There is a “whole slew” of Health Savings Account compliance issues, said Atlanta Attorney John Hickman in a presentation here.
Health insurance professionals need to know about these issues so they can inform their clients, he told an education session at the annual meeting of National Association of Health Underwriters.
Those who break the rules face what amounts to “tax jail,” he cautioned.
Some of these issues concern whether the Employee Retirement Income Security Act applies to HSAs, Hickman noted. The rules can be very technical.
The original view was that HSAs would be treated like individual retirement accounts, he pointed out, noting that IRAs satisfying 4 “safe harbor” conditions are not subject to ERISA.
But then, the Department of Labor issued Field Assistance Bulletin (FAB) 2004-1, establishing safe harbor specifically for HSAs. Essentially, Hickman said, “DOL found that employer contributions were less significant in determining whether ERISA applies to HSAs, so they tweaked the safe harbor to allow for employer contributions (to HSAs) without triggering ERISA.”
More recently, DOL issued FAB 2006-02 which clarified aspects of the earlier FAB and other ERISA-related issues, Hickman said.
These changes mean employers offering HSAs need to know how to avoid triggering ERISA. He developed a set of 4 steps to assist with that, as shown in the chart.
Another hot button issue concerning HSAs relates to prohibited transactions between the HSA and the HSA provider, said Hickman. “The Code prohibits certain transactions involving HSAs between a ‘fiduciary’ and a ‘disqualified person,’” he explained. A fiduciary could be an HSA accountholder or trustee, among others, he said, while a disqualified person could be a fiduciary, service provider, employer of employees covered by an HSA, or family member of the above.
Some transactions that he said are prohibited include: any direct or indirect sale or exchange of property between the HSA and disqualified person; lending money or other extension of credit between the HSA and the disqualified person; and furnishing goods or services between the HSA and the disqualified person.
His “rule of thumb” for identifying prohibited transactions is: “If the disqualified person receives compensation with respect to a transaction involving the HSA, analysis is required.”
The rules do have exceptions, he noted, so clients need to think things through.
For instance, a bank shouldn’t give a $100 incentive directly to the individual who decides to establish the HSA there. “That’s problematic,” said Hickman, citing IRA Guidance (PTE 93-1 and 93-33) on toasters and relationship banking. “Instead, deposit the money into the account.”
In FAB 2006-02, DOL addressed several fine points concerning what is prohibited and what is not, he indicated.
For example, under this FAB, he said, the employer is deemed to have received “compensation” if it receives a discount on services offered by the vendor in conjunction with the HSA. “This may violate prohibited transaction requirements (Q-7),” Hickman said.
In addition, failing to forward contributions promptly to the trust is a prohibited transaction, even if ERISA does not apply,” he said, explaining that “the money should be deposited into the HSA account as soon as feasible.
Also, while cash incentives to the HSA are not problematic, incentives to the accountholder are problematic. For instance, “waiving fees for non-HAS related services is not okay,” said Hickman, “but it could be okay if the firm waives HSA fees themselves.”
Similarly, credit extended in conjunction with the HSA may be problematic, Hickman said. For instance, the HSA cannot be used as security for a line of credit, and the accountholder cannot benefit in an individual capacity from the HSA (say, by getting a lower percentage on the line of credit). But a personal line of credit to the accountholder may be permissible.”
To sum up, he listed situations in which prohibited transactions involving HSAs might occur. These include:
–Retention of (electronic payment) card interchange fees by the trustee who issues the card
–Receipt of fees (e.g., 12b-1 or investment advisory fees) from investment funds
–Receipt of commissions or “finder fees” by the service provider from another service provider
–Choosing an investment management company which is owned by a fiduciary or family member of the fiduciary
–Offering inducements to the account holder such as free services, incentives and rebates, or credit extension.
His advice to health care professionals is to “be aware that these issues are in play” and to inform clients about this.
Other parts of his presentation touched on HSA implementation issues, reporting issues and related topics. With the new HSA provisions in the Tax Relief and Health Care Act of 2006, he said, the new era of HSA has begun.