Health savings accounts (HSAs) are growing in popularity as employers increasingly rely on high-deductible health plans, and only individuals enrolled in a high-deductible health plan can make HSA contributions (Sec. 223). Employer-sponsored high-deductible health plans generally are subject to the Employee Retirement Income Security Act (ERISA) of 1974, P.L. 93-406. However, the HSA that the employer offers its employees generally will not be subject to ERISA if the employer limits its involvement with the HSA. (ERISA does not apply to many church and governmental plans.)
The U.S. Department of Labor (DOL) has provided two safe harbors to help employers ensure they avoid ERISA, but only one of the safe harbors allows employers and employees to maximize the tax savings available from HSAs. Regardless of the safe harbor chosen, employers will want to ensure that their HSA plans do not become subject to ERISA since they will face significant compliance burdens. Also, most HSA providers will not support HSAs that are subject to ERISA and may require the employer to provide significant indemnification for the additional compliance burdens they face if an HSA becomes subject to ERISA.
DOL safe harbor for group or group-type insurance program
First, employers that follow the DOL regulatory safe harbor for group or group-type insurance programs will not cause their HSA plan to become subject to ERISA (DOL Field Assistance Bulletin 2004-01 (April 7, 2004); 29 C.F.R. §§2510.3-1(j)(1)–(4)). This safe harbor has four basic requirements:
- The employer cannot contribute to the HSA;
- The program must be voluntary;
- The employer's involvement in administering the arrangement must be limited to payroll functions and publicizing, but not endorsing, the program; and
- The employer cannot receive any consideration other than reasonable compensation for expenses related to the payroll functions it performs.
The DOL has said that employers can select a single HSA provider to which they will forward contributions without violating these requirements (DOL Field Assistance Bulletin 2006-02 (Oct. 27, 2006)). Employers can also give employees general information about using an HSA with a high-deductible health plan.
The safe harbor might not be very helpful to employers or employees because the restriction on endorsement has been interpreted to prohibit an employee's pretax contributions to an HSA through a Sec. 125 cafeteria plan (see, e.g., Butero v. Royal Maccabees Life Ins. Co., 174 F.3d 1207 (11th Cir. 1999) (incorporating an insurance policy in a summary plan description for a cafeteria plan factored in finding endorsement); Stoudemire v. Provident Life & Accident Ins. Co., 24 F. Supp. 2d 1252 (M.D. Ala. 1998) (premiums payable under a cafeteria plan factored in finding endorsement); and Hrabe v. Paul Revere Life Ins. Co., 951 F. Supp. 997 (M.D. Ala. 1996) (endorsement due to payment under a cafeteria plan)).
Recent Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, guidance that prohibits pretax premium payments for individual health insurance policies also indicates that the safe harbor does not apply when pretax contributions are involved (see, e.g., DOL Technical Release 2013-03 (Sept. 13, 2013): "Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL's regulation at 29 C.F.R. §2510.3-1(j) are met.").
If employees do not contribute through a cafeteria plan, then neither the employee nor the employer will experience any employment tax savings (i.e., Federal Insurance Contributions Act (FICA) taxes). Employees could receive this same result of making payments that are not subject to income tax but are still subject to FICA by contributing to the HSA directly and taking an above-the-line tax deduction on their tax return, which means the employer has little incentive to facilitate after-tax payroll contributions.
Special HSA safe harbor
The DOL provided a second safe harbor for HSAs in Field Assistance Bulletin 2004-01. An employer's HSA also will not be subject to ERISA as long as the employer does not:
- Require contributions (in other words, employees' contributions must be completely voluntary);
- Limit its employees' ability to move funds to another HSA;
- Impose conditions on employees' use of HSA funds;
- Make or influence investment decisions;
- Represent that the HSA is subject to ERISA; or
- Receive any payment or compensation related to the HSA.
