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

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

HSAs & RETIREMENTPLAN ADVISORS: A LEGAL,

FIDUCIARY & BESTPRACTICES PERSPECTIVE

Marcia S. Wagner

Page 2: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Employer Sponsored HSAs?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.

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Page 3: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Questions for Employer and Questions for Employer and ProviderProviderWould 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.

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Page 4: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

ERISA’s Investment RulesERISA’s Investment RulesInvestments 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.

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Page 5: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Possible Practical Consequences if Possible Practical Consequences if HSA Programs Are Subject to ERISA 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.

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Page 6: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Concerns for Employer with More Concerns for Employer with More Than One PlanThan One PlanMany 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.6

Page 7: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Additional Prohibited Transaction Additional Prohibited Transaction IssuesIssuesHSAs 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.

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Page 8: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

ERISA Exemption for Most HSAsUnder 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.

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Page 9: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Conditions for ERISA ExemptionUnder 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.

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Page 10: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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.

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Page 11: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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.

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Page 12: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Special Issues Under FAB 2006-2Most 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.

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Page 13: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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.

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Page 14: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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.

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Page 15: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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.

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Page 16: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Coordinating HSAs with 401(k) Plan Investment OptionsAn 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.”

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Page 17: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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.

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Page 18: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Traps for HSA Vendor Using Own Products for Own EmployeesPresumably, 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.

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Page 19: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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).

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Page 20: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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.”

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Page 21: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Prohibited TransactionsAn 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.

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Page 22: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

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.

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Page 23: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Possible Plan Design ObjectivesHSAs 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.

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Page 24: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Possible Plan Design TrapsHealth 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.

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Page 25: HSAs & RETIREMENT PLAN ADVISORS: A LEGAL, FIDUCIARY & BEST PRACTICES PERSPECTIVE Marcia S. Wagner

Marcia S. Wagner

99 Summer Street, 13th FloorBoston, Massachusetts 02110

Tel: (617) 357-5200 Fax: (617) 357-5250 Website: www.wagnerlawgroup.com

[email protected] A0130825.ppt

HSAs & RETIREMENTPLAN ADVISORS: A LEGAL,

FIDUCIARY & BESTPRACTICES PERSPECTIVE