Designing Incentives and Lifestyle Spending Accounts For a Modern Workforce

This article presents key considerations for revitalizing incentive strategies and exploring 'lifestyle spending accounts' (LSAs).

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December 13, 2022

Incentives were a mainstay of traditional wellness programs and continue to play a role in promoting and rewarding desired behaviors. Although the use of financial incentives has been flat or declining over the past 4 years, in 2022 68% of large employers offer them to employees for participating in well-being initiatives and progressing toward health goals.

Incentives remain popular with employees. Employer data indicate that 70% of employees earn either the partial or full incentive amount.1 Given the significant investment from employers (the median incentive amount in 2022 is $600) and growing interest in ‘lifestyle spending accounts’ (LSAs), post-tax funds provided by employers for well-being-related activities and resources, some employers are evaluating whether to continue to offer incentives, and if so, what value and design will attract the greatest engagement. This article presents key considerations for revitalizing incentive strategies and exploring LSAs.

Incentives Can Be Leveraged to Increase Program Participation and Encourage Specific Behaviors

Incentives have long been used as a tool to reward actions like getting a biometric screening, completing a health risk assessment and reaching physical activity goals. Employers who offer them indicate a host of reasons they continue the practice. One employer noted that incentives can act as the tipping point to engage employees on the cusp of making improved health decisions. A second employer sees incentives as an opportunity for employees to “right size” the cost of health insurance by offsetting deductible and out-of-pocket costs. Still another employer sees incentives as a pivotal tool to encourage preventive care, especially in light of COVID-era deferred care; one employer noted that incentives played a role in returning annual physicals and screenings for breast, cervical and colorectal cancer back to pre-pandemic numbers in 2021.

Research has shown that in some contexts, incentives can be an effective approach to increase program uptake and engagement. One study of 407 employer wellness programs indicated that employers who offer incentives report a 22% higher program participation rate (28% vs. 50% uptake).2 Other studies have reported similar findings; one study of 589 public- and private-sector employers indicated that employers who offer incentives have median wellness program participation rates of 40%, 20% higher than employers who did not offer incentives.3 The same study found that disincentives, or penalties, increased the median participation rate even more, to 73%.3 For the 65% of employers who view their health and well-being strategy as an integral part of their workforce strategy, incentives can be used as a stepping stone to greater program participation.4

Incentives can be especially motivating for engaging employees in activities like biometric screening. One study found a 2% increase in biometric screening participation for every $25 increment of incentive, and other studies have produced similar findings.5 The value and immediacy of the incentive also play a significant role in garnering participation in biometric screenings and personal health assessments (PHA). A study of 56 employers with more than 426,694 employees showed that high-value incentives (greater than $400) paid out within 90 days of the incented activity led to a 72.2% participation rate, compared to a participation rate of 33.7% within the low-value (less than $400) delayed incentives group.6

Smoking is another behavior that can be targeted through incentives. A review of 33 randomized controlled trials, mostly within the U.S. and covering 21,600 individuals, indicated that 6 months or more into a trial, individuals who received incentives were more likely to have stopped smoking. These individuals were also likely to remain non-smokers even after the incentives ended.7

Considerations for an Effective and Equitable Incentive Program

Although studies show that incentives can be effective in increasing participation in one-time activities, there is limited evidence that they elicit long-term behavior change. Incentives may also create unintended challenges for employers, including inequities for lower-paid employees, morale concerns and ongoing budget investments that are difficult to pull back once in place. For these reasons, some employers are reconsidering their current incentive strategy.

