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.”