Employers should not, through good intentions, become overinvolved in employees’ decisions to invest in health savings accounts (HSAs). Over-involvement could inadvertently lead to triggering Employee Retirement Income Security Act (ERISA) coverage of the accounts—and employer obligations under ERISA—when ordinarily, HSAs are not covered.
Employers should refrain from six actions to ensure their HSAs are not covered by ERISA, according to Steven Mindy, an attorney with Alston & Bird in Washington, D.C. Employers should not:
- Make employees’ contributions to an HSA involuntary.
- Limit employees’ ability to move funds to another HSA.
- Impose conditions on the use of HSA funds. If employees want to use the funds for something other than medical expenses, they must be allowed to, even though the employees may have to pay penalties and taxes on the funds.
- Influence HSA investment decisions.
- Represent that the HSA is subject to ERISA.
- Receive payment in connection with the HSA.
An employer can unilaterally open an HSA for an employee and deposit employer funds into the HSA, noted Tad Devlin, an attorney with Kaufman Dolowich & Voluck in San Francisco. This does not deprive the HSA account holder of control and responsibility and therefore does not give rise to an ERISA-covered plan.
HSAs sometimes replicate 401(k) plan investment choices, Mindy noted. If some but not all of the 401(k) options are offered in the HSA, that might be considered influencing employees’ investment decisions, Mindy cautioned.
“It is extremely important for the employer to communicate that the HSA program is not subject to ERISA when introducing the HSA in conjunction with employment-based health plans,” Devlin said. He recommended avoiding the use of the word “plan” after HSA to avoid confusion among employees about whether it is covered by ERISA.
“We are operating in an era of ‘wrap plan’ documentation where information may be pulled together in one document or interrelated documents,” said Ann Caresani, an attorney with Tucker Ellis in Cleveland and Columbus, Ohio. A separate communication stating that HSAs are not ERISA plans may clarify that point but is not required.
Consequences of Being Subject to ERISA
Devlin noted that if the HSA program were subject to ERISA, employers would have to:
- File Form 5500s annually with the Department of Labor (DOL).
- Provide a written plan document and summary plan description.
- Follow DOL claims procedures.
- Offer COBRA continuation coverage.
If ERISA applied, COBRA calculations would be particularly difficult to calculate, Mindy said.
“An employer sued under ERISA would be subject to penalties and potentially prevailing party attorney’s fees,” Devlin noted.
While most benefits attorneys recommend preserving the ERISA-exempt status of HSAs, Andrew Oringer, an attorney with Dechert in New York City, and Shannon Rushing, an attorney with Dechert in Philadelphia, noted in an e-mail to SHRM Online the following possible positive aspects of ERISA coverage:
- Federal pre-emption of state law. This could provide for greater uniformity and certainty and would usually bar punitive damages claims.
- Provisions giving the plan administrator the right to interpret the plan have been specifically upheld in the ERISA context.
- Oral assurances to employees may be more likely to be unenforceable under ERISA.
But the presumption is HSAs are not subject to ERISA, Rushing emphasized in a follow-up call. She would be surprised if an HSA administrator contractually agreed to take on any liability under ERISA.
These Rules Always Apply
One controversial aspect of the DOL fiduciary rule was to include HSAs among the types of accounts subject to the rule. As a result, “employers will need to be more diligent about reviewing the fees charged to HSA participants,” said Marcia Wagner, an attorney with The Wagner Law Group in Boston.
The Internal Revenue Code’s prohibited transaction rules still apply to HSAs, said Damian Myers, an attorney with Proskauer in Washington, D.C. So, employers must deposit contributions withheld from pay in a timely manner.
Disqualification from HSA Eligibility
Employers that offer HSAs also should keep track of other benefits offerings that could disqualify an individual from HSA eligibility, he said. “For example, an employee cannot be enrolled in both an HSA and a general purpose flexible spending account. Instead, a limited-purposes flexible spending account [FSA] that reimburses costs for dental and vision only should be established for HSA enrollees,” he noted.
There may be special concerns for employees who are moving between employer-sponsored plans from one plan year to the next, Oringer and Rushing said.
“For example, an employee participating in a low-deductible plan option while contributing to a health care FSA during one plan year should not be permitted to maintain a balance in the health care FSA during the following plan year while participating in a high-deductible plan with an HSA,” they cautioned.