In early April, the Department of Labor ("DOL") issued Field Assistance Bulletin 2004-1 (the "FAB")addressing the application of ERISA to health savings accounts ("HSAs"). In a nutshell, the FAB clarifies that HSAs generally will not constitute ERISA-covered employee welfare benefit plans, provided that the employer’s involvement with the HSA is limited. The FAB was issued almost a week after the Treasury Department and IRS issued their latest guidance regarding the Code requirements of HSAs. (See our April 2004 Legal Alert on the Treasury and IRS guidance at The FAB is welcome guidance for employers who are thinking of offering HSAs to their employees, and the FAB, together with the recent guidance from Treasury and IRS, should significantly increase the growth of HSAs in the employer community.

Overview of the FAB

In general, any plan, fund or program that is established or maintained by an employer is an ERISA-covered employee welfare benefit plan, if the arrangement provides, medical, surgical or hospital care or benefits. Because HSAs are established to receive tax-favored contributions that can be used to pay or reimburse qualified medical expenses, the issue has arisen whether they are employee welfare benefit plans under ERISA. If HSAs were covered by ERISA, they would be subject to the burdens and responsibilities that apply to ERISA plans, including distributing summary plan descriptions to participants, filing annual Forms 5500 and possibly fiduciary responsibility for investments.

DOL initially confirms in the FAB that HSAs that meet the safe harbor requirements for group insurance programs in DOL regulation §2510.3-1(j) will not be employee welfare benefit plans. In general, this safe harbor requires – (1) no employer contributions, (2) voluntary participation by employees, (3) no endorsement of the HSA by the employer (other than collecting payroll deductions and forwarding them to the trustee), and (4) no compensation to the employer by the HSA provider (other than reasonable compensation for administrative services in connection with payroll deductions). However, DOL goes on to note that HSAs are really personal health care savings vehicles rather than a form of traditional group health insurance. For this reason, the FAB goes beyond the safe harbor for group insurance plans, creating a separate safe harbor exemption from ERISA for HSAs – an exemption that is applicable even where an employer makes contributions to an HSA.

Safe Harbor Exemption for HSAs Receiving Employer Contributions

Under the FAB, DOL provides that it will not find that employer contributions to an HSA create an ERISA plan as long as the establishment of the HSA is completely voluntary on the part of the employee and the HSA meets five conditions, each of which is individually discussed below –

  • The employer cannot limit the ability of eligible employees to move their funds to another HSA beyond the restrictions imposed by the Code.

This condition bars restrictions on the ability of eligible employees to move funds already in an HSA to another HSA. It does not bar the employer from restricting the number of HSA alternatives that the employer makes available for the receipt of payroll deduction amounts withheld from employees’ pay. Indeed, the FAB specifically provides that the employer may limit the forwarding of payroll deductions through its payroll system to a single HSA trustee, and may also permit only a limited number of HSA trustees to advertise or market their HSA products in the workplace. This aspect of the FAB is extremely helpful to employers because it avoids the practical burden of being required to establish payroll connections with numerous HSA trustees. Therefore, under the special HSA safe harbor, employers may establish HSA accounts at a single HSA trustee, if thereafter employees who desire to use a different trustee are permitted to roll over their funds into another HSA account to the extent permitted by the Code. Code section 223(f)(5) permits one rollover during each one-year period. However, the IRS may issue guidance allowing direct trustee-to-trustee transfers that would not be subject to the one-per-year rollover restriction. This would be consistent with the trustee-to-trustee transfers that are allowed for IRAs and Archer MSAs. If IRS permits trustee-to-trustee transfers for HSAs, presumably an employer could not restrict these transfers while still satisfying DOL’s special HSA safe harbor, because no restrictions on trustee-to-trustee transfers are imposed by the Code.

  • The employer cannot impose conditions on utilization of HSA funds beyond restrictions permitted by the Code.

