HSAs & RETIREMENT
PLAN ADVISORS: A LEGAL,
FIDUCIARY & BEST
PRACTICES PERSPECTIVE
Marcia S. Wagner
Employer Sponsored HSAs?

Now that HSAs have been in existence for
some time, employers may be evaluating
them as investment-oriented benefits for:
◦ Employees in general
◦ Executives

Clearly, HSAs can only accumulate for
investment if not used for ongoing
medical expenses, so utilization of such a
program will not be universal.
2
Questions for Employer and
Provider

Would an Employer Sponsored HSA
Program be Subject to ERISA?
◦ The employer, and all service providers to the
employer’s program, must consider whether
the program is subject to ERISA.

What happens if an HSA program is
subject to ERISA?
◦ ERISA’s fiduciary and other investmentoriented rules apply.
3
ERISA’s Investment Rules

Investments must be
◦ Prudent
◦ Diversified unless clearly prudent not to
diversify
◦ Protected from prohibited transactions
An employer would likely be a fiduciary of
its ERISA-covered HSA program.
 Advisors providing or recommending
investments would be ERISA fiduciaries.

4
Possible Practical Consequences if
HSA Programs Are Subject to ERISA

Liability Risk for fiduciaries (including de
facto fiduciaries) if Investments are not
viewed as prudent.
◦ Co-fiduciary liability is a possibility

Service provider compensation must be
reasonable.
◦ Compensation structures may be difficult to
defend if unreasonable fees could result.
◦ Proper fee disclosures would be necessary.
5
Concerns for Employer with More
Than One Plan

Many employers interesting in sponsoring
an HSA program will already have at least
a 401(k) program, and they may well
want to add the HSA program on to the
existing structure. If the HSA program is
subject to ERISA:
◦ It will be important to make sure neither
plan’s assets are used to benefit the other.
◦ This issue could impact both the employer
and its investment providers.
6
Additional Prohibited Transaction
Issues

HSAs are subject to Internal Revenue
Code prohibited transaction rules even if
the HSAs are exempt from ERISA.
Additional wrinkles could emerge,
however, if ERISA applies because the
conditions for exemption are not met.
◦ Fiduciaries may not use the assets of the plan
for their own benefit. An advisor to an HSA
program subject to ERISA could be subject to
additional scrutiny compared to exempt HSAs.
7
ERISA Exemption for Most HSAs
Under FAB 2004-1, most HSAs are exempt
from ERISA if the establishment of the
HSAs is completely voluntary on the part
of the employees.
 However, as with other exemptions, there
are conditions in order for an employer’s
HSA program to be exempt, and the
employer (and its advisors) must not
violate these conditions.

8
Conditions for ERISA Exemption

Under FAB 2004-1, the HSAs must belong
to the employees. To be exempt from
ERISA, the employer must not:
 limit the ability of eligible individuals to move their
funds to another HSA beyond restrictions imposed
by the Code;
 impose conditions on utilization of HSA funds
beyond those permitted under the Code;
 make or influence the investment decisions with
respect to funds contributed to an HSA.
9
Further Conditions for Exemption

Under FAB 2004-1, the employer
sponsoring an ERISA-exempt HSA
program cannot assume ERISA
responsibilities or benefit financially from
the HSAs. The employer must not :
 represent that the HSAs are an employee welfare
benefit plan established or maintained by the
employer; or
 receive any payment or compensation in
connection with an HSA.
10
If ERISA Exemption Conditions are
Violated – What Happens?
The HSA could be drawn into ERISA
coverage under FAB 2004-1 if the
employee’s coverage by the HSA were not
voluntary, or if any of these conditions for
ERISA exemption were violated.
 A heavily marketed program based on
investment options, for example, could
cross over the FAB 2004-1 line even with
respect to the HSAs themselves.

11
Special Issues Under FAB 2006-2
Most HSAs are not in danger of becoming
covered by ERISA. The ERISA exemption
is broad, and covers HSAs the way most
are created and operated.
 However, there are limits on the leeway
afforded. Crossing those limits can lead
to loss of the ERISA exemption.
 FAB 2006-2 addresses special
circumstances.

