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.

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:

1. Be specific in category definitions. “Wellness” is vague; “gym memberships, fitness classes, meditation apps, massage therapy” is clear.
2. 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.
3. 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.
4. 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.
5. 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:

1. Choose your spending categories and set allowance amounts per employee.
2. Connect Compt to your HRIS and payroll systems.
3. 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

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.

The post What Are LSA-Eligible Expenses? A Practical Guide for HR and Finance appeared first on COMPT.

Employee benefits have exploded in complexity, with SHRM now tracking 216 distinct benefits (up 23% from just two years prior). Among Compt users, Lifestyle Spending Accounts (LSAs) are the largest category — two-thirds of our users offered one to their employees last year.

The LSA’s appeal is obvious: employees get flexibility, while HR gets simplicity and Finance gets better cost control. And in a world where seven in 10 American workers are at least somewhat dissatisfied with their benefits, offering something personalized feels like an easy win.

What HR and Finance teams aren’t hearing on vendor calls, though, is that the way they administer their lifestyle benefits could be creating tremendous IRS compliance exposure — and that, in practice, lifestyle benefits and IRS compliance are inseparable.

A few issues that come to mind:

• Taxable wellness expenses coded as tax-free
• Nontaxable categories overtaxed to play it safe
• Pre-funded benefits cards creating unclear tax timing
• Zero audit trail connecting transactions to proper tax treatment

The issue isn’t whether lifestyle benefits are a good idea. They are. The issue is that the gap between how these programs are marketed and how they’re actually administered puts employers squarely in the IRS’s crosshairs, sometimes without anyone realizing it until an audit letter arrives.

We’re the vendor who’s going to spell it all out for you. Everything you need to know about lifestyle benefits and IRS compliance risks, right here, right now.

The IRS default Finance and HR need to understand

The IRS uses a “taxable unless excluded” framework for fringe benefits, which includes all your lifestyle benefits.

IRS Publication 15-B says:

• The default position is taxable. You must include lifestyle benefits in pay unless a specific exclusion applies.
• Exclusions are narrow and codified. They’re listed in Section 2 of Pub 15-B.
• The burden is on the employer. Not just for knowing an exclusion exists, but to be able to show, at the transaction level, exactly why it applied.

The exclusions are (deliberately) narrower than you might expect.

Gym memberships, for instance, are explicitly not deductible medical expenses under IRC Section 213(d), regardless of how healthy they are for your team. Neither are fitness classes, wellness apps, personal training, or meal delivery services.

And those kinds of things make up the bulk of LSA spending, which is why LSAs are generally — but not fully — taxable.

Taxable vs. nontaxable lifestyle benefits: what actually qualifies

We recently published in our 2026 Annual Lifestyle Benefits Benchmarking Report that the most popular LSA spend categories were health and wellness, learning and professional development, office equipment + cell and internet, and commuter.

Naturally, those are also the areas in which we see HR and Finance teams mess up the most often, so let’s take a look at what qualifies vs. what doesn’t in those four categories.

Health and wellness

Almost always taxable. Gym memberships, fitness classes, meditation apps, nutrition programs, and massage therapy are all considered general health and well-being expenses with no IRS exclusion.

The exception is medical care as defined under IRC Section 213(d), like smoking cessation programs and physician-prescribed treatments, which are nontaxable if you reimburse for them through a qualifying health plan (which is separate from an LSA).

Learning and professional development

It depends. Education that “maintains or improves skills required for the employee’s current job” can qualify as a nontaxable working condition benefit. And formal educational assistance under a qualifying educational assistance program is nontaxable up to $5,250 annually.

Same with student loan repayment assistance — nontaxable up to $5,250 per year when it’s part of a qualifying program.

But general enrichment courses and career-change education? Both taxable.

Home office + cell and internet 

This one’s more nuanced. Internet and cell phone reimbursements are nontaxable when you provide them primarily for business purposes (and prove it). A monitor or desk required for work may qualify as a working condition benefit.

