Safe Harbor Excludes HSAs from ERISA

The Department of Labor (DOL) has ruled that Title I of the Employee Retirement Income Security Act of 1974 (ERISA) will not apply to employee health savings accounts (HSAs) when employer involvement with the HSA is limited, even if the employer sponsors the employees health plan.

HSAs and HDHPs

Sec. 223 permits eligible individuals to establish HSAs. In general, HSAs may receive tax-favored contributions from an employee, employer or both, which are accumulated over the years and distributed tax free to pay or reimburse qualified medical expenses. Employers are not responsible for determining whether HSAs are used for qualified medical expenses or for investing or managing HSA contributions.

To establish an HSA, an eligible individual must be covered under a high-deductible health plan (HDHP). A number of employers that currently sponsor ERISA-covered group health plans want to add an HDHP option and offer programs to enable employees to establish HSAs to pay for medical expenses not covered by the HDHP. Neither Sec. 223 nor the legislation that created it (Section 1201 of the Medi-care Modernization Act), specifically address the application of ERISA Title I to HSAs.

Analysis

Under existing rules, HSAs could be considered employee welfare benefit plans under ERISA Section 3(1), if they met the safe harbor for group insurance programs at 29 CFR 2510.3-1(j)(1)(4). In general, such programs are excluded if:

1. There are no employer contributions;

2. Employee participation is voluntary;

3. The employer does not endorse the program; and

4. The employer receives no consideration in connection with the program, other than reasonable compensation for administrative services actually rendered in connection with payroll deductions.

However, an employers contributions or payments of group insurance premiums are not necessarily significant in analyzing the status of HSAs under ERISA. HSAs are personal healthcare savings vehicles, rather than a form of group health insurance. For example, funds deposited in an HSA generally may not be used to pay health insurance premiums; the account beneficiaries have sole control and are exclusively responsible for expending the funds in compliance with the Code. Thus, court precedent on the significance of employer contributions to group insurance arrangements is inapposite to HSAs. In the group health insurance context, the employer, whether by choosing an insurance policy or creating a self-funded program, typically establishes the type of benefits provided, the conditions for their receipt and the manner in which claims will be adjudicated. In the context of HSAs, however, the employer may be doing little more than contributing funds to an account controlled solely by the employee.

Thus, the DOL will not find that employer contributions to HSAs give rise to an ERISA-covered plan when the establishment of the HSAs is completely voluntary on the employees part and the employer does not:

1. Limit the ability of eligible individuals to move their funds to another HSA beyond Code restrictions;

2. Impose conditions on using HSA funds beyond those permitted under the Code;

3. Make or influence the investment decisions for funds contributed to an HSA;

4. Represent the HSAs as an employee welfare benefit plan established or maintained by the employer; or

5. Receive any payment or compensation in connection with an HSA.

The safe harbor would still apply if an employer imposes terms and conditions on contributions to satisfy Code requirements, limits the forwarding of contributions through its payroll system to a single HSA provider or permits only a limited number of HSA providers to advertise or market their HSA products in the workplace. However, the employer or the HSA provider cannot restrict an employees ability to move funds to another HSA beyond those restrictions imposed by the Code.

DOL Field Assistance Bulletin 2004-1, 4/7/04

Reflections: In Rev. Rul. 2004-38, IRB 2004-15, the IRS ruled that an individual can make HSA contributions even if he or she is covered by both (1) an HDHP that does not provide benefits for prescription drugs and (2) a separate health plan or rider that provides prescription drug benefits before the HDHPs minimum annual deductible is satisfied (i.e., the separate prescription drug plan is not an HDHP). Rev. Rul. 2004-38 suspends the ruling in Rev. Proc. 2004-22, IRB 2004-15, 727, and is effective until 2006.