During a panel at PLANSPONSOR’s virtual 2021 HSA Review conference, “Plan Sponsor Duties With Regard to HSAs,” an attorney and an adviser discussed legislation and regulations applicable to health savings accounts (HSAs), as well as employers’ duties and responsibilities with regard to HSA investments.
Christine Keller, principal at Groom Law Group, Chartered, said plan sponsors have limited administrative duties when it comes to HSAs. Their duties primarily relate to the way employees’ contributions get from payroll to their HSAs, which are held by an HSA administrator, she explained.
Jamie Greenleaf, senior vice president at OneDigital Retirement + Wealth, noted that HSAs are owned by individuals, so employers only aid in their administration. In other words, the benefit is not explicitly tied to an employer. This is a point of confusion for both employers and employees, she noted.
Keller said an employer may offer an HSA as part of its cafeteria plan, allowing an individual to make HSA contributions on a pre-tax basis to avoid income tax withholding from wages, as well as Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA) and Railroad Retirement Tax Act (RRTA) withholding. Using a cafeteria plan, employers can also contribute to an employee’s HSA.
Or contributions may be made outside a cafeteria plan (subject to Internal Revenue Code [IRC] Section 4980G) on an after-tax basis, with a corresponding deduction available, Keller added.
Employers can avoid having their HSA benefit subject to the Employee Retirement Income Security Act (ERISA) by having limited involvement with the plan.
Keller said when HSAs were first enacted, the Department of Labor (DOL) issued two field assistant bulletins (FABs) boiling down the rules regarding what employers can and cannot do.
In FAB 2004-01, the DOL provided guidance concerning when an HSA could be considered outside the definition of ERISA. Specifically, FAB 2004-01 provides that an employer can contribute to an HSA and can select a single HSA provider to which it will forward employer and employee contributions without causing the HSA to become subject to ERISA as long as it follows several terms. She said these terms include that the employee establish an HSA voluntarily; that the employer does not make or influence investment decisions with respect to funds contributed to an HSA; and that the employer does not impose conditions on the use of HSA funds, such as stating that HSA distributions may only be used for medical expenses.
According to Keller, in FAB 2006-02, the DOL clarified that an employer can take the following actions and still satisfy the requirements of FAB 2004-01 that allow employee HSAs to be outside the scope of ERISA: It can select an HSA provider that also offers some or all of the investment options made available to employees in the employer-sponsored defined contribution (DC) plan and it can pay HSA fees that the employees would otherwise have to pay.
Greenleaf said, “We think of [HSAs] like an individual retirement account [IRA]. Plan sponsors just need to withhold the dollars and send it to the provider.” However, she noted that she does not see anything wrong with having the HSA benefit covered by ERISA, with its protections and duties of prudence, but most plan sponsors don’t want to go there.
Investing With an HSA
When it comes to HSA investments, Greenleaf said she is not a fan of mirroring the investments on a plan sponsor’s DC plan investment menu. “HSA dollars are different from DC dollars, so why use the same funds?” she queried. “Plus, when an investment on the plan menu is not prudent, does the plan sponsor have the obligation to have the fund changed that the [HSA] provider manages?”
Greenleaf said she promotes a model portfolio approach to HSA investments. The model is based on how employees use their accounts—as a long-term savings vehicle or a short-term spending account.
Keller said for employers that don’t want to trigger ERISA governance over their HSA benefit, it is best to take a hands-off approach. “Plan sponsors, for instance, can find an HSA administrator that has several off-the-shelf investment options and choose one,” she told conference attendees. “If a provider offers only one option, then the investment is being hand-picked, which should be avoided.”
Greenleaf noted that in her practice, she finds that HSAs are more often than not being used like flexible spending accounts (FSAs)—that is, employees are spending their account dollars on short-term medical expenses—so HSA education should be a priority over HSA investments.
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