But ergonomic upgrades for personal comfort, standing desk converters, or office décor? A nice touch for sure, and one they’re paying tax on.

Note: In 11 states, plus Washington, D.C. and Seattle, employers are generally required to reimburse employees for necessary work-related expenses — which may include business use of personal cell phones or internet service.

Commuter benefits

Nontaxable up to a certain amount. As an employer, you’re able to allocate up to $340 per month per employee for transit passes or qualified parking in 2026. It applies to buses, subways, trains, ferries, and vanpools, but standard Uber and Lyft rides are not eligible.

Cheat sheet: taxable vs. nontaxable lifestyle benefits

This distinction sits at the heart of lifestyle benefits and IRS compliance, because the IRS evaluates each expense individually, not the benefit program as a whole.

Psst: We’ve already published a complete guide to taxable vs. nontaxable fringe benefits. That’s where you’ll get the FULL rundown.

Where the IRS exposure lives in your lifestyle benefits program

We’ve been in the lifestyle benefits game for almost 10 years, and there are four main risk categories we’ve put our finger on: misclassification, inconsistent treatment, pre-funding timing issues, and cost leakage from overtaxing.

Misclassification is the most common problem.

Your employee gets reimbursed for a gym membership (taxable) but your expense tool treats it the same as a professional development course, which might qualify for exclusion. The system doesn’t know the difference, so it processes both identically.

When that gym reimbursement doesn’t show up on the employee’s W-2, you’ve got unreported wages and unpaid payroll taxes, which is a huge compliance gap the IRS will spot during an audit.

Inconsistent treatment compounds the issue.

Maybe one employee’s yoga class gets taxed and another’s doesn’t, depending on which manager approved it or how the receipt was coded. Generic payroll systems and corporate cards fail here because many rely on human categorization and after-the-fact tax handling.

Well … the IRS expects employers to apply the same tax treatment to the same type of benefit across the organization. Inconsistency raises a red flag that maybe — just maybe — you don’t have a compliant process at all.

Pre-funding timing creates its own exposure risks.

When you load money onto a benefits card at the start of the month, how’s it treated taxwise? If the funds are available to the employee without restriction, you might have to treat them as taxable wages the moment you fund them rather than when they’re spent.

Most generic prepaid card programs don’t account for this, though, which creates a timing mismatch that eventually snowballs across hundreds of employees.

Cost leakage from overtaxing might not trigger an IRS letter, but it’ll hurt your bottom line.

You’d be surprised, but some companies, unsure of the rules, just tax everything. That lowers your chances of getting audited (because it sort of “guarantees” you taxed the right things), but it also means employees pay double-digit taxes on benefits that could have been tax-free.

If your company does this, you’re paying unnecessary FICA (7.65%) while the benefit itself loses a huge percent of its value for your team members.

Why lifestyle benefits compliance matters beyond IRS audit risk

Administering lifestyle benefits comes with significant risks if you’re just pushing them through generic expense tools or payroll.

The flip side of that is also true. Properly administering them brings you a significant upside: it turns a potential tax liability into a strategic cost-savings engine that boosts employee purchasing power without increasing your payroll budget.

When you apply the rules correctly, a well-designed LSA reduces your taxable exposure.

This is the upside.

According to our internal data, 78% of stipend spend in 2025 fell into a taxable category. In other words, roughly 22% of spending does qualify for nontaxable treatment.

By no means is that a trivial number.

For a company spending $1,000 per employee annually on lifestyle benefits (which tracks with our benchmarking averages), proper treatment through an IRS-compliant platform would mean the difference between employees seeing that full $220 tax-free vs. having it added to their W-2.

IRS penalties scale with headcount.

For incorrect W-2 reporting (like failing to report taxable stipends in employees’ gross income), penalties reach $340 per return, with a maximum of $1.366 million for small businesses and $4.098 million for large ones.

