A Small Business Guide to HSAs, FSAs, LSAs, and Employee Stipends

A well-rounded benefits package often includes more than traditional health insurance, giving employers more ways to support their teams. But with several benefit programs available — many with similar names and overlapping use cases — it isn't always obvious which option is the right fit.

Health savings accounts (HSAs), flexible spending accounts (FSAs), lifestyle spending accounts (LSAs), and stipends are among the most common options. While they can complement one another, each serves a different purpose, follows different tax rules, and supports different employee needs.

Generally, these benefits fall into two categories:

• Tax-advantaged healthcare accounts, like HSAs and FSAs, help employees save on eligible medical and caregiving expenses.
• Employer-funded lifestyle benefits, like LSAs and stipends, give employers flexibility to support wellness, professional development, remote work, commuting, and other employee needs.

Understanding how the options compare can help you build a benefits package that fits your workforce, your budget, and your business goals. Read on for an overview of each option.

Health Savings Account (HSA)

An HSA is a tax-advantaged savings account available to employees enrolled in a qualified high-deductible health plan (HDHP). Employees can contribute pre-tax dollars to pay for eligible medical expenses. Employers can choose to contribute as well.

HSA funds belong to the employee, roll over from year to year, and remain with them if they change jobs. Employees can also invest unused balances. These features allow HSAs to help cover both current healthcare expenses and future medical costs.

Key considerations:

• HSAs are available only to employees enrolled in a qualified HDHP.
• Employers can seed HSAs to encourage enrollment in HDHPs.  
• Contributions, investment growth, and qualified withdrawals receive favorable tax treatment.
• Funds roll over each year and remain with the employee if they leave the company.

HSAs are a strong option for employers who offer HDHPs and want to give employees both immediate healthcare savings and a long-term financial resource.

Flexible Spending Account (FSA)

An FSA is another tax-advantaged spending account that allows employees to set aside pre-tax dollars to pay for eligible expenses. Depending on the type of FSA, those expenses may include healthcare costs, dependent care, or certain dental and vision expenses.

Unlike an HSA, an FSA is generally subject to a "use it or lose it" rule, although employers may choose to offer a limited carryover or grace period within IRS guidelines.

Some common types of FSAs are:

• Healthcare FSA: Eligible medical, dental, and vision expenses
• Dependent Care FSA:  Eligible childcare and dependent care expenses
• Limited Purpose FSA: Eligible dental and vision expenses and is often paired with an HSA.

Key considerations:

• Employees typically fund the account through payroll deductions.
• Different FSA types support different eligible expenses.
• Unused funds may be forfeited, subject to plan rules.

FSAs are ideal for employers who want to help employees reduce their taxable income while making healthcare and caregiving expenses more manageable.

Lifestyle Spending Account (LSA)

An LSA is an employer-funded benefit that reimburses employees for eligible lifestyle and wellness expenses. Unlike HSAs and FSAs, LSAs aren't governed by IRS rules that define eligible healthcare expenses, giving employers greater flexibility to decide which categories qualify.

Common eligible expenses may include:

• Fitness memberships
• Mental health resources
• Professional development
• Financial wellness programs
• Childcare support
• Commuting expenses

Key considerations:

• LSAs are funded entirely by the employer.
• Eligible expenses are determined by the employer.
• They offer flexibility to support a wide range of employee needs.
• Reimbursements are generally taxable.

LSAs work well for employers who want to personalize their benefits package and support employee wellbeing beyond traditional healthcare.

Employee Stipends

Employee stipends provide a fixed amount of money to help employees cover approved expenses, such as remote work equipment, commuting, continuing education, or wellness.

Unlike reimbursement programs that require employees to submit eligible expenses for repayment, stipends are often paid directly to employees. They're generally simpler to administer, although employers can set up guidelines around how the funds should be used.

Unless they qualify under another tax rule, stipend payments are generally considered taxable income.

Key considerations:

• Employee stipends are funded by the employer.
• They can support a variety of business-approved expenses.
• Stipends are taxable.  

For many small businesses, stipends offer a straightforward way to offer more support without adding another formal benefit plan.

How to Choose the Right Options for Your Business

Each of these benefits serves a different purpose, and many employers combine several to create a well-rounded benefits package. As you evaluate your options, consider:

• The healthcare and lifestyle needs of your employees  
• Your overall benefits budget  
• The level of administration your team can support  
• Your hiring and retention goals  
• Whether you want to prioritize tax-advantaged healthcare benefits, flexible lifestyle benefits, or a combination of both  

You don't have to offer every benefit. Many small businesses start with a core set of benefits and add programs over time as their workforce and priorities change.

What a Benefits Package Might Look Like as Your Business Grows

Every small business grows differently, but many employers expand their benefits gradually as they hire more employees and invest in attracting and keeping talent.

Starting with the basics

A newer or smaller business may begin with:

• A medical plan
• An HSA, if offering a qualified HDHP
• A simple wellness or remote work stipend

This approach gives employees valuable support while keeping the administration manageable.

Expanding your offerings

As your business grows, you may decide to offer more flexibility through benefits such as:

• Healthcare FSA
• Dependent care FSA
• Employer HSA contributions
• An LSA that covers wellness, professional development, commuting, or financial wellness

These additions give employees more choice while allowing employers to offer a more competitive benefits package.

Building a well-rounded benefits program

As your workforce becomes more established, you may choose to create a broader strategy that supports employees through different stages of life and work.

A more comprehensive package might include:

• Multiple medical plan options
• Employer-funded HSA contributions
• Healthcare and dependent care FSAs
• An LSA with a wider range of eligible expenses
• More targeted employee stipends for specific business-specific needs  

Finding the right balance

As we’ve covered, HSAs, FSAs, LSAs, and employee stipends each play a different role in an employee benefits strategy. Some help employees save on healthcare costs through tax advantages, while others provide flexibility to support wellness, professional growth, and everyday work expenses.

The best approach depends on your business, your employees, and the resources you have available. If you're evaluating your options, PeopleLoop can help you compare benefit programs, understand the tradeoffs, and design a benefits strategy that works for your business and your employees.  Connect with us to get started.