It's not often that a retirement benefits compliance issue crosses over to the welfare side, but it does happen. Most recently this occurred with respect to health savings accounts (HSAs) and the DOL's fairly recent rules regulating ERISA fiduciary conduct, which aim to better define who is a fiduciary under ERISA when someone is providing investment advice or recommendations. What's interesting is that DOL expressly included vendors involved in the administration of HSAs in the scope of the new fiduciary rules.

Employers Should Care about the Fiduciary Status of HSA Trustees

As in the retirement benefits context, the folks setting up the investment platform and providing individual participants investment advice or recommendations are fiduciaries. To the extent the HSA plan or group of individual HSA accounts is an employer-sponsored plan, the employer (or committee of an employer) as ERISA plan administrator is a co-fiduciary of the plan, responsible for overseeing and holding accountable the other co-fiduciaries. This means that, if the HSA plan or group of individual HSA accounts is subject to ERISA, the same level of scrutiny that must be given to retirement plan investment fees must be given to HSA account and investment fees.

But Aren't HSAs Exempt from ERISA?

If you have a little technical knowledge of HSAs, then you know that an HSA is an individually-owned account—the health and welfare equivalent of the individual retirement account (IRA). Like IRAs, the employer has no control over, and no duty to monitor, whether employees are spending HSA money on the right things. In short, they're not employer-sponsored.

You might also know that, technically speaking, the HSA (meaning the individual's HSA investment account) is separate from the funding mechanism the employer provides so that employees can make salary reduction elections to contribute to their individual HSAs on a pre-tax basis. And you might even know that, as a funding vehicle only, the HSA contribution feature of a Section 125 cafeteria plan is not technically subject to ERISA.

As HSA plan designs have evolved and grown, however, these truisms are becoming less and less universally true.

Some Technical Details for the Geek in All of Us

As HSAs came into being and gained traction, DOL received numerous requests for guidance on whether HSAs were employer-sponsored welfare plans under ERISA. In response to these requests, DOL issued two Field Assistance Bulletins, FAB 2004-1 and FAB 2006-02. DOL came to the conclusion that the HSA itself (that is, the individual's HSA investment account) is not subject to ERISA, provided the employer follow the voluntary plan safe harbor for worksite policies. The voluntary plan safe harbor contains 4 requirements:

1. There can be no employer contributions.
2. Employee participation is completely voluntary.
3. There can be no employer endorsement of the plan or policy, but the employer can collect premiums through payroll deductions and permit the worksite vendor to publicize the program.
4. The employer receives no benefit or compensation except for reimbursement of reasonable expenses it incurs for administering the program—e.g., a small reimbursement for the payroll activities required to deduct employee premiums and remit them to the insurer.

Applying that regulation to HSAs, the DOL stated that employers must do the following things in order to keep the HSA from being an employer-sponsored plan subject to ERISA:

1. Contributions to employee HSAs must be completely voluntary.
2. The employer cannot limit employees' ability to transfer their HSA funds to a different HSA vendor.
3. The employer cannot impose conditions on how employees use their HSA funds.
4. The employer cannot make or influence HSA investment decisions.
5. The employer must not endorse the HSA, except that it may limit the number of HSA vendors to which it will remit HSA contributions, and it may tell employees about the general benefits of saving via an HSA.
6. The employer cannot receive direct or indirect payment or other consideration in connection with the HSA, including discounts on other products.

Regarding what DOL means by "endorsement" of the HSA, DOL has looked to analogous IRA guidance, in particular DOL Interpretive Bulletin 99-1: "[T]he employer must make clear that its involvement in the program is limited to collecting the deducted amounts and remitting them promptly to the [HSA] sponsor and that it does not provide any additional benefit or promise any particular investment return on the employee's savings" (substituting "HSA" for "IRA").

HSAs Can Easily Become ERISA Plans

For the most part, the classic plan design of pairing an HSA contribution vehicle with an HSA-qualified high-deductible health plan (HDHP) satisfies these requirements, with one major sticking point. As HSA/HDHP plan designs grew in popularity, insurers and TPAs responded by offering their own prepackaged HSA/HDHP pairings in which the insurer or TPA (or a subsidiary of the insurer or TPA) was both the health plan insurer/administrator and the HSA administrator. The plan documentation that insurers and TPAs provide employers is sloppy, at best. On top of that, the marketing departments of insurers/TPAs have created slick materials that accomplished their intended task of selling HDHPs and HSA services, but they also tend to create the perception in the eyes of employers (and likely employees) that the two components are one employer-sponsored plan. This is precisely the kind of endorsement that the DOL cautioned employers to avoid.

The Regulatory Landscape Is Shifting

Not only has the quality of the HDHP/HSA plan design evolved, but so has the quantity. The DOL's HSA guidance is over a decade old, before HSA popularity exploded. According to research by Devenir Group, in 2006, when the DOL issued its most recent HSA guidance, the aggregate amount Americans invested in HSAs was $1.7 billion. That figure is now $34.7 billion, representing a 20-fold increase over a 10 year period. What's more, the research shows that the single largest factor contributing to new HSA accounts is "health plan partnerships," which is a euphemism for exclusive, employer-selected HSA vendors tied to employer-sponsored high-deductible plans.

This is an important observation because employers are already liable for regulatory compliance of certain aspects of HSA plan designs—namely indirect compensation received by the employer from the HSA vendor and forwarding of employee contributions. DOL is on quite the consumer protection bent, so as the amount invested in HSAs grows, it's reasonable to think that regulatory oversight and scrutiny will grow with it. It's likely DOL will begin to more narrowly construe the voluntary plan safe harbor and be less forgiving of facts that indicate employer endorsement of individual HSA investment accounts. 

Action Items and Recommendations

The DOL's new fiduciary rules are complex, and the implications for HSA vendors and employers are yet to be fully realized. There are, however, a few key things to consider and steps that employers can take now.

1. Include an IRA-like disclaimer in open enrollment materials (e.g., the employer does not select the HSA trustee or investment advisor; employees should do their homework and compare HSA fees; the employer does not provide any additional benefit or promise any particular investment return on the employee's savings; etc.).
2. Update plan documents to clearly distinguish between the individually-owned HSA investment accounts and the Section 125 cafeteria plan funding mechanism that permits pre-tax salary reduction contributions to those individually-owned HSA accounts.
3. Consider whether to permit salary reduction contributions to any HSA or HSAs maintained by a list of vendors in order to reduce the likelihood of employer endorsement.
4. Even if there is ample evidence that the employer does not endorse the HSA program, employers should still compare investment and administrative fees charged to participants when selecting an HSA vendor, just like for 401(k) plans, and they should document their fee review efforts. Fee litigation is popular, and employer liability for HSAs is far from a settled matter. Better safe than sorry.