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Lifestyle Spending Accounts


Christine Roberts
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Lifestyle spending accounts are a trending after-tax benefit consisting of employer after-tax reimbursement of lifestyle products and services such as personal coaching, fitness wear and gear,  pet boarding, personal training, etc. Employers choose a yearly maximum and only pay out documented reimbursement requests, up to the maximum limit.  Employer deducts reimbursed amounts as taxable compensation to employees.  Just wondering if anyone out there has formally classified this "benefit" as either a payroll practice, benefit plan, or addressed potential constructive receipt issues.  

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I am sorry I am not answering your question....

I just have to know who likes this idea as a benefit that is a "trending" benefit? 

Am I understanding how this works correctly?  Say we have employee A and employee B.  They both do the same job and get paid exactly the same in terms of salary and benefits except for this program.  A has a pet they board and B doesn't.  So A's W-2 will reflect a higher gross and taxable wages because of the reimbursement of the pet boarding?   If so, that means a person's total compensation is based on a personal choice to own and board a pet and not work place actions, is that correct? 

Like I said I am not answering your question at all so if you want to ignore me as I am being way off topic there will be no hurt feelings on my part.   This board collectively can hijack a topic and I am as guilty as the next person.  I am however curious about my questions enough to write them. 

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@Christine Roberts I agree, these are on the upswing. As soon as the FSA TPAs start offering it, you can tell there's at least a push to create a market for them.  I've heard from a couple clients that they are popular in Canada and that's why they're starting to be offered here.

My basic feeling is it doesn't really matter how you classify an LSA because it's not an ERISA benefit and it's not tax-advantaged.  So there is not set legal scheme we're trying to make it operate within.

The constructive receipt question is one where I think the IRS is going to have to weigh in at some point on both LSAs and employee rewards programs.  They both offer a bucket of funds (sometimes with a specific "coin of the realm" in the form of points that act as funds) that can be used or converted to purchase items.   

While there is an argument that the doctrine of constructive receipt should apply to make the amount available taxable (as opposed to the amount used/reimbursed), I have never seen an employer actually take that position in practice.  Every employer I have seen with this type of arrangement has made only the amount used/reimbursed taxable to the employee. 

But I agree that in theory the §451 constructive receipt rules seem to potentially apply to make the amount made available taxable.  This is the best post I've seen tackling that issue: https://www.thetaxadviser.com/issues/2011/jan/takacs-jan2011.html

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Brian, thanks for the comments and the link, and yes, like the Maple Leafs and poutine, LSAs originated in Canada.  ESOP Guy - I understand your viewpoint.  The roster of reimbursables for LSAs is long, so the pet-free employee can use their budget to purchase some $100 Lululemon yoga togs or get cosmetic dentistry.  FWIW.  

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I have reviewed these issues closely for a client within the LSA industry.  Whether the benefits are subject to ERISA and/or wellness regulations depends on what is being offered.  I have advised clients that the constructive receipt rules do apply, regardless of whether the employee uses/receives the entire amount available during the taxable year.  Basically, absent the use of a cafeteria plan (which is restricted to certain benefits) or a deferred compensation/retirement plan, employer-provided benefits are taxable once they are made available, unless they fall within a specific fringe benefit section of the Internal Revenue Code.  Finally, as you mentioned, employers tend to make a long list of items available for selection, so that it is not just pet owners, for example, who receive the bump in compensation.  I hope that helps.

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You people seem to be over thinking the example in the details and are missing the main point.

I find the idea that my compensation will be in part based on if I do behaviors my employer approves outside of work odd at best and offensive at worst. 

Who are they to judge if my idea of hobbies, ways to better myself, deciding to own a pet, other lifestyle choices I make.... are worthy enough of their approval seen by given cash to people?  

Just pay people and they can spend THEIR money as they see fit and stop making me go and find out if my employer approves of my spending/lifestyle or not.  

To get real blunt (if I haven't crossed that line already) I would find this benefit a negative.  I might not refuse to work for an employer that offered it but if I was making a list of good and bad things about the company as I was making a decision to work for them this would be on the bad list.  It points to the idea they are too paternalistic.  I don't mind a boss but I don't need nor want a new parent. 

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I haven’t looked at it from a tax perspective, but, seems to me that the better option would be to set up the same amount to everyone as a set of credits, as a dollar amount per capita, or a percent of pay.  Perhaps they can be “funded” by a traditional profit sharing award - tied to corporate, or team and/or individual performance.  Then, to the extent the individual dies not allocate them through the cafeteria plan to items eligible for tax preferred treatment, or to a 401k, they would be paid as wages - leaving choice and control up to the individual.  I don’t have them at hand, but I know there are behavioral economics studies showing improved engagement where individuals have choice and control - where outside of tax preferences, that is maximized as cash.

most importantly, I don’t want to be in the position as an employer, of making decisions on what qualifies.

By the way, I feel the same about taxable reimbursements of student debt - aren’t those folks already earning wages that reflect their skills, performance?  I don’t support any such items - but, if I had to, I would favor reimbursement to cover debts for those who did not graduate.

 

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