Employers should be careful to avoid certain pitfalls related to these requirements, such as:
- Employers should consult counsel before automatically enrolling or using a negative consent procedure for pretax salary contributions. Although DOL guidance allows employers to make employer contributions to an HSA unilaterally, it is silent on whether an employer would violate the requirement for voluntary contributions if the employer used automatic enrollment or negative consent procedures (DOL Field Assistance Bulletin 2006-02).
- Although DOL guidance allows an employer to limit payroll contributions to a single HSA vendor, the employer must ensure that the vendor will allow employees to move their funds to another HSA vendor in accordance with IRS rules.
- Employers cannot require employees to use HSA funds for medical expenses. The employee must be allowed to withdraw funds for any reason, subject to applicable income and excise taxes when the funds are not used for eligible medical expenses.
- DOL guidance does not treat an employer as making or influencing investment decisions if the HSA provider selected offers only a limited selection of investment options or mirrors the options of the employer's 401(k) plan (DOL Field Assistance Bulletin 2006-02). However, it is possible that an employer that offers some, but not all, of its 401(k) plan options could be seen as influencing investments depending on the circumstances. The DOL generally requires employers to give employees a "reasonable choice" of investment options based on the relevant circumstances.
- Employers should ensure that communications to participants do not represent that the HSA is part of an ERISA welfare plan. Communications should include disclaimers that the HSA is not subject to ERISA and is not part of an employee welfare benefits plan. Employers may wish to have their communications and plan documentation reviewed by counsel to ensure that they do not violate this requirement.
- Employers should ensure that they do not receive compensation from HSA vendors, which might include discounts on other services from the vendor.
Following this second safe harbor will typically provide the greatest benefit to both the employer and the employee. Unlike the first safe harbor, both the employer and the employee will save on FICA contributions.
Consequences if an HSA becomes subject to ERISA
An employer will face significant compliance burdens if its HSA plan becomes subject to ERISA. Since regulators expect that most HSAs will not be subject to ERISA, they have not provided much guidance on the nuances of how ERISA and related laws for health plans will apply. Burdens that the employer faces if its HSA becomes subject to ERISA include:
- ERISA's reporting and disclosure requirements. For example, an annual Form 5500, Annual Return/Report of Employee Benefit Plan, would be required to be filed and a summary plan description would need to be distributed to participants.
- ERISA's claims procedures, although it is not clear how they would apply because participants can withdraw funds from an HSA at any time without submitting a claim.
- The portability, privacy, and security requirements of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), P.L. 104-191. HIPAA would create burdens for both the employer and the HSA provider.
- Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), P.L. 99-272. Among other things, COBRA could create a right to future employer contributions. Also, it might create a right for a spouse to receive an HSA with the same balance upon divorce or legal separation.
- Significant indemnification provisions under the HSA provider's contract with the employer due to the additional costs the provider will incur for supporting an HSA subject to ERISA. In addition to indemnification for past compliance matters, the HSA provider might terminate the agreement with the employer.
For these and other reasons, employers must be careful to ensure that their HSAs do not become subject to ERISA. Most employers will want to use the second DOL safe harbor since it typically provides the greatest tax benefit to the employer and the employee.
The DOL safe harbors seem complicated, but most employers manage to comply. Nonetheless, now might be a good time for an employer to have a checkup for its HSA plan to ensure it is not doing anything that might cause it to become subject to ERISA.
Also, even if the employer is confident that ERISA does not apply, it should ensure that it forwards contributions to the HSA provider promptly. The prohibited transaction rules of Sec. 4975 apply regardless of whether the HSA is subject to ERISA. The DOL noted that "employers who fail to transmit promptly participants' HSA contributions may violate the prohibited transaction provisions of section 4975 of the Code" (DOL Field Assistance Bulletin 2006-02, Q/A-8). Violating these prohibited transaction rules could trigger significant excise taxes.
Steven C. Mindy is a senior associate in the Washington, D.C., office of Alston & Bird, where he specializes in employee benefits and ERISA litigation on health and welfare benefits.