So if you have a midsize team of 250 employees and they all had incorrect W-2s, you’re looking at noncompliance costs as high as $85,000 for that tax year.

Also worth mentioning: If the IRS determines your noncompliance is due to “intentional disregard,” fines are unlimited and start at a minimum of $680 per W-2.

M&A due diligence is another trigger.

Even if you see neither ‘M’ nor ‘A’ in your immediate future, it’s still worth knowing that employee benefit plans are a common source of hidden liabilities in both. Buyers routinely flag IRS reporting failures like misclassified benefits and underfunded tax obligations during eval.

If you’re running a lifestyle benefits program without transaction-level tax compliance, you are building a liability that will surface at the worst possible time, when you’re trying to close a deal, go public, or attract investors.

Then there’s the employee experience fallout.

When a compliance issue comes up, employers find themselves correcting past W-2s and 941s for open tax years. If that happens, your team members might have to amend their personal returns and could owe back taxes, plus interest.

Employees trusted that their wellness stipend was handled correctly. Learning they owe money because their employer got it wrong kills their confidence in your entire benefits program.

What compliant lifestyle benefits administration looks like

There are five pillars of compliant lifestyle benefits administration:

1. Transaction-level categorization
2. Rules-based enforcement
3. Real-time tax handling
4. Clean documentation
5. Multistate compliance

Let’s dive into each so you know what to look for in benefits software and how to set up your program.

1. Transaction-level categorization

By design, LSAs are catch-all budgets. Employees use the same allowance for wellness, learning, home office, and commuting. But from an IRS perspective, flexibility doesn’t change the rules; you treat the LSA allowance purely as a funding source, not a tax bucket.

Transaction-level categorization means your benefits software assigns tax treatment to each individual reimbursement within your employee’s broader LSA spending.

A …

• certification course,
• gym membership,
• and internet bill

… can all come from the same LSA balance, but the system categorizes them separately and situationally applies the appropriate tax treatment and documentation.

2. Rules-based enforcement

Categorization only works if your software’s backend applies those rules 100% of the time. When you have a manager/reviewer or payroll system reconciling and categorizing expenses after the fact, mistakes will be made at least some of the time.

In a compliant lifestyle benefits program, when an expense falls into a taxable category, it’s always taxed. If it qualifies for a specific exclusion, it’s treated as nontaxable and documented. And if it doesn’t meet the criteria, it’s flagged or reclassed before reimbursement happens.

3. Real-time tax handling

A lot of setups defer tax treatment until after they’ve approved, paid, or loaded expenses onto a card because again, most expense management and corporate card platforms are set up to focus on month-end reconciliation.

Tax-compliant LSA software closes that gap by determining “taxable” or “nontaxable” immediately, then auto-syncing the data with your payroll software before or at the moment of reimbursement.

4. Clean documentation

Properly allocating each expense is the first half of the battle. You now have to prove each tax-exempt benefit belongs in that category.

Three important considerations:

1. Every lifestyle benefit category has different qualification and reporting requirements. What you need to substantiate an education expense is not the same as what’s required for a commuter benefit.
2. Everything has to be centralized and permanent. Audits are backward-looking up to three years. If the IRS audits your company, you’re expected to produce receipts, classifications, and tax treatment decisions from the prior tax year.
3. There isn’t always a statute of limitations. The IRS can audit indefinitely if (a) an employee’s return was never filed or (b) the IRS can show it was filed with the intent of fraud or tax evasion.

Without centralized, permanent documentation, you have no practical way of defending tax treatment decisions years later. That’s why a compliant setup stores receipts, categories, applied tax logic, and timing alongside each transaction in a single system of record.

5. Multistate compliance

Most lifestyle benefits guidance focuses on federal rules, but it’s important to remember that states are sometimes different. Commuter benefits are a perfect example of this; federal law sets the tax exclusion limits for them, but states and cities set the participation rules.

