United States: DOL Paves The Way For Employer-Arranged Health Savings Accounts

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.

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.

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.

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.

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.