It is noteworthy that this condition bars the employer from adding restrictions on the utilization of HSA funds beyond those that are "permitted" by the Code. On its face, this language gives the employer more latitude than is granted under the first condition, which only allows restrictions that are actually "imposed" by the Code. Here, the different language suggests the employer can apply any restriction that the Code does not forbid. This could be important because a number of employers are considering restrictions on the utilization of HSA funds, e.g., requiring employer HSA contributions to be used only for medical expenses. Nothing in the Code specifically forbids such restrictions and, so far, IRS and Treasury guidance has not forbidden them. However, the bottom line here is that the FAB sends mixed signals on the question of employer restrictions on utilization. As noted, DOL’s choice of language in phrasing this condition is encouraging. At the same time, in stating its rationale for the special HSA safe harbor, DOL emphasizes that "the beneficiaries of the account have sole control and are exclusively responsible for expending the funds in compliance with the requirements of the Code." (Emphasis added.) An employer considering utilization restrictions on HSA funds, therefore, will need to give careful consideration to the correct resolution of these mixed signals. At the same time, for the many employers who have no interest in imposing utilization restrictions, this condition will be easily met.

  • The employer cannot make or influence investment decisions with respect to funds contributed to the HSA.

Under the first condition discussed above, DOL does allow an employer to restrict contributions to a limited number of HSA providers, or even a single HSA provider. If the HSA provider that the employer selects offers an array of investment options, and an eligible employee makes the choice between these options without "influence" from the employer, this third condition for the safe harbor should be satisfied. On the other hand, if a single HSA provider chosen by the employer offers only one investment option (e.g., a money market investment), then the employer’s HSA structure would pose a real issue of whether the employer has made an investment decision for the HSA funds. Indeed, the HSA structure appears to raise this issue, even though employees are free to rollover their funds to another HSA trustee. To be on a safe footing with respect to this condition, therefore, employers will want to select an HSA provider that offers several investment options and then avoid influencing employees’ investment choices. While presumably offering investment education does not constitute "influence," care and caution to avoid "crossing the line" is always advisable when offering investment education.

  • The employer cannot represent that the HSA is an employee welfare benefit plan established or maintained by the employer.

Under a literal interpretation of this condition, an employer should be able to meet this fourth condition by clearly and unequivocally stating in its employee communication materials for the HSA that the HSA is not an employee welfare benefit plan established or maintained by the employer. Rather, the employer would characterize the HSA as established and maintained by the employee.

In examining prior DOL interpretations on similar issues, this fourth condition appears substantially less restrictive than the standard DOL has used in other contexts. For example, under the general safe harbor for group insurance programs discussed above and under a separate safe harbor for payroll-deduction IRAs, employers are barred from "endorsing" the program. This is functionally a broader prohibition and presents challenges when an employer communicates the program to keep the communication neutral and avoid an endorsement. The phrasing of this fourth condition appears to give employers more latitude in communications regarding HSAs. However, even under the more restrictive no-endorsement standard, Interpretive Bulletin 99-1 concerning payroll-deduction IRAs allows employers to encourage employees to save for retirement by providing general information on the program, including mentioning the advantages of contributing to the IRA, without the employer converting the program into an ERISA plan. Therefore, similar encouragement to take advantage of the HSA clearly should be permissible and, as noted, even more latitude should be available.

  • The employer cannot receive any payment or compensation in connection with the HSA.

Under the safe harbor for certain group insurance programs and the safe harbor for payroll-deduction IRAs, an employer may receive reasonable compensation for administrative services it performs in connection with deducting contributions from employee paychecks and forwarding them to the provider. However, under the FAB, it appears an employer may not receive any compensation from an HSA provider, even compensation that was based on the employer’s expense for payroll functions. Some have suggested that a reimbursement of expenses is different than a payment of compensation, and so such reimbursements should be permissible. However, it is significant that in prior DOL guidance such reimbursements are referred to as compensation. Therefore, the FAB’s prohibition on "compensation" is a strong signal that such reimbursements are not permitted under the HSA safe harbor.