12
May an Employer Establish an HSA
for an Employee?

Yes, and even without the employee’s
express consent, provided:
◦ The conditions for exemption (from FAB 20041) must be met.
◦ The employee must be able to “move the
funds to another HSA or otherwise withdraw
the funds." Any restriction designed to inhibit
an employee’s free movement to another HSA
would jeopardize the ERISA exemption for the
HSA.
13
May an employer limit the HSA
providers?

Yes, an employer may limit the HSA
providers to which it will make or transfer
contributions.
◦ Under one approach to ERISA exemption,
however, it is important that the employer
not “endorse” the HSA provider or the
employer will (or may) have violated this rule.
◦ There may even be only one provider as long
as the employer refrains from “endorsing”
that provider.
14
Employer Limiting HSA Providers
Too much pushing towards a single HSA
provider could cross the line into the
employer having endorsed the program
or the provider, and thus jeopardize the
ERISA exemption.
 Also, an employer cannot “make or
influence” the employees’ investment
choices if the employer wants the HSAs to
be exempt from ERISA.

15
Coordinating HSAs with 401(k) Plan
Investment Options

An employer may offer the same or
similar investments through its HSA
program as those it offers to its 401(k)
plan, but only if:
◦ Employees are “afforded a reasonable choice
of investment options, and
◦ Employees are not limited in moving their
funds to another HSA.”
16
May an HSA Vendor Offer its Own
Products to its Own Employees?

Yes, an HSA vendor may offer its own HSA
products to its employees, so long as it
does so “in the regular course of
business.”
◦ And an employer, including an employer that
is an HSA vendor, may pay expenses
associated with an HSA that the employee
would normally have to bear.
17
Traps for HSA Vendor Using Own
Products for Own Employees

Presumably, affirmative incentives for the
vendor’s employees to use the vendor’s
own HSA products (such as payment of
the fees only if the employee uses the
vendor’s products) could cross the line
into an ERISA-covered (and an ERISAnoncompliant) HSA program.
18
May an HSA Vendor Discount Other
Products as an Incentive for HSAs?

NO. FAB 2006-2 makes clear that a
discount from an approved HSA vendor
on any other product offered by that
vendor will constitute a “payment” or
“compensation” to the employer, and
thus invalidate the ERISA exemption
(making the HSAs subject to ERISA).
19
Prohibited Transactions Rules
Apply, per FAB 2006-2
Even an ERISA-exempt HSA will be subject
to the prohibited transaction rules of the
Internal Revenue Code.
 “Employers who fail to transmit
participants' HSA contributions promptly
may violate the prohibited transaction
provisions of section 4975 of the Code.”

20
Prohibited Transactions

An investment advisor (for the 401(k)
plan, for example), introducing HSAs into
an existing fiduciary relationship must be
extremely careful. Cross-subsidization of
the various products could create :
◦ A prohibited transaction for the employer
(using one plan’s assets to benefit the other),
or
◦ A self-dealing issue for the employer, if the
fiduciary benefits itself with plan assets.
21
HDHPs Fully Subject to ERISA
Even if HSAs avoid ERISA applicability,
they must be paired with a High
Deductible Health Plan (“HDHP”) in order
for the participant to qualify for the HSA.
 Unless otherwise exempt (government
plan, for example), the HDHP will always
be subject to ERISA.

22
Possible Plan Design Objectives
HSAs were designed to be used in health
plan design to save health care dollars.
 People may not want to use medical
services in order to save the HSA funds
for later.
 HSAs will thus be most attractive to
advisors if employees are medically able
to save their HSA contributions, or are
financially able to pay medical expenses
out-of-pocket with after-tax dollars.

23
Possible Plan Design Traps

Health plans, including the HDHPs that go
with HSAs, have rules that retirement
plan advisors may not be familiar with:
◦ Prohibition on discrimination against those
with adverse medical factors.
◦ Incentives for people to go on Medicare are
prohibited.
◦ Too much enthusiasm towards those who can
save in HSAs could create violations of rules.
24
HSAs & RETIREMENT
PLAN ADVISORS: A LEGAL,
FIDUCIARY & BEST
PRACTICES PERSPECTIVE
Marcia S. Wagner
99 Summer Street, 13th Floor
Boston, Massachusetts 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.wagnerlawgroup.com
marcia@wagnerlawgroup.com
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