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HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner. Employer Sponsored HSAs?. Now that HSAs have been in existence for some time, employers may be evaluating them as investment-oriented benefits for: Employees in general Executives

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HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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  1. HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

  2. Employer Sponsored HSAs? • Now that HSAs have been in existence for some time, employers may be evaluating them as investment-oriented benefits for: • Employees in general • Executives • Clearly, HSAs can only accumulate for investment if not used for ongoing medical expenses, so utilization of such a program will not be universal.

  3. Questions for Employer and Provider • Would an Employer Sponsored HSA Program be Subject to ERISA? • The employer, and all service providers to the employer’s program, must consider whether the program is subject to ERISA. • What happens if an HSA program is subject to ERISA? • ERISA’s fiduciary and other investment-oriented rules apply.

  4. ERISA’s Investment Rules • Investments must be • Prudent • Diversified unless clearly prudent not to diversify • Protected from prohibited transactions • An employer would likely be a fiduciary of its ERISA-covered HSA program. • Advisors providing or recommending investments would be ERISA fiduciaries.

  5. Possible Practical Consequences if HSA Programs Are Subject to ERISA • Liability Risk for fiduciaries (including de facto fiduciaries) if Investments are not viewed as prudent. • Co-fiduciary liability is a possibility • Service provider compensation must be reasonable. • Compensation structures may be difficult to defend if unreasonable fees could result. • Proper fee disclosures would be necessary.

  6. Concerns for Employer with More Than One Plan • Many employers interesting in sponsoring an HSA program will already have at least a 401(k) program, and they may well want to add the HSA program on to the existing structure. If the HSA program is subject to ERISA: • It will be important to make sure neither plan’s assets are used to benefit the other. • This issue could impact both the employer and its investment providers.

  7. Additional Prohibited Transaction Issues • HSAs are subject to Internal Revenue Code prohibited transaction rules even if the HSAs are exempt from ERISA. Additional wrinkles could emerge, however, if ERISA applies because the conditions for exemption are not met. • Fiduciaries may not use the assets of the plan for their own benefit. An advisor to an HSA program subject to ERISA could be subject to additional scrutiny compared to exempt HSAs.

  8. ERISA Exemption for Most HSAs • Under FAB 2004-1, most HSAs are exempt from ERISA if the establishment of the HSAs is completely voluntary on the part of the employees. • However, as with other exemptions, there are conditions in order for an employer’s HSA program to be exempt, and the employer (and its advisors) must not violate these conditions.

  9. Conditions for ERISA Exemption • Under FAB 2004-1, the HSAs must belong to the employees. To be exempt from ERISA, the employer must not: • limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; • impose conditions on utilization of HSA funds beyond those permitted under the Code; • make or influence the investment decisions with respect to funds contributed to an HSA.

  10. Further Conditions for Exemption • Under FAB 2004-1, the employer sponsoring an ERISA-exempt HSA program cannot assume ERISA responsibilities or benefit financially from the HSAs. The employer must not : • represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or • receive any payment or compensation in connection with an HSA.

  11. If ERISA Exemption Conditions are Violated – What Happens? • The HSA could be drawn into ERISA coverage under FAB 2004-1 if the employee’s coverage by the HSA were not voluntary, or if any of these conditions for ERISA exemption were violated.  • A heavily marketed program based on investment options, for example, could cross over the FAB 2004-1 line even with respect to the HSAs themselves.

  12. Special Issues Under FAB 2006-2 • Most HSAs are not in danger of becoming covered by ERISA.  The ERISA exemption is broad, and covers HSAs the way most are created and operated. • However, there are limits on the leeway afforded.  Crossing those limits can lead to loss of the ERISA exemption. • FAB 2006-2 addresses special circumstances.