For instance, New York City, the San Francisco Bay Area, New Jersey, and Massachusetts all mandate that eligible employers offer commuter benefits based on employee location. If you’re not careful, you might comply with federal tax exclusion limits but still be out of compliance locally.

So in addition to all of the above, you need a platform that applies your benefits based on each employee’s location in order to meet specific mandates across all 50 U.S. states without manual exceptions.

Compt simplifies multistate tax compliance for LSAs and lifestyle stipends.

Most of the IRS compliance risks associated with lifestyle benefits aren’t your fault. They ultimately boil down to the fact that the tools companies use to run them weren’t built to handle their nuance and complexity.

• Payroll systems calculate taxes but don’t evaluate benefit eligibility.
• Expense tools move money but don’t apply IRS exclusions.
• Corporate cards simplify spending but flatten tax treatment.

Compt does all three.

Whenever someone submits an expense for reimbursement, it helps HR cross-reference eligibility and categorize it against IRS rules. It integrates with your payroll through a bidirectional API connection, so the right amounts show up on W-2s automatically.

The employee doesn’t have to worry about it, and HR can be confident they have the proper support. And more importantly, neither will have to worry about it come tax season.

Ready to see what IRS-compliant lifestyle benefits look like in practice? Request a demo of Compt.

FAQs: IRS compliance for lifestyle benefits

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.

The post Lifestyle Benefits and IRS Compliance: Complete Guide for HR and Finance appeared first on COMPT.

Depending on what kind of benefits you want to offer your employees, you can offer two main types: pre-tax and post-tax.

Pre-tax deductions offer immediate tax savings for the employee. That’s because any money put aside from their paycheck before taxes are taken out will result in a lower taxable income, potentially helping them be in a lower tax bracket and not have to pay as much on overall taxes.

Post-tax deductions don’t provide immediate tax relief for your employees. Instead, these benefits won’t be taxed when they use them in the future.

Pre-tax and post-tax deductions have their pros and cons. In this article, we’ll give you the ins and outs of each.

What are pre-tax benefits?

Pre-tax benefits are deductions an employer sets aside before calculating payroll taxes. With pre-tax deductions, employees pay lower taxes yearly because their taxable income is lower.

For example, if an employee set aside $100 for a pre-tax 401(k) plan, they only have to report $900 of their earnings as taxable income. So, instead of paying taxes on the full $1,000, they only have to pay taxes on $900.

Pre-tax deductions reduce income tax liability for employers and their employees in the near future.

However, employees sometimes owe taxes when they use the benefit they ‘prepaid’ for. For instance, the abovementioned 401(k) plan is taxed when the employee withdraws it in retirement.

Not all pre-tax deductions can be withheld entirely from federal income tax. Social Security, federal unemployment, and Medicare taxes still apply to adoption assistance and other childcare benefits.

Depending on the state, state and local taxes may also apply to pre-tax benefits. It is the employer’s responsibility to stay current with state and local tax laws.

It’s something we keep a close eye on at Compt, where we specialize in building our software to be tax-compliant. In our latest Lifestyle Benefits Benchmark Report, we cotinually see that employees are opting for taxable expenses over non-taxable spending.

Types of Pre-Tax Benefits

For the most part, pre-tax benefits are the ones everyone’s heard of. The most common include health plans, retirement plans, disability insurance, and commuter benefits.

Health Plan Contributions

In 2024, 54% of U.S. firms offered health benefits to their employees. That puts health plan contributions among the most common pre-tax deductions. When employers set aside money for employee health plan premiums, they deduct those funds from total taxable income. Then, they’re paid to the health insurance provider (or savings account) directly.

