More companies are adding lifestyle benefits to their total comp packages for two reasons.
For one, 93% of workers say workplace well-being is equally as important to them as salary. And two, meeting that demand brings higher engagement and job satisfaction for a relatively low per-employee cost.
So how do you actually offer them? The most practical vehicle is a Lifestyle Spending Account (LSA).
According to our 2026 Lifestyle Benefits Benchmarking Report, 64% of Compt customers offered an LSA in 2025.
LSAs are less complicated than pre-tax accounts with rigid IRS rules and more flexible than individual perks (e.g., a vendor-specific gym reimbursement). A 25-year-old might spend their allowance on a gym membership and online courses. A working parent might use it for childcare and food delivery.
But because they’re designed to accommodate everyone within the same policy framework, a natural question emerges: Does that mean everything is eligible?
The short answer is … no.
In today’s guide, I’ll walk you through everything you need to know about LSA-eligible expenses, plus what you can’t include in your program.
Who is eligible for an LSA, and how is it structured?
Because LSAs are employer-funded and employer-designed, eligibility is entirely up to you. There’s no IRS mandate telling you who qualifies.
That said, most companies follow a similar structure when defining who can access LSA funds:
- Full-time employees are almost always eligible. Part-time and contract workers may also qualify, though often with a smaller allowance that reflects their hours or employment terms.
- Most orgs also set a waiting period for new hires. This is somewhere between 30 and 90 days, mirroring the approach you’d take with health insurance or retirement benefits.
Beyond the “who,” you also control the “what” and “how much.”
You define the categories from which employees can spend. According to our 2026 Lifestyle Benefits Benchmarking Report, the most common are health and wellness, office equipment, professional development, cell/internet, commuter, food, and caregiver/family expenses.
And you determine the allowance allocated to each employee, which can vary based on role, tenure, location, or employment status.
In practice, that flexibility only works if your rules are enforced automatically. With Compt, eligibility can be defined using attributes like country, department, employment status, or hire date, and synced directly with your HRIS or HCM. When employee attributes change, the platform can update eligibility based on the parameters you’ve configured, so employees only see the categories and amounts available to them.
Want to see for yourself? Request a demo of Compt.
Why eligibility clarity matters more than you think
The level of control you get with an LSA is a double-edged sword. On one hand, it lets you design a benefit that genuinely fits your people and your budget. On the other, it means the clarity of your policy depends entirely on the work you put into defining it.
Vague policies create compounding problems.
An employee submits an expense that seems reasonable but doesn’t quite fit your categories. HR makes a personal judgment call. Then a month later, someone else submits something similar but gets a different response.
Employees talk; one person’s approval becomes another’s expectation. And Finance probably won’t flag the discrepancies until your quarterly review. What started as a minor ambiguity is now a recurring administrative burden and potential audit liability.
Unclear policies cost more to administer.
Companies with clearly documented policies spend significantly less time on benefits-related inquiries and disputes. Employees who understand what’s covered submit fewer out-of-scope requests and approvers who have clear guidelines resolve claims faster.
Employees value benefits they actually understand.
Many of your employees won’t enroll in your lifestyle benefits program at all if they don’t understand what those benefits are and how to use them. Low participation negates the engagement and retention upsides to offering an LSA in the first place.
What’s typically eligible under an LSA?
LSA-eligible expenses include those that improve your employees’ physical, mental, and financial wellness, as well as those covering broader lifestyle-related expenses associated with professional development, commuting, home office, and family care.
Let’s dive into each category so you know what it entails.
Physical wellness
This is the most common category and the most straightforward for employees to understand. Your team can use it for gym memberships, fitness classes, sports league fees, personal training, and fitness equipment like weights or yoga mats.
Some plans also include wearables like fitness trackers, though these sometimes fall into gray areas depending on how you define the category.
Mental wellness
LSA-eligible mental health expenses include therapy sessions, counseling, psychiatry visits, and mental health apps like Calm or Headspace. Most employers also cover stress management programs, resilience training, and mindfulness workshops.
Financial wellness
66% of employees told Morgan Stanley that financial stress negatively affected their work and personal life. Because that, in turn, affects performance and retention, more employers include financial wellness as an LSA category.