Financial incentives can be hard for lower paid and minority employees to ignore, and harder to attain

In 2022, 81% of large employers indicated that diversity, equity and inclusion influence their well-being strategy. However, incentives may be overlooked as a potentially significant contributor to inequity. Some of the common behaviors that are incented or penalized, such as smoking cessation or maintaining a healthy weight, disproportionately affect Black, Indigenous and employees of color (BIPOC). CDC data indicate that across all U.S. states, Black adults had the highest prevalence of obesity (38.4%), followed by Hispanic adults (32.6%) and non-Hispanic white adults (28.6%).8 Similarly, smoking rates in the United States are highest among Native American and Alaska Native adults (21.9%), compared to Black adults (16.8%), non-Hispanic white adults (16.6%) and Hispanics (10.1%).9

The financial implications of incentives, particularly when framed as a penalty, can also be greater on lower-income employees who may find it harder to ignore the incentive and who may have more barriers to meeting program requirements. For example, for employees without access to dependent care, reliable transportation, paid sick time or an established primary care relationship, biometric screening requirements can create an unforeseen burden when not offered on-site.

Some incentive strategies can miss the mark

While well intended, incentive strategies may not reach the desired population. Business Group data found that diabetes and weight were among the top ten physical health incentive targets in 2022; however, a recent study of 283,365 employees and dependents across 90 employers found that conditions like obesity and diabetes were associated with significantly lower odds of participating in an incentivized biometric screening or achieving biometric goals.5 The same study found that individuals with a healthy BMI, never-smokers and those with access to primary care were more likely to participate in biometric activities compared to their counterparts.5 Similarly, another study that evaluated almost a decade of data from one large employer with nearly 200,000 employees found that healthier employees and those who lived in higher income areas were more likely to complete a health risk assessment than their counterparts.3 These data points illustrate how incentive strategies can fail to reach the intended audience.

Incentives are sticky

Once financial rewards are initiated it can be difficult to discontinue them. Employers may hesitate to remove financial incentives out of fear of lower engagement or negative employee perception. One employer put its long-standing incentive program on hiatus for 3 years and noted a distinct drop in engagement when the program was paused. Echoing this observation were results from a 2015 systematic review of research on financial incentives, which found that while incentives were effective at changing some behaviors in the short term, these behaviors typically did not extend more than 2 to 3 months after the incentive was removed.10

Incentives for a Global Workforce

For companies with employees located outside the U.S., there are added layers of complexity to managing an incentive program, including cultural norms, social acceptability and legality. Incentives for well-being programs are not common outside the U.S.; as of 2019, only 10% of employers offered well-being incentives globally. As one Business Group member commented, “Globally, financial incentives may actually be a turn off… [since] in many cultures or societies, good health is considered a matter of personal responsibility.” Some cultures are also more skeptical of sharing personal health data, and employees in these locations may be more concerned with protecting their personal health data.11. Employers who extend incentives to their global population should review the incentive through a culturally conscious lens. Incentive rewards like health savings account (HSA) contributions don’t translate outside the U.S., so many employers choose to engage with a vendor to help manage a points system that can create parity across regions and local currencies.


Reenvisioning the Next Iteration of Well-being Incentives

With these challenges in mind, many employers are reexamining their incentive approach to fit a modern workforce and well-being strategy. Incentives can still be used as an effective motivator when deployed in appropriate contexts; as such, employers are seeking to make incentives more personalized, flexible and accessible. For those looking to revamp their strategy, the following considerations provide helpful guidelines.

Use incentive dollars in a targeted way by rewarding one-time activities

As research indicates, incentives can produce positive results for activities that require a simple or one-time effort, so employers may consider reserving their incentives budget to reward participation in single activities like a health assessment and/or biometric screening.12 Business Group data indicate that these two activities are the most heavily rewarded by large employers. Encouraging these screenings may prove to be critical in identifying risk factors and changing employee behaviors; one study found that 39.5% of employees who participated in a worksite biometric screening clinic were not aware of at least one of their cardiovascular disease risk factors, and knowledge of one’s risk is a prerequisite for change.13 Data from biometric screenings can also inform decisions about an employer’s future health and well-being strategy.

