSA, as long as you have it in the plan, and they can get a receipt for it, it can be adjudicated and approved.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // That’s great. And then she asked at what rate is an LSA tax and where can she find that information?

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Very good question. So you have pre-tax and post-tax for the purpose of this question, let’s assume that it’s a taxable benefit such as a gym membership. That’s going to be taxed at the appropriate income tax rate based on that employee’s regular taxation. So tax bracket, where they’re located, what country they’re in, all of that goes into that tax rate.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // Great. And Sarah C asks, what are some of the more innovative ways companies are using LSAs outside of basic wellness?

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Very, very good question and something that’s been evolving over the past 18 months. So historically it’s been very common for companies to offer gym memberships to their employees. It’s well known that healthy employees are better employees, leads to less health-related issues as well. So that’s been very common, but over the last 18 months, we’ve seen people go from just gym memberships [inaudible] a vast array of things in their offering. Things, not only online wellness, like I mentioned, like a peloton or Les Mills, but also the complete wellbeing of that individual. Things that are focused on mental health, things that are focused on financial wellbeing, other aspects of health, in addition to fitness. Things like healthy meal delivery services or subscriptions to health coaches. So those are our areas, but we also see things like I mentioned earlier, child care, elder care. For folks that don’t have kids, they may want to have pet care instead of those types of benefits. So it’s really all-encompassing, whatever you want to offer, as long as they can get a receipt, it can be provided in an LSA.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // Michael wants to know, we’re thinking about adding athletic wear like shoes and nutritional support for employees as part of our total wellbeing program. Is that something we can do easily or is there a manual component?

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Very good question, Michael. And we want this to be easy for your employees. So one of the things that a purpose-built LSA is going to have is the ability to feature certain products or services. And I know, speaking for us here at Espresa, we actually have a whole benefit discount, a discounted store where people can go and find Nike shoes or Fit bit’s at a significant discount. Or well-being apps like the call map at a significant discount. Why that’s important, Michael is let’s say you’re investing, we’ll say a $1,000 a year, $250 a quarter. And those $250 can be used for shoes or wellbeing coaching, or wearables like Fitbit. Your money is going to go further with your employees, enhancing the benefit at no extra cost to you by having that whole discounted store. And additionally, we can feature any of, the products or services that you want.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // And his follow-up question is also, can we have different LSAs for different campuses? We want a different benefit for our Utah office versus Austin versus Toronto, for example.

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Absolutely. That’s a very good question. And one of the aspects that we’ve historically done with a lot of our clients that have wide geographical coverage is maybe in Utah, you have a partnership with a local gym, they have a number of different locations. And that’s not only the featured gym, that’s the one employees can use if they want to reimburse for that, we can set that up in the plan. It is an audience smart platform, meaning that it knows where your folks are and what campus they belong to. So in Utah, they’d see the specific offering in Utah.

Maybe you have something completely different in Austin, and you want to show that. Or maybe in Utah, you have the ability to have discounted lift tickets at a local mountain to go skiing. We can feature that and make sure that that comes out of the LSA. And then taking it a step further to global reach, we also support something called the Purchase Power Parity Index. So that, let’s say you’re not just in two states, but you’re in 30 or 40 countries, all of that’s going to be automated for you. So if you’re giving a thousand dollars in the U.S., we’ll have that same purchasing power in a place like India, China, France, et cetera.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // With the contractor market still booming these days, this is a question from Sarah C. Do LSAs have varying levels like $500 per year if for our full-time contractors and maybe $1,500 a year for our full-time employees.

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Yeah. That’s very common both with contractor work and with part-time employees. That’s a very good question where in addition to the global parity, we can break down label folks full-time, part-time, contractor, intern, et cetera. Again, really, the sky’s the limit when it comes to LSAs because they have that flexibility. They’re not regulated, like traditional plans, by the U.S. government. It’s really up to each company to design with a partner, what that’s going to look like and how that’s going to look to their workforce.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // That’s awesome. And then Brian wants to know, how do you build consensus with the C-suite? And I know we’re coming up against time. And so I think that’s a really interesting question with the consensus piece, but then also does Espresa help with plan-design that may also assist in that consensus?

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Yeah, that’s a great question. And one that comes up all the time where we want to offer these new benefits to our employees. How can we get support from our CFO, CEO, et cetera? And the key really comes down to particularly right now, how are we going to attract, engage and retain talent across our workforce? And what we’ve seen with LSAs is that offering this as a benefit is a great way to differentiate yourself from other organizations and not only attract new talent, but retain the talent you have by making it very visible that this is a benefit that’s available to them. It’s no secret, we have a labor shortage in the United States, the world economic forum said 41% of current employees are considering quitting. So just under half of the current employees. So if you have a tool in your toolbox, that’s going to help up with that, such as an LSA, oftentimes the C-suite really buys into that.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // That’s awesome. I have one more that I was going to try and sneak in if we have a moment. And that was outside of wellbeing, and this is from Brian also. Do LSAs fit with other programs like rewards?

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Yeah, absolutely. That’s very common when you look at your total rewards bucket and the various offerings that you have. You may have LSAs, you may have rewards. It’s a great way to also, if you’re doing rewards currently, expand your offering beyond a limited scope, because LSAs do really have that infinite reward capability. It’s just up to how they’re designed to determine that.

Sylvia Flores, Head of Brand, Marketing + Culture, Espresa // Awesome. Then that is all of the questions from our lovely participants today.

Brandon Markham, Vice President, Workplace Culture Solutions, Espresa // Well, thank you everyone for joining us today, we really appreciated you coming to this educational series. Do know this was part one of four, so we’d love for you to join us in the next few weeks. We’re going to get much deeper next week, into what’s possible with an LSA. And share even more of what we’re seeing the trends in the marketplace, going to both what we’re seeing with our clients and what we’re hearing from brokers. If you’re a global company, you definitely don’t want to miss the 18th, where we can talk about how expansive, on a global scale, an LSA can be for your organization and your employees. And then to bring it home on the 30th, we’re going to talk about how we make this fun and really improve the impact on your employees, so they see this as a fantastic benefit by gamifying, really getting creative with LSAs. So we hope you continue to join us. If you have any questions, don’t hesitate to reach out. We’re happy to jump on the phone with any of you and take a deeper dive into this.