A team member might use their LSA allowance to pay for sessions with a financial planner, budgeting tools or courses, student loan repayment contributions, or an emergency savings program. A few plans even cover legal services related to estate planning or tax preparation.
Professional development
Investing in employee growth pays dividends in their overall engagement and on-the-job capabilities. If your organization wants to create a culture of continuous learning, this is a natural fit.
The PD category typically covers:
- Online courses
- Professional certification programs
- Conferences
- Industry memberships
- Books
- Coaching
Increasingly, it also includes AI tools and productivity software; in 2025, 20% of all professional development reimbursements on the Compt platform were AI-related.
Pro tip: Unlike most LSA categories, many professional development perks are tax-free. We created Professional Development Pro™ to make requests, approvals, budgets, and tax prep as easy as possible for HR and Finance teams.
Commuting
The average American spends almost $8,500 annually on their commute to and from work. So for employees who come into the office, commuting support makes a tremendous difference.
Nontaxable commuter benefits include public transit passes, parking garage fees, and vanpooling. As part of your LSA program, we’d also recommend including ridesharing services like Uber and Lyft, bike maintenance/equipment, and fuel costs.
Remote work and home office
If your team works at home some or all of the time, they won’t have to commute. But they will have to spend money on things that make their workspace functional.
Office furniture, ergonomic equipment like standing desks or monitor arms, cell and internet subsidies, and tech accessories should all be eligible for LSA spending. And for employees who prefer working outside their homes, cover coworking space memberships as well.
Family and caregiving
On average, family caregivers spend 26% of their income on out-of-pocket caregiving expenses. If you have a few on your team, chances are they’ll want to use their LSA to ease that financial burden.
Childcare costs, elder care support, backup care services, and family planning resources are the core items in this category. Some plans extend to pet care and broader family-building benefits.
Personal wellness and lifestyle
A lot of times, LSA plans also include lifestyle expenses like hobbies, recreational classes, travel, entertainment, and self-care services like massage or spa treatments. As long as there’s a demonstrable connection to personal growth, stress reduction, or well-being, it’s LSA-eligible.
Our recommendation for Compt users
Within those defined categories, it’s best to make the program as inclusive as possible. Doing otherwise defeats the purpose of offering such a broad and flexible benefit in the first place.
But at the same time, you can be intentional about what you emphasize. If your workforce skews toward early-to-mid-30s employees starting families, highlight the family and caregiving benefits. If you’re trying to reduce burnout, put mental wellness front and center.
What isn’t eligible under an LSA?
While LSAs give you room to design a benefit that perfectly fits your workforce, some expenses are off the table.
The following are not qualifying uses of LSA funds.
Medical expenses
LSAs are not HSAs, nor are they any other kind of health account. Expenses that belong in an HSA, FSA, or HRA should never be reimbursed through your LSA. This includes doctor visits, prescriptions, medical equipment, and health insurance premiums.
Mixing these categories creates huge compliance issues and confuses employees about which account to use for what.
Gift cards and cash equivalents
Anything that looks like disguised compensation is a no-go. Gift cards, prepaid debit cards, and cash equivalents don’t qualify because they’re not tied to a specific well-being expense.
They’re just money in a different form, and they undermine the entire point of an LSA: supporting employees in defined lifestyle categories, not handing out untraceable funds.
Expenses without documentation or receipts
No receipt, no reimbursement. An easy way to make sure employees don’t purposely or accidentally misuse the program is to require proof of purchase for every expense submission. This makes for a consistent experience across your entire team.
For example, Compt’s optional claim verification tools can flag mismatches between receipt details and submitted claim information (like vendor name, date, or amount) for review before reimbursement is approved. Administrators can choose to manually review certain categories (like nontaxable expenses) while automatically approving others, depending on their compliance posture.
In the case of nontaxable lifestyle benefits, it’s also a compliance requirement; you’ll need to prove, for example, that an employee’s commuting costs fall under “transit pass fees” or “parking,” not rideshare services (which are taxable).
Items already covered by other benefits
Double-dipping isn’t allowed. If you already subsidize employees’ gym memberships through another program, they shouldn’t be able to claim it again through the LSA. The same goes for any expense that’s reimbursable through a different benefit.