  13. May an Employer Establish an HSA for an Employee? • Yes, and even without the employee’s express consent, provided: • The conditions for exemption (from FAB 2004-1) must be met. • The employee must be able to “move the funds to another HSA or otherwise withdraw the funds."  Any restriction designed to inhibit an employee’s free movement to another HSA would jeopardize the ERISA exemption for the HSA.

  14. May an employer limit the HSA providers? • Yes, an employer may limit the HSA providers to which it will make or transfer contributions.  • Under one approach to ERISA exemption, however, it is important that the employer not “endorse” the HSA provider or the employer will (or may) have violated this rule. • There may even be only one provider as long as the employer refrains from “endorsing” that provider. 

  15. Employer Limiting HSA Providers • Too much pushing towards a single HSA provider could cross the line into the employer having endorsed the program or the provider, and thus jeopardize the ERISA exemption. •  Also, an employer cannot “make or influence” the employees’ investment choices if the employer wants the HSAs to be exempt from ERISA. 

  16. Coordinating HSAs with 401(k) Plan Investment Options • An employer may offer the same or similar investments through its HSA program as those it offers to its 401(k) plan, but only if: • Employees are “afforded a reasonable choice of investment options, and • Employees are not limited in moving their funds to another HSA.”    

  17. May an HSA Vendor Offer its Own Products to its Own Employees? • Yes, an HSA vendor may offer its own HSA products to its employees, so long as it does so “in the regular course of business.”  • And an employer, including an employer that is an HSA vendor, may pay expenses associated with an HSA that the employee would normally have to bear. 

  18. Traps for HSA Vendor Using Own Products for Own Employees • Presumably, affirmative incentives for the vendor’s employees to use the vendor’s own HSA products (such as payment of the fees only if the employee uses the vendor’s products) could cross the line into an ERISA-covered (and an ERISA-noncompliant) HSA program.

  19. May an HSA Vendor Discount Other Products as an Incentive for HSAs? • NO. FAB 2006-2 makes clear that a discount from an approved HSA vendor on any other product offered by that vendor will constitute a “payment” or “compensation” to the employer, and thus invalidate the ERISA exemption (making the HSAs subject to ERISA).

  20. Prohibited Transactions Rules Apply, per FAB 2006-2 • Even an ERISA-exempt HSA will be subject to the prohibited transaction rules of the Internal Revenue Code.  • “Employers who fail to transmit participants' HSA contributions promptly may violate the prohibited transaction provisions of section 4975 of the Code.” 

  21. Prohibited Transactions • An investment advisor (for the 401(k) plan, for example), introducing HSAs into an existing fiduciary relationship must be extremely careful. Cross-subsidization of the various products could create : • A prohibited transaction for the employer (using one plan’s assets to benefit the other), or • A self-dealing issue for the employer, if the fiduciary benefits itself with plan assets.

  22. HDHPs Fully Subject to ERISA • Even if HSAs avoid ERISA applicability, they must be paired with a High Deductible Health Plan (“HDHP”) in order for the participant to qualify for the HSA. • Unless otherwise exempt (government plan, for example), the HDHP will always be subject to ERISA.

  23. Possible Plan Design Objectives • HSAs were designed to be used in health plan design to save health care dollars. • People may not want to use medical services in order to save the HSA funds for later. • HSAs will thus be most attractive to advisors if employees are medically able to save their HSA contributions, or are financially able to pay medical expenses out-of-pocket with after-tax dollars.

  24. Possible Plan Design Traps • Health plans, including the HDHPs that go with HSAs, have rules that retirement plan advisors may not be familiar with: • Prohibition on discrimination against those with adverse medical factors. • Incentives for people to go on Medicare are prohibited. • Too much enthusiasm towards those who can save in HSAs could create violations of rules.

  25. HSAs & RETIREMENTPLAN ADVISORS: A LEGAL,FIDUCIARY & BESTPRACTICES PERSPECTIVE Marcia S. Wagner 99 Summer Street, 13th Floor Boston, Massachusetts 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0130825.ppt

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