Types of health plan contributions include:

• Employer-sponsored health plans: Employers provide health coverage to employees and their dependents. Standard employer-sponsored health plans include group, dental, and vision insurance. Typically, employers and employees split the cost of pre-tax premiums.
• Health savings account (HSA): Employees spend employer-provided funds on medical expenses for themselves and their families. Employers can set up a pre-tax HSA for employees who enroll in high-deductible health plans. In 2025, annual HSA contribution limits are rising to $4,300 (self-only coverage) and $8,550 (family coverage). To be eligible to contribute to an HSA, you must be enrolled in a High-Deductible Health Plan (HDHP). For 2025, the IRS defines an HDHP as a plan with a minimum annual deductible of $1,650 (self-only coverage) or $3,300 (family coverage) AND $8,300 (self-only coverage) or $16,600 (family coverage).
• Flexible spending account (FSA): Employees own the pre-tax funds set aside in an FSA. They can use this money to pay for dependent care expenses or qualified out-of-pocket medical expenses, like copays and prescriptions.

Psst: See more about the 2025 tax changes to fringe and lifestyle benefits in our updated blog.

Pre-Tax Retirement Plan Contributions

Employers offer retirement plans so employees can save up for their golden years. Employees make pre-tax contributions to their retirement plans, which they can withdraw money from when they’re older (59 1/2 for most plans).

Common retirement accounts with pre-tax payroll deductions include:

• Traditional IRAs
• Most 401(k)s
• 457s
• 403(b)s

Employer contributions are also available for retirement plans. They can match employee contributions up to a certain percentage of their salary. Vanguard data shows the most common match amount is 50%, up to 6% of the employee’s salary.

Using that as an example, if an employer matches 50% of an employee’s contributions and the employee makes $100,000/year, they’d get $500 for every $1,000 they contribute, up to $6,000 in total matched contributions.

Disability Insurance Contributions

Roughly 70 million U.S. adults have a disability. That’s about one-quarter of the entire adult population, and an even bigger proportion of the working-age population.

Disability insurance covers up to 60% of a worker’s salary (on average) if they become disabled and can’t work. Employers can set aside pre-tax dollars for disability insurance, which covers the cost of premiums.

There are two types of disability insurance:

• Short-term disability insurance: Employees receive a portion of their salary if they can’t work for weeks or months due to an illness or injury.
• Long-term disability insurance: Employees with disabilities for longer than 90 days receive monthly payments for a prolonged period, determined by the employer’s policy.

Note: Employees who wind up ill or injured after enrolling in pre-tax disability insurance will owe taxes on their monthly payments.

Commuter Benefits

Employers offer commuter benefits to support their in-office and hybrid employees’ daily commute to work. They’re some of the best benefits you can offer your employees – they stretch their dollar while they get to and from the office and provide alternative commuting options while reducing payroll taxes for the business.

Pre-tax benefits commuting programs cover include:

• Train, bus, and ferry passes
• Highway tolls
• Parking fees
• Carpooling/vanpooling expenses

With these benefits, employers can withhold up to $325 per month for employees’ transit expenses and a separate (i.e., additional) $325 per month for parking expenses on a pre-tax basis (for the 2025 tax year). Employees can access this money through a benefits card, prepaid pass, or reimbursement. See IRS Publication 15-B (2025) for more info.

Psst: Compt offers an easy way to offer commuter benefits to your employees through our platform. Learn more.

What are post-tax benefits?

Post-tax benefits are payroll deductions an employer sets aside after calculating payroll taxes. They reduce an employee’s net pay, not gross pay.

When employers deduct benefits from an employee’s paycheck on a post-tax basis, they (and their employees) pay more in income tax than they would with pre-tax benefits.

That’s because pre-tax benefits reduce the taxable income.

Some employees prefer post-tax benefits over pre-tax benefits that are tax-deferred rather than exempt. For example, someone who withdraws from a Roth 401(k) won’t need to pay taxes on the money when they withdraw it. All federal and state income taxes would have already been paid.

Types of Post-Tax Benefits

Although they don’t reduce an employee’s taxable income, post-tax payroll deductions give employees more control over their total compensation package. Many post-tax benefits allow employers to go above and beyond for their employees.