This gets especially risky when pre-tax accounts like FSAs or HSAs are in the mix. If your benefits admin doesn’t notice double-dipping between lifestyle and medical expenses, the whole plan could be considered noncompliant. Then, everyone in the company could lose the benefit.
Goods or services from non-approved vendors
Most LSA plans — including Compt’s — are vendor-agnostic (that’s part of the appeal). But some companies restrict certain vendors for legal, ethical, or practical reasons.
For instance, you might exclude purchases from businesses that conflict with company values, or block reimbursements from vendors in certain countries because of compliance concerns. These restrictions should be rare and clearly communicated.
Personal expenses outside plan categories
An LSA isn’t a slush fund. The expense needs a clear link to well-being, growth, or another objective your plan supports. That means luxury goods, general retail shopping, or anything an employee just happens to want isn’t eligible simply because they’d enjoy having it.
Gray areas in LSA eligibility
Unlike HSAs or FSAs, LSAs aren’t governed by a U.S. tax code bright-line list of eligible expenses. They’re post-tax, employer-defined benefits, meaning it’s you who gets to decide what qualifies and must articulate that decision clearly.
Every company’s LSA will be slightly different, and that’s why gray areas show up so often.
Dual-purpose expenses
Some purchases serve both work and personal use, like a phone for remote work that also gets used for personal calls. These situations require different approaches depending on the item.
Using the cell phone reimbursement example, what’s interesting is that per IRS guidance, you don’t have to track exactly how many business vs. personal minutes you use to get that tax-free treatment. It’s nontaxable as long as it’s used to stay reachable for emergencies or client calls.
As for items that were always taxable to begin with, you have more room to work with. You could (a) reimburse these items at full value if they fall within a stated category or (b) cap reimbursement at, say, 50% to acknowledge the personal use.
Either works, as long as you’re consistent.
Category boundary questions
Some devices have multiple functions. A fitness tracker’s intended benefit is wellness, but a smartwatch adds messaging, calls, and apps that don’t map cleanly to a benefit category.
LSAs list broad categories like physical wellness and mental well-being. Most eligible lists include wearable fitness trackers and exercise gear, without specifying limitations on additional functionality.
The solution here is to use functional intent instead of feature lists. For example:
- If the primary claimed purpose is wellness, accept it (with optional documentation of how it supports health goals).
- Make a note in your policy that extra non-wellness features don’t disqualify.
- Add examples so reviewers have precedent: “Approved: fitness wearable used to track activity goals; Not approved: smartwatch purchased solely for notifications.”
Vendor and format ambiguity
We see this one come up a lot in the professional development category. A lot of employees want professional or personal growth courses from nontraditional education providers like Skillshare, MasterClass, and online workshops.
Just like the other examples, this really only gets complicated when you’re considering what’s taxable vs. what’s not.
The solution is to create education eligibility tiers in your policy:
- Tier A (nontaxable): Traditional accredited education tied to career progression (certifications, degrees).
- Tier B (taxable): Skills-building courses regardless of provider; reimbursable if tied to a clearly articulated learning goal.
And of course, use a tax-compliant benefits software that automatically categorizes taxable and nontaxable reimbursements.
It’s important to note that LSA platforms don’t withhold taxes themselves. Instead, they calculate which reimbursements are taxable vs. nontaxable, apply relevant limits (such as annual professional development caps or monthly commuter thresholds), and generate structured payroll reports. Those reports sync with your payroll provider, where tax withholding is applied based on each employee’s tax code and country-specific requirements.
Examples of taxable vs. nontaxable LSA reimbursements
While exact treatment depends on how the benefit is structured and reported, here are common examples:
Often nontaxable (when structured properly):
- Qualified commuter transit passes (up to IRS monthly limits)
- Certain professional development expenses (up to the annual $5,250 threshold)
- Employer-provided cell phone reimbursements when primarily for business use
Typically taxable:
- Gym memberships
- Food delivery
- Rideshare services
- General wellness stipends not tied to IRS-qualified categories
The distinction isn’t just the category name; it’s whether the expense qualifies under specific IRS rules and how it’s reported through payroll.
