Art by Dadu Shin
SECTION 223 of the Internal Revenue Code (IRC) defines a
health savings account (HSA) as a trust or custodial account established
exclusively to pay qualified medical expenses of an account beneficiary covered
by a high-deductible health plan (HDHP). This account may receive tax-favored
contributions from the employee, from his employer or from both. Amounts in an
HSA may be accumulated over the years or distributed on a tax-free basis to pay
for certain medical expenses.
In general, according to the Department of Labor (DOL), HSAs
are not viewed as “welfare benefit plans” subject to the Employee Retirement
Income Security Act (ERISA). However, as discussed below, this exemption is
contingent on the employer’s limited involvement with the HSA, and advisers
assisting employers with HSA arrangements need to be aware of such limitations.
Voluntary employee contributions.
DOL Field Assistance Bulletin (FAB) 2004-1 states that in order to qualify for
ERISA exemption, an HSA must be completely voluntary on the part of the
employees. The bulletin goes on to specify those activities an employer must
refrain from so as to avoid employer control. An employer cannot 1) limit the
ability of employees to move their funds to another HSA; 2) impose conditions
on the utilization of HSA funds; 3) make or influence HSA investment decisions;
4) represent that the HSA is an employee welfare benefit plan; or 5) receive
any payment or compensation in connection with the HSA.
FAB 2006-2, another piece of guidance from the DOL, also
indicates that, in the absence of affirmative consent, an employer may open an
HSA for an employee and deposit employer funds into it without violating the
requirement that establishment of an HSA by an employee be “completely
voluntary.” The intended purpose of this rule is to ensure that any
contributions an employee makes to an HSA, including salary reduction amounts,
will be voluntary and that the deposit of employer funds does not divest the
employee of this control.
restrictions. FAB 2004-1 also provides that, if movement of HSA funds by
employees is unrestricted, certain limitations imposed by an employer will be
permitted without jeopardizing the HSA ERISA exemption. These include
restricting the forwarding of contributions through the employer’s payroll
system to a single HSA provider and permitting only a limited number of
providers to advertise or market their products in the workplace.
employer endorsement. It’s important that the employer not “endorse” an HSA
provider, or the employer may be found to have crossed the line and become
“involved” with the HSA program.
A similar requirement can be found in the ERISA exemption
for employer-sponsored individual retirement account (IRA) programs and 403(b)
arrangements. When selecting an IRA provider where an employer offers a SIMPLE
[Savings Incentive Match Plan for Employees] IRA plan or a payroll deduction
IRA, the employer must remain neutral about the IRA provider. However, the
guidance relating to HSAs is more liberal than IRA guidance when it comes to
employer contributions or fees paid by employers, which employees would
otherwise be required to pay; these employer expenditures are allowed in the
HSA context. Further, employers may provide employees with general information
on the advisability of using an HSA in conjunction with a high-deductible plan
without being treated as endorsing the HSA.
FAB 2006-2 provides further detail regarding employer
actions that will not give rise to an ERISA-covered plan by noting that an
employer will not be “making or influencing” the HSA investment decisions of
employees if it offers the same or similar investments through its HSA program
as are provided under its 401(k) plan; however, employees will then need to be
“afforded a reasonable choice of investment options and be allowed to move
their funds to another HSA.”
Prohibited transactions. Importantly, FAB 2006-2 also reminded
employers that HSAs, even if exempt from ERISA, are subject to the prohibited
transaction rules of the IRC. Similar to the requirement that employers
promptly transmit employees’ salary reduction amounts to a 401(k) plan, an
employer that fails to promptly transmit participants’ contributions to the HSA
trustee or custodian will violate the code’s prohibited transaction rules,
resulting in imposition of excise taxes. In addition, an employer’s receipt of
a discount on another product from an HSA vendor that the employer selected
could constitute a prohibited kickback; this would raise fiduciary issues as
well as prohibited transaction penalties. Cash incentives paid to HSA
account-holders would be problematic for the same reasons.
Marcia S. Wagner is
an expert in a variety of employee benefits and executive compensation issues,
including qualified and non-qualified retirement plans, and welfare benefit
arrangements. She is a summa cum laude graduate of Cornell University and
Harvard Law School and has has practiced law for 27 years. Wagner is a frequent
lecturer and has authored numerous books and articles.