Post-Tax Retirement Contributions

Retirement accounts with after-tax deductions are great for employees who want to save up more money but don’t need the tax break that comes with pre-tax deductions.

There are three main types of post-tax retirement plans:

• Roth IRA: Employees pay income taxes on the money they contribute to a Roth IRA but not when they withdraw it.
• After-tax 401(k) options: Employees can save up pre-tax and after-tax money in the same account. After-tax 401(k) contributions happen after pre-tax payroll deductions and employer contributions, allowing employees to save more of their paycheck toward retirement.
• Roth 401(k): Employees contribute after payroll deductions, and the earnings grow tax-free (assuming no withdrawals before 59 1/2). The same limits that apply to a tax-deferred 401(k) apply to a Roth 401(k).

Note: Employees must specify post-tax contributions when they open their retirement plan accounts. Once saved in the account, these funds can’t be converted from pre-tax to post-tax.

Life Insurance

Company-sponsored life insurance policies allow employees to choose the coverage they want and make payments via payroll deduction on a post-tax basis. For employers, life insurance premiums are tax-deductible as business expenses.

Group-term life insurance is the most common type of employer-sponsored life insurance. Group-term life policies are pooled into a single policy and cover all employees in the group, offering death benefits for members who pass away while employed.

Employers offering group term coverage can deduct premiums paid on the first $50,000 of benefits per employee, but these deductions are made after tax.

Employee Stipends

A stipend is a lump-sum benefit an employer provides to cover the cost of meals, transportation, and other living expenses. It can range from $50 to over $200 monthly and helps employees pay for various out-of-pocket expenses.

In our Lifestyle Benefits Benchmark Report, we saw these budgets range widely depending on company size, showing that no matter what your budget might be, there are tangible ways to support employees. Here’s a look at the latest findings:

Types of stipends include:

• Student loan repayment
• Career and professional development
• Relocation living expenses
• Meals and transportation
• Health and wellness
• Perk stipends

Note: Some stipends, for example, student loan repayment assistance, may be tax-exempt, so employees may be able to receive the fringe benefit tax-free (i.e. the reimbursement dollars are not considered taxable income).

Lifestyle Spending Accounts (LSAs)

A lifestyle spending account (LSA) is a post-tax benefit employers can offer to help employees manage A lifestyle spending account (LSA) is a post-tax benefit that’s growing in popularity — 38% are either planning to introduce LSAs (7%) or are considering adding them by 2025 (31%), indicating that by 2025, up to 45% of companies may offer LSAs.

Among Compt clients, 57% of all stipends already fall under the “LSA” category, according to our 2024 Mid-Year Lifestyle Benefits Report.

Employers can use an LSA offer to help employees manage healthcare, childcare, health and wellness, and education expenses (or anything else, really). They’re different from an HSA in that they’re designed for lifestyle benefits, not healthcare expenses and long-term savings. But they offer ultimate control over how and when employees use their benefits.

Employees can access funds in an LSA up to a certain dollar amount per year, and the account balance rolls over from one benefit year to the next. When employees spend money from LSAs, generally they pay income tax on them. Some benefits within an LSA can be considered tax-exempt according to the IRS.

Make tax compliance easy with Compt

We get it. Figuring out income tax deductions for employees is probably the hardest part of running payroll.

If you’re reading this thinking, “There’s no chance I’ll remember all these numbers, rules, details, and deadlines,” don’t worry. We do the heavy lifting for you. Our software is built for tax-compliance, taking all these rules and regulations under consideration so that you can adminster post-tax benefits to your people with ease.

We have 27 taxable and non-taxable categories, each with built-in (yes, you read that correctly) tax compliance.

We make sure you and your employees always get the most out of their lifestyle benefits – no guessing, no headaches. Schedule a demo with us to learn more.

Editor’s Notes: 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.