For more details, see “Which Fringe Benefits Are Taxable and Nontaxable?“
Timing and frequency issues
Someone buys a yearly gym membership before the LSA goes live and then wants reimbursement after the plan starts. Should that count? Again, completely up to you, which is why clear timing rules are so important.
A good place to start:
- Plan effective date eligibility: Only expenses incurred on or after the plan start date qualify.
- Annual items: Allow prorated reimbursements if the membership covers part of the eligible period.
- Grace periods: If you want to ease the transition, add something like “prorated reimbursement allowed for memberships purchased within 30 days before plan start” to your policy.
Designing an LSA policy that reduces admin and audit risk
You’ll mainly hear about LSAs as post-tax benefits but, as you can tell, the reality’s more nuanced. Flexibility is the main selling point, but it also means you need to get the tax treatment right at the individual expense level.
For example, if an employee exceeds a nontaxable threshold — such as the $5,250 annual limit for certain education benefits — the amount above that limit must be treated as taxable.
During payroll export with Compt, eligibility settings, tax classifications, and applicable limits are rechecked against your configured rules. This creates a final review layer before reimbursement data is sent to payroll.
Not only that, but benefits participation and satisfaction will suffer if you don’t communicate eligibility clearly or make your categories broad enough for employees to use in a way that’s relevant to them.
There are five things our most successful users do differently:
- Be specific in category definitions. “Wellness” is vague; “gym memberships, fitness classes, meditation apps, massage therapy” is clear.
- Set clear documentation requirements upfront. Decide before launch whether you’ll require receipts for every claim, only for claims above a certain threshold, or not at all.
- Communicate eligibility in accessible language. Write it like you’re explaining it to a new hire on their first day, and maintain open access to benefits info.
- Be as inclusive as possible. Broader eligibility tends to drive higher participation and engagement. ButterflyMX’s team spans 10 countries, yet they were able to achieve a near-perfect 96% participation because their benefits covered the entire “wellness” category.
- Build in review mechanisms. Whether that’s a quick manager sign-off or a monthly audit of submitted claims, catching issues before reimbursement is far easier than clawing back funds or explaining inconsistencies during an audit.
For a deeper dive into the compliance side, check out our full guide on Lifestyle Benefits and IRS Compliance.
Compt makes LSA-eligible expenses simple to set up and manage.
The process is easy as 1-2-3:
- Choose your spending categories and set allowance amounts per employee.
- Connect Compt to your HRIS and payroll systems.
- Launch. Employees submit expenses through Compt, which applies your eligibility rules, verifies claims, classifies reimbursements as taxable or nontaxable, and generates payroll-ready reports automatically.
Our customers are up and running within 14 days, and ongoing administration takes, on average, about 30 minutes a month. Jellyvision handles theirs in one day of work per quarter, and TEN7 got theirs down to 5-10 minutes per month.
Want to see how it works? Request a demo and a Compt Benefits Specialist will be happy to show you.
FAQs: LSA-eligible expenses, taxes, and payroll
LSA-eligible expenses are defined by the employer and typically include categories that support employees’ physical, mental, financial, and professional well-being. Common eligible categories include gym memberships and fitness classes, therapy and mental health services, professional development courses and certifications, commuter benefits, home-office equipment, cell and internet reimbursements, caregiving expenses, and certain lifestyle or enrichment activities. The key is that each expense must clearly align with the categories outlined in your written LSA policy.
Ineligible expenses are those that fall outside your defined categories or create compliance risk. Medical expenses that belong under an HSA, FSA, or HRA should not be reimbursed through an LSA. Cash equivalents such as gift cards or prepaid debit cards are generally not permitted because they function as disguised compensation. Expenses without proper documentation, items already reimbursed through another benefit, and general retail purchases with no connection to well-being or professional growth are also typically excluded. Ultimately, eligibility depends on how clearly your program categories are defined and consistently enforced.
Can you give clear examples of taxable vs. nontaxable fringe benefits under an LSA?
Most LSA reimbursements are taxable because LSAs are generally structured as post-tax benefits. For example, gym memberships, food delivery, rideshare services, wellness stipends, and many lifestyle purchases are treated as taxable income and must be reported through payroll.