Encouraging Activities With the Greatest Impact: UnitedHealth Group’s Unique Rewards for Health Program

UnitedHealth Group has enhanced its health rewards program for its employees enrolled in an eligible medical plan to identify and incentivize the activities that maximize health on an individual level. Using data from health assessments, biometric screenings and health care claims, the UnitedHealth Group Rewards for Health program recommends personalized actions that are “good, better and best” for employees to take. For example, the “best” suggested action for an employee with type 2 diabetes is to enroll in a specialty care diabetes program that provides people with a continuous glucose monitor, activity tracker and dedicated care team to help lower A1C levels and potentially achieve remission for this condition. Alternatively, the employee could engage with the next best and other “good” options, which could be one-on-one diabetes lifestyle coaching. When the employee completes the recommended actions, they can put their rewards dollars toward a premium discount, HSA contribution, or use them to purchase gift cards in an online marketplace for things like athletic gear, airline credits, groceries and baby supplies.


Introduce variety to your incentive delivery system

Incentives can be paid out in a variety of ways, including gift cards, cash rewards, health plan premium reductions, points to be redeemed in a well-being marketplace and/or funding for HSAs and HRAs. Business Group on Health data shows that the most common incentive delivery vehicles are premium discounts (offered by 51% of large employers) and HSA/HRA funding (offered by 44% of large employers). Some research indicates that incentives tied to reducing out-of-pocket employee health care spend may be more motivating than cash incentives, and HSA funding has specifically been found to be motivating given the individual ownership and portability of the account. This may prove to be a useful lever for employers looking to revitalize their incentive strategy, since among employers offering a consumer-driven health plan, the median enrollment is 50%.4

In addition to how incentives are paid, employers have options for how and when to provide incentives:

  • One Business Group employer allows employees to participate in an incentive program on a quarterly basis and earn up to $600 per year. Employees can earn anywhere from $150 to $600 by meeting quarterly requirements. Those who do not meet one quarter’s requirements are still eligible to earn up to the remaining $450 by participating during any of the other three quarters.
  • Another Business Group employer tiers its incentives to integrate a variety of financial and non-monetary rewards. Employees who reach tier one earn a $500 premium discount for the following year. Upon reaching tiers two and three, employees can earn HSA or FSA funding. The fourth and final tier doesn’t offer financial benefits but offers a marketplace with company swag.

Target’s Inclusive Incentive Strategy for a Stratified Workforce

Target redesigned its incentive strategy to remove hurdles and increase engagement from its non-exempt population. The stratified incentives program, available to those on the medical plan, has different engagement criteria for exempt and non-exempt employees. Earned incentives are paid as HSA contributions, and while both exempt and non-exempt employees receive the same total dollar amount, the engagement threshold is lower for non-exempt employees to encourage broader participation. With the new design, non-exempt employees receive partial HSA seed money upfront, and can earn the remainder of the funds by completing any type of preventive activity. Exempt employees are asked to do slightly more to earn their HSA funding, including completing a preventive care activity in addition to engaging in a chronic condition management program or, for those without chronic conditions, receiving additional preventive care services like a dental or vision exam.


Leverage behavioral economics to create an effective incentive strategy

Behavioral economics suggests individuals often don’t act rationally and instead make economically suboptimal choices that don’t benefit them in the long run.14,15 For example, an individual may choose a cookie over an apple as an afternoon snack because the cookie offers instant gratification. Many behavioral economic theories can be deployed to prompt “better” behaviors. Loss aversion theory, for example, suggests individuals are more likely to engage in behaviors to avoid a loss vs. to receive a gain. Using this theory as a guide, employers can leverage deposit contracts, where employees commit their own money for potential loss if they do not complete a designated behavior or meet a target outcome. One study of more than 400,000 individuals utilizing a commonly used well-being platform found that participants were more active when their own money was at stake. Participants had the opportunity to purchase an Apple Watch at a discounted rate, to be paid back to the employee over 2 years if targeted activity levels were met. If they weren’t met, the participant would pay full price for the Apple Watch. When comparing participants earning Apple Watch discounts to others using the well-being platform, the study found that the Apple Watch group increased their physical activity by 34% each month and were exercising almost 5 extra days per month.16

