Alegeus expert Duke Janssen, VP, Strategy, recently led a webinar in which he explained the ins and outs of lifestyle spending accounts (LSAs).

Notably, the market opportunity for these post-tax benefit accounts is large and growing; LSAs are forecasted to grow 10.6% annually over the next five years. Among the key factors driving this growth are a competitive labor market; a post-pandemic appetite for more personalized, “whole-health” benefits packages; and inflationary pressures driving employers to seek alternative ways to attract and retain talent without implementing permanent wage increases.

In other words, the notion of a one-size-fits-all benefits package is fast becoming obsolete. Today’s employees expect benefits tailored to their needs and values, while their employers seek to contain rising costs. Lifestyle spending accounts offer a way to satisfy everyone.

In a conversation aimed at empowering benefits administrators, Duke explained the tremendous potential for the LSA market and offered tips for capturing this new wave of opportunity. Then he fielded a wide range of insightful questions from Alegeus partners, including the following:

MCC stands for merchant category code. These are overarching merchant categories that various retailers fall under. There are about 1,500 MCCs that exist, and Alegeus has worked extensively with our fraud prevention team to identify a list of about 100 MCCs we make available to build our lifestyle programs. Our partners also have the ability to submit a form to request additional merchant category codes if there’s something they think would help make a program better.

We’ve done our best to find the broadest category codes that provide the most value while also doing our best to protect our partners. That doesn’t mean, though, that these categories are completely unlimited. There are controls that our fraud prevention team puts in place, as well as controls applied by MasterCard® or another third party that bring additional protection.

Some of the most common benefits we see being set up are related to fitness or wellness – for example, clients using an MCC that applies to membership clubs. In most cases, we’re seeing them use a separate card, independent from the healthcare accounts card, which serves a couple purposes. One, it keeps the healthcare and the non-healthcare spend separate. And two, it also allows partners to brand that second card in a way that’s unique to the lifestyle program. So if the account holder is using two different cards, they’re not questioning which one is their FSA versus which one is their lifestyle account.

Our best practice is to offer the lifestyle account on a separate card. As mentioned previously, the second card allows for healthcare and non-healthcare spend to remain separate from a compliance standpoint. In some cases, it may make sense for an employer or group to stack their accounts. Much like you would have an FSA and a dependent care and a commuter account all on the same card, lifestyle could also be on that card. But there are spending restrictions pertaining to IIAS where a transaction may get declined — for example, if you went to Target and tried to buy a prescription and a lamp, the transaction might be declined because the lamp isn’t eligible as a healthcare purchase. So we do recommend using the second card for the LSA.

The short answer is yes. But to expand on that, there are a couple different ways you can set things up. One is through the use of service categories within our WealthCare Administration system. So you could set up specific categories, one for health and wellness, one for education, one for adoption, and you could set limits on each of those categories. Or, you could put it all into one bucket and apply a spending limit that includes a variety of different categories.

It really depends on what the benefit is for. Some of the minimums we’ve seen fall around the $150 to $200 annual mark. But if, say, you’re offering an adoption benefit, $150 isn’t going to go very far compared to something like a gym membership. So it just depends on what the employer is looking to offer.

Do LSAs have plan years like an FSA? Or are they more like an HSA — ongoing with no end date?

The overwhelming majority are utilizing plan year — the reason being that employers like to be able to recoup unused funds at the end of the year. In the case of things like adoption, surrogacy or fertility, those benefits often have a rollover component like a lifetime maximum that can be spent against the plan. But the typical use case is definitely plan year.

Yes. It can be set up just like an FSA. It’s completely flexible in terms of what you’re trying to accomplish with the program. The vast majority of plans we see use some kind of run-out or grace period.

We do know that claims have a place within the lifestyle realm, especially if you’re trying to get down to the level of only wanting to allow a very specific item. For example, one of the benefits we’ve heard requested is that an employer only wants to allow running shoes. In the case of a card, there’s not an MCC that corresponds directly to running shoes. So having a claim-based option for that specific item can help the program. In general, we believe the value that cards provide is something of a differentiator because of the ability to swipe at multiple terminals and have those auto-adjudicated transactions happen. But we also understand allowing claims for specific, one-off solutions can be valuable.

The best way to answer this is in terms of general compliance. The nice thing about lifestyle is that since this is post-tax, non-healthcare spending, the plan documents or compliance requirements are a lot less than they would be for CDH accounts. For example, LSAs typically don’t need to have ERISA compliance. There are, however, tax implications at the end of the year. Usually the spend is taxed, rather than the amount funded. So if you fund $500 but the participant only spends $250, the $250 is what would be taxed. We always recommend consulting a tax advisor on this one.

Another good question. Lifestyle and Medicare supplemental benefits can walk a similar line in terms of spending categories. They’re trying to accomplish two different things, but they share some commonalities in terms of what is eligible. But generally speaking, we think of them as two different market opportunities — two different distribution paths, if you will. Both exciting opportunities.

Alegeus has a number of resources available in terms of lifestyle plan designs, as well as recommended best practices. We recommend speaking to an Alegeus account representative to walk through some discovery questions and then dig in with you to design a unique, customized approach.

If you would like to hear Duke talk through these questions (and more), you can access a recording of the full webinar here: WEBINAR: Lifestyle Spending Accounts.