Because the HSA safe harbor is narrower than the safe harbor for group insurance programs in this area, an employer that wants to receive compensation for payroll expenses could still do so by meeting the terms of the group insurance safe harbor. As noted above, the FAB makes clear that HSAs have the alternative of using the group insurance safe harbor to avoid the application of ERISA. This would apply stricter rules in some other respects. For example, it would bar HSA contributions by the employer and would subject employers to the stricter "noendorsement" rule discussed above. However, for employers who are not interested in making HSA contributions, the group insurance safe harbor is a viable alternative.

Other Issues

  • The HDHP is an ERISA plan – Satisfying the group insurance safe harbor or the special HSA safe harbor does not affect whether the high deductible health plan ("HDHP") is itself an ERISA-covered employee welfare benefit plan. (Under the Code, employees who are covered by an HSA must also be covered by an HDHP. See our April HSA Legal Alert for more on this requirement.) Specifically, the FAB provides that unless another exemption from ERISA would apply (e.g., the HDHP is a governmental or church plan), an HDHP offered by employer will be an ERISAcovered employee welfare benefit plan.
  • Voluntariness Issues – Under both the special HSA safe harbor and the group insurance safe harbor, the establishment of the HSA must be "completely voluntary" on the part of employees. However, this rule may conflict with the nondiscrimination requirements of Code section 4980G. That section requires an employer to make available comparable contributions to all comparable employees participating in an HDHP. In commenting on section 4980G compliance at the end of March, IRS officials unofficially suggested that it may not be enough for an employer to offer a comparable HSA contribution; instead, the employer may need to actually provide comparable contributions to all HDHP participants (if any HDHP participant receives an employer contribution). If the IRS and Treasury ultimately adopt this interpretation of section 4980G, an employer might not be able to give employees the right to decline receiving an employer HSA contribution. If an employee cannot decline an employer contribution, is the HSA that receives the employer contribution "completely voluntary"? IRS and Treasury can resolve this issue by providing that it does not violate section 4980G if employees have the right to turn down an unconditional employer contribution. That would still allow IRS and Treasury to address their primary area of concern, i.e., employer matching contributions, because matching contributions are conditioned on employees contributing. Alternatively, DOL could clarify that an employer’s making HSA contributions in conformance with section 4980G does not run afoul of the voluntariness requirement.
  • No ERISA Preemption for HSAs Satisfying the FAB – Although not addressed in the FAB, if an HSA is not an ERISA plan, then none of ERISA’s provisions apply, including preemption of state laws. This means that employers offering non-ERISA HSAs would be subject generally to the laws of the states in which their employees reside and employees could bring state law claims relating to HSAs. However, most employers already have some non-ERISA benefit programs, such as unfunded sick and vacation pay (or cancer insurance that complies with the group insurance safe harbor). The unavailability of ERISA preemption has not kept employers from offering these benefits, and it should not keep employers from offering non-ERISA HSAs. Most HSAs should offer little occasion for state law claims. This is because most HSA sponsors will not restrict the utilization of HSA funds and, therefore, the most common source of disputes for ERISA plans (benefit denials) will not be a factor. For employers who do wish to restrict utilization of HSA funds, structuring the arrangement to clarify the applicability of ERISA remains an option if state law is a concern.


The FAB is welcome news for employers who are thinking of offering HSAs to their employees, and who were concerned about ERISA compliance. The innovative reasoning the FAB adopts reflects a real interest in providing a regulatory environment for HSAs that is flexible and hospitable. All in all, the FAB strongly reinforces the view that HSAs will receive the governmental support needed to emerge as a real force in the health care marketplace.

The information contained in this article is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact the author(s) of this article or your existing firm contact. The invitation to contact the author is not to be construed as a solicitation for legal work in any jurisdiction in which the author is not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship must be confirmed in writing. You may also contact us through our Web site at