Integrate multiple dimensions of well-being into your company’s incentive strategy

Incentive programs often reward participants for physical health activities like an annual preventive visit or a dental exam. Business Group on Health data indicate that incentive dollars are primarily tied to health assessments and/or biometric screenings (50%) and physical health initiatives (30%). Only 13% of employers reward mental health initiatives like preventive mental health visits and stress management programs, and fewer still incent financial well-being initiatives (7%).1 Opportunities exist for employers to bolster the rewarded activities, including social connectedness activities like volunteering. In fact, one Business Group employer has taken this idea a step further by converting all earned incentives into charitable contributions.

A Growing Interest in Lifestyle Spending Accounts

Coinciding with the shift toward more flexible and inclusive incentive programs is a growing interest in ‘lifestyle spending accounts’ (LSAs). According to a recent Mercer survey, while only 10% of employers currently have an LSA in place, “a startling 70% of respondents… are considering adding [one].”17 LSAs, sometimes called “well-being wallets,”18 are employer-funded post-tax accounts that provide employees with a fixed amount to spend on the well-being resources they most value. LSAs can benefit employers and employees alike by providing choice and versatility. Incentives and LSAs aren’t mutually exclusive; LSAs can be offered in tandem with existing incentive structures.

Here are some of the reasons these accounts are attracting interest:

LSAs offer a channel to streamline an employer’s budget and benefit offerings

Because they are post-tax accounts, LSAs can be used for many purposes. Notably, employers can keep the list of eligible items as broad or narrow as desired. One Business Group on Health member who offers an LSA recommends that employers make the list of eligible items simple and straightforward to create a more personalized benefit and minimize the potential for friction among employees. A few popular items included on this company’s list are student loan repayment, national park passes, virtual reality sets and fitness items like gym memberships, exercise equipment and fitness trackers. In addition to deciding what activities are covered by an LSA, employers can, in certain circumstances, differentiate the seed amounts for various employee populations. For example, if an employer wants to focus retention efforts on hourly employees, they may be able to fund those accounts more heavily than salaried employee accounts.19 The accounts also offer a way for employers to streamline benefit offerings. Instead of investing in many different solutions that may be underutilized, employees can use the funds to address their most pressing well-being needs at a point in time. One employee may choose to purchase meal kit delivery services, while another puts LSA funds toward student loan repayment, and yet another uses the funds for family planning. This array of choice can instill a sense of autonomy that is beneficial for employee satisfaction and retention. Value is in the eye of the beholder, and LSAs enable employees to invest in the activities most important to them.

LinkedIn’s PerkUp! Program

LinkedIn’s PerkUp! program enables employees to use their lifestyle spending account funds for the perks that best fit their needs – from fitness classes, gym memberships, massage, personal trainers, childcare, eldercare, pet care, and house cleaning to tax preparation and student loan repayments. The company offers $2,000 annually, which employees can put toward one purchase or spread out over multiple eligible items. The funds are use-it-or-lose-it each plan year and can’t be cashed out or traded for other benefits. When piloting the program in 2015, LinkedIn focused on their “biggest asks globally,” which included help with childcare and wellness. Based on employee feedback, the company has expanded the benefit over time to include other perks in high demand, including rock climbing memberships and pet care.20


LSAs offer financial flexibility

While LSAs can be a significant company investment, employers retain control of key decisions related to account structure. Unlike HSAs or FSAs, employers can determine whether the funds in an LSA are use-it-or-lose-it at the end of each year. Additionally, funds in an LSA are only paid out when an employee uses them, so employers retain money not spent.21 LSAs can be frontloaded or funded over the course of the plan year, making them attractive to companies with high turnover. LSA funds can also be prorated for part-time populations, allowing employers to offer the benefit to that population with a lower impact to the benefits budget. Because LSAs are considered taxable income, employers should consider allowing employees to opt out of receiving the funds before the beginning of the plan year.17