Originally published in 2023, this post has been recently updated for clarity and relevance for our readers.

The post Pre-Tax vs. Post-Tax Benefits: Key Differences appeared first on COMPT.

Not to panic! We thought it would be useful to share the top updates from the IRS that will impact employers when they are designing their programs for 2026. 

Here are the areas we find our customers want to understand most, based on our program analysis. These updates would be helpful for Finance teams to keep in mind as well. 

Summary of new tax changes to fringe and lifestyle benefits for 2026

• Employer-Provided Student Loan Repayment Assistance will continue. Student loan repayments up to $5,250 are considered nontaxable benefits indefinitely. Previously, this expired as of December 31, 2025. Everything else with this regulation is the same, and must be administered according to the guidance under Education Assistance in the IRS Publication 15b. 
• Dependent Care Assistance / Dependent Care FSA (DCAP/DC FSA): Updated thresholds move up from $5,000 to $7,500 as of January 1, 2026. Companies issuing a dependent care stipend should be aware of the updated limits and adjust plan documents and communications to employees. 
• Moving Expenses: Continue to be considered taxable benefits (as enacted in the TCJA of 2017), so there are no changes to current treatment and this treatment is just extended indefinitely.
• (New) Trump Accounts: These tax-favored accounts are similar to nondeductible IRAs. The federal government will contribute $1,000 to such an account for every U.S. citizen born during 2025 through 2028. Contributions up to $5,000 per year can be made from birth through age 17. Distributions are subject to rules of traditional IRAs, and not allowed until age 18. Employers may adopt a plan to contribute up to $2,500 tax-deferred. 
• Employer-Provided Childcare Credit: The credit percentage increased from 25% to 40% of employers providing a childcare facility onsite (for larger employers), with a maximum credit cap raised to $500,000. For “eligible small businesses,” the credit rate is 50% and the cap is $600,000. Also, small businesses may pool resources and/or use third-party intermediaries and still qualify.
• Commuting (Bicycle): The OBBBA permanently excludes any bicycle benefit from being provided tax-free. This is the same treatment as previously, but now it’s permanent. All other commuter benefits are under the same rules, and will be adjusted for inflation (see below).

2026 inflation adjustments to lifestyle benefits

• Qualified Transportation Fringe Benefit: For the upcoming tax year, the monthly limitation for these benefits (commonly known as commuter benefits or parking stipends) have increased from $325 to $340 for a monthly limitation. 
• Health Savings Accounts: This limit has increased, with annual contributions for individuals increasing to $4,400 (up from $4,300) and for families to $8,750 (up from $8,550). 
• Health Flexible Spending Accounts (Cafeteria Plans): For taxable years beginning in 2026, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $3,400, up from $3,300 in 2025. If the cafeteria plan permits the carryover of unused amounts, the maximum carryover amount is $680, up from $660 in 2025.
• Standard Mileage Rate: Beginning January 1, 2025, the standard mileage rates for the use of a car, van, pickup, or panel truck will be 70 cents per mile driven for business use, up 3 cents from 2024. The standard mileage rate for 2026 has not been released yet, but is expected in December 2025. We will update this post when this information is available. 

While the taxation of Lifestyle Spending Accounts is complicated, having Compt as an extension of your team will ensure that your benefits are tax compliant, as we have purpose-built our platform to make IRS tax compliance a priority. We stay up-to-date with regulations and automate these rules into our platform to make it as easy as possible for our customers, including global organizations. When it comes to 2026 tax changes to fringe and lifestyle benefits, we’ve got your back.

Looking for a tax-compliant benefits solution? Hi, we’re Compt.

If you’re struggling with (or even just unsure about!) the ins and outs of taxation for employee benefits, Compt may be a great solution for you. 

Get in touch with us to learn more. 

FAQ: Tax changes to fringe and lifestyle benefits

The post Tax Changes to Fringe and Lifestyle Benefits: What to Know for 2026 appeared first on COMPT.