Changes in Fiduciary Laws Will Impact Health Savings Accounts
by Wendy Hoke
New regulations affecting investment advice pertaining to 401(k) and other retirement plans will take effect in April 2017. These regulations prohibit advice that is deemed “conflicted,” and the new policies also extend to financial advice supplied to employees who are enrolled in health savings accounts (HSAs) through their employer.
The Department of Labor (DOL) issued its rulings in April 2016 to expand the application of the new fiduciary requirements. The ruling is designed to make sure that financial advisors make recommendations that meet the best interests of participants in retirement plans, for example, not influenced by fees or commissions. In addition, any potential conflicts of interest must be disclosed. The regulations expand the compliance obligations for sponsors if they contract with or facilitate access to investments advisors.
Regulatory Reach in HSAs
Health savings accounts are individually owned accounts that are generally structured differently than the typical employee benefit plan subject to the Employee Retirement Income Security Act (ERISA) and the extensive compliance requirements.
However, the Department of Labor’s ruling covers financial advice given to participants in non-ERISA plans, such as HSAs and individual retirement accounts. “The Department received extensive comments on whether the proposal should apply to other non-ERISA plans covered by [Internal Revenue] Code section 4975,” the rule states. “The Department does not agree with the commenters that the owners of these accounts [HSAs] are entitled to less protection than IRA investors. Accordingly, the final rule continues to include these ‘plans’ in the scope of the final rule.”
HSA Bank in Milwaukee has examined the regulations and written a white paper on how the fiduciary rule can impact employers that contract with health savings accounts services companies. In addition, health insurers that administer an employer’s HSA eligible health plan may contract out to an HSA services company. In both instances, the employer transfers the employees’ tax deferred dollars and the employer contributions to fund the accounts.
Investment Options for HSAs
Contributions to HSAs are triple tax free, avoiding state and federal income taxes and FICA taxes in many states. In addition, money that is earned through HSA investments will not be taxed, nor is there a tax on funds withdrawn to pay for certain medical bills.
In August 2016, the Employee Benefit Research Institute in Washington, D.C., which is a nonprofit entity, noted in a report that “Because of the triple tax-preference, some individuals might find using an HSA as a savings vehicle for health care expenses in retirement more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan. HSAs often have an investment-account option that allows account owners to invest in not just a money market account, but in mutual funds and other investment vehicles much like they would in a 401(k) plan.”
The investment services company Devenir, based in Minneapolis, issued a research report on HSAs that noted health savings accounts held assets estimated at $4.7 billion in June 2016, which is an increase of 23 percent from the prior year. The average account had a balance of close to $15,100.
Fiduciary Risks in HSAs
Similar to 401(k) plans, the mutual fund options available to HSAs generally charge annual fees as well as separate fees for account administration. This is the area in which potential conflicts of interest can happen, thereby triggering liability according to the DOL fiduciary rule.
According to Keven Robertson, author of the HSA Bank white paper, “Employers may be impacted by the [DOL’s fiduciary] rule if they provide information to their employees about HSAs that crosses the line from general investment education to investment advice, or if they benefit in some way from the advice being given. Examples of “crossing the line” could include “the employer receiving revenue sharing in connection with specific HSA investments suggested by financial planning tools it provides, or an employer receiving bonuses for steering employees toward particular HSA vendors. Most employers in those situations are likely to want to scale back those activities or revise their compensation arrangements.”
However, general information regarding HSA investment options that an employer “merely makes available or passes along without endorsement,” and over which the employer has no say, “should not have to be taken into account,” Mr. Robertson stated. He also advised HSA vendors, employers and financial advisors to limit their risks by fully disclosing all fees and ensuring that the fees are appropriate. In addition, they should ensure that communication and educational materials do not make investment advice or recommendations.
Another article in 2016 by Mercer suggested that plan sponsors should review the methods by which HSA providers are paid on account balances. One recent analysis by Ascensus in Pennsylvania, stated that “While it will take some time to fully analyze the DOL’s final rule, HSA providers should begin reviewing the types of communications that they provide to HSA owners, the compensation schemes and incentive payments for employees working with HSAs, and their arrangements with third-party brokers and investment advisors, if applicable.”
Regulatory compliance will take careful attention to detail to avoid liability, and employers should also review procedures to ensure that HSA vendors comply with the fiduciary rule.