Because lifestyle spending accounts are post-tax accounts, the IRS does not mandate eligible expenses; rather, the employer decides what they'd like to cover for employees.
Lifestyle spending accounts have been around for years, but have gained traction in recent weeks as a result of COVID-19's impact on business. These accounts provide a way for employers to assist employees with unexpected expenses during an emergency or change in their routines.
In this Q&A-style post, we'll give you a baseline overview of these accounts, how they work, how employees use them, and why they can be a helpful resource to employees in times of need.
Lifestyle spending accounts: What are they?
Sometimes known as Lifestyle Accounts or Lifestyle Benefits Programs, these are accounts funded exclusively by the employer, after taxes have been taken out. Because they are post-tax accounts, the IRS does not mandate eligible expenses; rather, the employer decides what they'd like to cover for employees.
Note: During a time of widespread disaster, personal, family, living, and other expenses under a Lifestyle Spending Account may qualify for tax-free reimbursement under Section 139 of the IRS Disaster Relief Payments tax law. Check with your tax and legal counsel to determine if your program qualifies for the tax exemption.
What types of expenses do these accounts cover?
In short, these accounts can help employees pay for basically any expenses, up to an employer-determined limit. Due to the recent COVID-19 pandemic, many employers are opting to use these accounts to help assist with day-to-day expenses that may have become difficult for employees to pay during this time—whether it's groceries, utilities, child care, rent and mortgage payments, or other bills.
Wait, I thought lifestyle spending accounts are for wellness or fitness services!
Not necessarily, though many employers use them that way to attract and retain candidates looking for more than your standard medical, dental and vision benefits. Health and fitness services are common, such as gym memberships and personal training, as are ski passes and fitness equipment. But lifestyle spending accounts can also apply to transit, child care, home office equipment, cell phone bills, pet care, and more…just to name a few. Again, since a lifestyle spending account is not a pre-tax benefit, the employer has more freedom in determining categories for post-tax reimbursement.
Who is eligible to use these accounts?
Any employee can use these accounts, regardless of their full- or part-time status. They do not have to be a part of their employer's group health plan.
Employers can also offer these accounts in a tiered approach based on employee status. For example, employers can offer a higher dollar amount to hourly workers who have experienced a reduction in hours (compared to full-time employees, for example).
Why would my organization offer one of these accounts?
Given the current health crisis, for employees, these accounts are great for those who aren't eligible for traditional benefits, such as part-time or contingent staff who are hit hard by the pandemic. When the administration of the benefit is outsourced to a provider, it further offers a level of privacy for the employee. These accounts are also highly flexible and expandable as needs grow and change, allowing the benefit to accommodate the unique needs of multiple individuals.
For employers, these accounts can be set up and implemented quickly, as the post-tax nature of this offering eliminates cumbersome regulations. The "per-enrolled" employee pricing also makes this benefit affordable for small businesses.
Do these accounts count as eligible expenses under COBRA?
These accounts are not considered an eligible expense under COBRA. For more on COBRA-eligible expenses, you can see this post.
How are expenses reimbursed?
Lifestyle spending account expenses can be reimbursed through payroll, direct deposit, or check.
Should my organization be offering these accounts?
With regards to COVID-19, organizations with the following populations may want to consider these accounts:
- A large population of hourly workers who've experienced reduced hours
- A high rate of employees who have children (to provide additional child care assistance)
- Those who have been hit hard financially by COVID-19, such as teaching, child care, hospitality, manufacturing, and health care
Jaclyn Cooksey ([email protected]) is the managing editor at ConnectYourCare, an industry leader in tax-advantaged benefits and COBRA administration. ConnectYourCare does not provide tax or legal advice. This information is not intended and should not be taken as tax or legal advice. Any tax or legal information in this notice is merely a summary of ConnectYourCare's understanding and interpretation of some of the current tax regulations and is not exhaustive. You should consult your tax advisor or legal counsel for advice and information concerning your particular situation before making any decisions.
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