New regulations that prohibit "conflicted" investment advice given to 401(k) and similar retirement plan participants can also extend to advice given employees enrolled in health savings accounts (HSAs) through their workplace.
In April 2016, the Department of Labor (DOL) issued its
final rule expanding application of the fiduciary standard, which was to take effect in April 2017 but was delayed by two months, eventually going into effect in June 2017.
The rule is meant to ensure that financial advisors make investment recommendations that are in the best interests of retirement plan participants (i.e., without regard to commissions and fees, and disclosing any potential conflicts of interest). It lso broadens the compliance obligations for plan sponsors, to the extent that they contract or otherwise provide participants with access to investment advisors, regulatory experts say.
Regulatory Reach
HSAs are individually owned accounts that, unlike flexible spending accounts and health reimbursement arrangements, are typically structured so that they
are not employee welfare benefit plans subject to the Employee Retirement Income Security Act (ERISA) and its vast compliance requirements.
But the DOL's final rule
does cover advice offered to participants in non-ERISA plans, including individual retirement accounts and HSAs. "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."
In a
new white paper, Milwaukee-based HSA Bank, a large administrator of HSA plans, outlines how the DOL's fiduciary rule can affect employers who contract with HSA services firms. Alternatively, health insurers that administer the employer's HSA-eligible high-deductible health plan may contract with an HSA firm. In either case, the employer typically transmits to the HSA administrator employer contributions and employees' own salary deferred dollars to fund these accounts.
Investment Options
HSA contributions are "triple tax-free," avoiding federal and state income taxes and FICA taxes in most states. Additionally, money earned through HSA investments is not taxed, and there is no tax on funds withdrawn to pay for qualified medical expenses.
Last August, the nonprofit Employee Benefit Research Institute in Washington, D.C., reporting on
investment options and HSAs, noted 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."
Minneapolis-based investment services firm Devenir's
2016 Midyear HSA Research Report shows that HSA investment assets reached an estimated $4.7 billion in June, up 23 percent year over year. The average investment account holder has a $15,092 total balance (cash deposit and investment account combined).
Fiduciary Risks
As with 401(k) plans, HSA mutual fund options charge annual fees, usually in addition to separate fees charged to administer the account. That's where possible conflicts of interest can arise, triggering liability under the DOL's fiduciary rule.
"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," explained Kevin Robertson, a senior vice president at HSA Bank and the white paper's author. 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."
But general information on HSA investment lineups that "the 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."
To limit liability risks, Robertson advised, employers, HSA vendors and financial advisors should:
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Ensure that the fees charged to participants within the HSA program are appropriate and fully disclosed.
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Review education and communication materials and practices to make sure they do not constitute investment advice and recommendations.
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Stay on top of changing investment options being offered to employees participating in the HSA plan.
Due in part to revenue sharing within the investment products offered, "the investment fees associated with HSA accounts are often significantly higher than similar investments offered through [a defined contribution] plan," explains
a July 2016 article by three Mercer consultants. "Considering the negative impact fees can have on returns, plan sponsors should look to how the HSA providers are being paid on participant account balances."
Similarly,
a recent analysis from financial services firm Ascensus in Dresher, Pa., observes 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."
And employers should put in place oversight procedures to see that their HSA vendors are complying with all relevant requirements under the fiduciary rule.
Related SHRM Article:
No More Delays for Fiduciary Rule Means It's Time to Ensure Compliance, SHRM Online Benefits, May 2017
How the Fiduciary Rule Affects Retirement Plan Sponsors,
SHRM Online Benefits, April 2016