However, certain expenses may qualify as nontaxable fringe benefits when structured properly and within IRS limits. Qualified commuter benefits, such as public transit passes and parking fees up to monthly IRS caps, may be excluded from taxable income. Certain educational assistance benefits may be nontaxable up to the annual $5,250 threshold under Section 127. Employer-provided cell phone reimbursements can also be nontaxable when the phone is primarily for business purposes rather than personal convenience.
The distinction depends not only on the category name but on whether the expense meets specific IRS definitions and limits. Proper classification and payroll reporting are critical to maintaining compliance.
If I offer a lifestyle perk, does it have to be run through payroll every time?
If a lifestyle perk is taxable, it must be reported through payroll so that the appropriate income and withholding taxes can be applied. Taxable reimbursements are generally treated as supplemental wages and added to the employee’s taxable income for the pay period in which they are processed.
Even when a benefit qualifies as nontaxable, it should still be documented and reported correctly within your payroll and accounting systems. Running reimbursements through payroll ensures proper tracking, correct tax treatment, and consistent reporting. Reimbursement-based LSA models typically generate payroll-ready reports that separate taxable and nontaxable amounts, while payroll systems handle the actual tax withholding based on each employee’s tax profile. The LSA platform itself does not withhold taxes; payroll does.
How should LSAs be accounted for and reported for payroll and tax purposes?
LSAs are usually structured as employer-funded, post-tax benefits. Taxable reimbursements should be reported through payroll and treated as supplemental income. Nontaxable reimbursements must meet applicable IRS requirements and stay within defined limits to maintain their tax-advantaged status.
Best practice is to use separate payroll codes for taxable and nontaxable reimbursements so they can be tracked clearly. Employers should maintain documentation for each reimbursed expense and keep records in accordance with IRS and local compliance guidelines. Structured payroll reports should summarize employee-level reimbursements, distinguish taxable from nontaxable amounts, and track year-to-date totals for benefits with annual limits.
Proper classification and reporting protect both the employer and employees from unexpected tax exposure.
What’s the best way to flag taxable vs. pre-tax expenses in an LSA so payroll processes them correctly?
The most effective approach is to classify each stipend category according to its tax treatment at the program level and apply any relevant IRS thresholds automatically. For example, commuter benefits and educational assistance may qualify as nontaxable only up to specific monthly or annual limits. Once those limits are exceeded, the excess amount must be treated as taxable income.
An LSA platform should track reimbursements, monitor year-to-date totals, and automatically distinguish between taxable and nontaxable portions before generating payroll reports. Those reports can then be mapped to the appropriate payroll codes, allowing the payroll system to apply withholding correctly. Many employers map taxable and nontaxable reimbursements to separate payroll codes to ensure accurate reporting and simplify month-end reconciliation. This layered process reduces manual calculations and minimizes the risk of misclassification.
What happens if an employee exceeds a nontaxable limit, such as the $5,250 annual education cap?
When a reimbursement exceeds a statutory nontaxable threshold, only the portion above the limit should be treated as taxable income. For example, if an employee receives $6,000 in eligible educational assistance in a calendar year, the first $5,250 may be excluded from taxable income, while the remaining $750 must be reported as taxable wages.
To manage this properly, employers need year-to-date tracking and automatic limit monitoring. With Compt, reimbursements that exceed statutory limits are automatically split into taxable and nontaxable portions before payroll export, ensuring that only the excess amount is subject to withholding. This prevents retroactive corrections and reduces audit risk.
For multi-state or international teams, eligibility and tax treatment may vary by jurisdiction. With Compt, employers can define eligibility rules by country, location, department, or employment status, ensuring that employees only see the stipend categories and allowances available to them. When local tax laws differ, reimbursements must be classified according to the rules of the employee’s tax jurisdiction.
In practice, LSA platforms generate structured payroll reports that reflect taxable and nontaxable reimbursements for each employee, while local payroll providers apply withholding according to country- or state-specific regulations. Vendor-agnostic reimbursement models also allow employees to use local vendors in their own currency, which supports global equity without requiring centralized vendor contracts.
Editor’s note: Compt software supports the categorization and proper reporting of benefits according to IRS guidelines, helping businesses maintain compliance. However, Compt cannot provide tax advice, and users should consult their own tax, legal, and accounting advisors when necessary.
