How to Run an HSA Exempt from ERISA

While few employers that offer health savings accounts (HSAs) become overly involved in running them and thereby subject the accounts to the Employee Retirement Income Security Act (ERISA), there are Department of Labor (DOL) guidelines that advisers should be aware of when working with plan sponsor clients on HSAs to avoid this foible, says Steven Mindy, an attorney in Alston & Bird’s compensation, benefits and ERISA practice in Washington, D.C.

Namely, DOL issued a Field Assistance Bulletin in 2004 addressing HSAs and ERISA and then followed up with further guidance in 2006, Mindy says. The DOL said employers can either follow the safe harbor practices for group insurance plans to avoid subjecting their HSAs to ERISA or follow six guidelines, he says.

The first is that participation in the HSA must be voluntary. Second, the employer cannot restrict their employees from moving funds in the HSAs the employer sponsors to another HSA. Third, the employer cannot influence or make investment decisions for their participants holding HSAs. Fourth, the employer cannot limit the employees from using the funds in their HSAs beyond what is permitted in the tax code; for example, the employer cannot tell their employees that they can only use their HSA funds for medical reasons, as HSA investors can use them for other purposes subject to penalties and taxes.

Fifth, and this is the most common mistake employers make, Mindy says, the employer cannot represent the HSA as part of their employee welfare benefit plan. Finally, the employer cannot receive any payment or compensation in connection with the HSAs.

Should the HSA become subject to ERISA, the employer would have to maintain a plan document and summary plan description and file a Form 5500 with the DOL annually, Mindy says. The more challenging component would be that the Health Insurance Portability and Accountability Act of 1996 (HIPPA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA) would apply to the HSAs, Mindy says. “That would be challenging because HSAs are individual accounts, and only the account holder knows their medical information,” he says.

Another area that employers should be aware of when offering an HSA that could potentially encroach into ERISA territory is if a participant is using their HSA as a savings account since it allows for pre-tax contributions, tax-free interest and the tax-free use of the money for medical purposes, Mindy says. Should an employer recommend an HSA over a 401(k) due to the tax-free use of the money, as opposed to the taxes paid on 401(k) plan withdrawals, that would be considered an investment recommendation.

However, for the most part, Mindy says, “it is very rare that an employer will run afoul of these rules, thanks to the advice from their advisers and service providers.”