Lifestyle Spending Accounts & Emergency Saving Accounts. Unveiling the Differences

Last Updated on November 6, 2023 by VantagePoint

Amid the challenges posed by the pandemic, inflation, economic downturn, and increasing debt, the financial well-being of employees appears to be facing considerable strain. Given these pressures, some individuals are taking a closer assessment of their expectations from employers. While higher compensation is desired, the emphasis is now shifting toward the degree of flexibility in the support and benefits offered by the company. Consequently, businesses themselves are reevaluating their financial well-being initiatives. They are exploring inventive approaches to assist employees in addressing immediate financial requirements without substantially inflating benefit expenses.

Can these initiatives genuinely have a significant impact on people’s lives and aid them in covering essential expenses? Let’s find out!

Lifestyle Spending Accounts & Emergency Savings Accounts serve distinct purposes in personal finance. The former caters to discretionary spending for enjoyment, while the latter acts as a safety net for unexpected financial hardships. Both contribute to fostering overall financial stability and promoting responsible money management.

What is a Lifestyle Spending Account (LSA)?

A Lifestyle Spending Account (LSA) is a benefit provided by employers that enables employees to allocate funds for discretionary expenditures. These accounts are customizable and serve various purposes, covering expenses such as childcare, wellness programs, transportation, home office equipment, and more. As per Mercer, 70% of respondents to a survey said that they are considering adding an LSA to their benefits package.

The employer establishes the funds and also sets the guidelines for how the money can be used. LSAs have demonstrated their ability to enhance employee morale, loyalty, and productivity. Furthermore, they empower employees with the autonomy to choose benefits that align with their unique lifestyles.

This benefit program can be combined with a Flexible Spending Plan (FSA), which enables employees to allocate a portion of their income before taxes to address particular expenses associated with their well-being and lifestyle. The primary advantage of an FSA lies in its tax-favorable nature. Employee contributions consist of pre-tax funds, resulting in the exclusion of federal income taxes on these funds. Simpler to manage compared to other employee benefits, you also have the option to engage a benefits administrator to handle your LSA.

What are the potential uses and benefits of a Lifestyle Spending Account (LSA)?

LSAs are commonly employed to address wellness expenditures that fall outside the coverage of existing health plans. These expenses encompass activities like fitness classes, gym memberships, spa treatments, as well as services like childcare. 

Additionally, Lifestyle Spending Accounts extend their coverage to other lifestyle-oriented aspects such as online streaming subscriptions, food delivery services, pet-related costs, home office essentials, and similar items that contribute to a holistic, healthful lifestyle – catering to both physical and mental well-being. The precise scope of usage will be contingent on the specific plan presented by the employer.

LSAs offer benefits to both employers and employees, granting employees the authority to explore and opt for valuable benefits that align with their lifestyles and requirements. Employers reap advantages like a versatile benefits strategy, boundless customization possibilities, benefits budgets resistant to inflation, and the capacity to adapt to the evolving needs of their workforce.

Reasons why companies may want to offer Lifestyle Spending Accounts benefits

Here are the top 10 reasons why companies may want to offer Lifestyle Spending Account benefits:

1. Attract and retain talent. LSAs provide valuable pre-tax benefits that employees value as part of their total compensation package.
2. Increase employee satisfaction and morale. LSAs give employees more flexibility and control over their benefits.
3. Lower healthcare costs. Encouraging preventative care and lifestyle changes can reduce long-term healthcare spending.
4. Easy to administer. LSAs piggyback onto existing spending account infrastructure with minimal additional overhead.
5. Tax savings for employers and employees. Contributions and qualified spending come out pre-tax, saving 7.5-30% depending on the tax bracket.
6. Optimize spending by paying solely for utilized services – ensure funds are efficiently utilized: Should an employee utilize only $50 out of their allocated $100, the company stands to conserve resources.
7. Supports work-life balance. LSAs help fund vacations, coaching, classes, and equipment for hobbies outside work.
8. Expand benefits offerings. LSAs complement traditional benefits and broaden the value proposition to a changing workforce.
9. Positive employer branding. LSAs show employees the company values overall well-being, not just healthcare.
10. Reduce future liabilities. Healthy lifestyles mean lower insurance claims and less spending on disabilities down the road.

Lifestyle spending accounts – eligible expenses

Below are several typical categories frequently encompassed within customizable Lifestyle Spending Accounts:

• Gym memberships
• Home exercise equipment
• Fitness apps and trackers
• Nutritional supplements
• Meditation and mindfulness apps
• Online therapy
• Massages
• Counseling or coaching services
• Home office equipment and technology
• Ergonomic furniture
• Childcare and personal care costs
• Memberships for hobbies and leisure activities
• Continuing education classes
• Career coaching or mentorship programs
• Certifications and professional memberships
• Student loan repayment
• Charitable donations
• Financial advising or coaching
• Family support like eldercare
• Telehealth and virtual doctor visits
• Grocery, meal, or prescription delivery

What is an Emergency Savings Account (ESA)?

Whether referred to as emergency savings accounts, emergency fund accounts, rainy-day accounts, or even sidecar accounts, employers are increasingly acknowledging this savings approach as an efficient means to assist employees in setting aside funds that can be accessed later during emergencies or crises.

An emergency fund is meant to be utilized. Unlike a long-term savings account that requires plan participants to navigate through paperwork and regulations to access funds, these funds are designed to be drawn upon. The purpose is for them to be gradually or even completely used up as emergencies occur. 

Employers who aim to maximize participation rates in their employer-sponsored Employee Savings Accounts (ESA) employ the following strategies to boost engagement:

• Concentrating solely on emergency savings, without combining an Emergency Savings Account (ESA) with a long-term retirement account.
• Facilitating hassle-free onboarding by offering invitation-based sign-up.
• Ensuring employees possess complete access and control over all funds within the account.
• Establishing a minimum contribution amount per paycheck for participation.
• Implementing incentives to boost engagement, such as sign-up bonuses, per-paycheck matches, or milestone bonuses.

What expenses can be covered under Emergency Savings Accounts

The main purpose of an emergency savings account is to give individuals a financial cushion for unplanned circumstances or crises. These kinds of accounts are meant to pay for things like medical issues, car repairs, unemployment, home repairs, or other unanticipated costs that could arise.

Typically, employers who offer emergency savings accounts will set up automatic deductions from each paycheck directly into a savings vehicle of the employee’s choosing. The regular deductions aim to gradually grow an easily accessible reserve to draw from in case of financial emergency or loss of stable income.

Having that pre-saved buffer can provide peace of mind for employees dealing with life’s unforeseen bumps on the road, whether it’s a large unexpected bill, periods of lost wages, or costly property damages. The goal is to establish a dependable rainy day cushion through low, automatic contributions over time.

Differences between Lifestyle Spending Accounts & Emergency Savings Accounts

If you’re an employer grappling with the choice between these employee benefits options, VantagePoint boasts a team of seasoned professionals. 

Our experts are primed to provide consultation and guidance on implementing either of these two benefits. With extensive experience in benefits administration, we’re here to assist you. Reach out to us or schedule a demo today!