EY’s Way of Working Fund: Financial Incentives to Return to the Office

As the third year of the COVID-19 pandemic approaches, many employers are increasingly determined to bring employees back to the office. Unfortunately, obstacles such as inflation and employee attitudes toward remote work are dampening these efforts. In response to these headwinds, EY US implemented a creative program to incentivize employees to come back on-site. The “EY Way of Working Fund” is an annual benefit that provides the financial support U.S. employees may need to get together for moments that matter – whether that be costs for commuting, dependent care or pet care. EY’s benefit highlights the potential contribution of financial incentives to building goodwill and creating culture.


LSAs can help employers maintain global consistency

Because LSAs are not U.S.- specific benefits with as many tax restrictions (like medical or dependent care spending accounts), they can be offered more broadly and may help support global parity.18 These accounts are not inhibited by the same cultural pitfalls that other incentives may encounter, since the funds aren’t tied to health outcomes and can be spent on a wide variety of options. Tax structures may vary by company, so employers should be sure to review local requirements if choosing to offer the benefit globally.

LSAs are an inclusive benefit that can tap into all pillars of well-being

By detaching financial rewards from a limited set of activities (e.g., biometric screenings or physical activity thresholds), LSAs can be designed to embrace all pillars of well-being, including physical, financial and emotional well-being.23 A 2020 survey revealed that two thirds of employees feel stressed when thinking about their financial future.24 LSAs can reduce the financial strain on employees by covering things like credit counseling, budget-tracking software, estate planning and student loan repayment, as well as day-to-day needs like groceries. LSAs can be also made available to all employees, including full-time and part-time employees, regardless of health plan status.

What Expenses Can LSAs Be Used for?

Because LSAs are taxable, their use is significantly more expansive than more traditional benefits like health saving accounts, health reimbursement accounts and flexible spending accounts. Some common covered LSA items include:17,25,26

  • Annual park passes (local and national parks);
  • Athletic/exercise equipment;
  • Budget- tracking services;
  • Camping and outdoor supplies;
  • Estate planning;
  • Financial advisor services;
  • Fitness trackers and devices;
  • Gym or fitness studio classes and memberships;
  • Home office equipment;
  • Identity theft services;
  • Massages;
  • Non-medical counseling (life coaching, parenting courses, executive coaching);
  • Nutritional supplements;
  • Personal development activities (cooking classes, art classes, meditation)
  • Personal trainer fees;
  • Pet care (walkers, grooming);
  • Recreational sports (rock climbing, tennis);
  • Tax preparation; and
  • Weight management programs.

As with any new benefit, LSAs have nuances and potential downstream impacts to consider

While interest in LSAs is growing, some employers aren’t quite ready to introduce this benefit. First and foremost, LSAs are a significant investment requiring leadership buy-in; account contributions typically range from $500 to $2,000 per person and must account for employer and employee taxation as normal income. Similar to traditional well-being incentives, once implemented, these programs can be hard to discontinue without disruption and negative employee perception. Beyond the financial aspects, because the reward isn’t tied to traditional incentive program activities, employers may not capture as much or any useful health and biometric data, which may be needed to justify the investment after the fact. Also, to maximize its value and the flexible spending options, it is more challenging to administer a robust program without the help of a vendor partner. LSAs also have other regulatory and compliance factors for employers to consider, including avoidance of inadvertently triggering group health plan requirements and navigating any applicable wellness, ADA or other general legal issues. Employers should consult with tax, legal and benefit advisors when considering the benefit.26

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TABLE OF CONTENTS

  1. Incentives Can Be Leveraged to Increase Program Participation and Encourage Specific Behaviors
  2. Considerations for an Effective and Equitable Incentive Program
  3. Reenvisioning the Next Iteration of Well-being Incentives
  4. A Growing Interest in Lifestyle Spending Accounts