Health Spending Accounts: Employers and Co-Employers Can Escape ERISA Fiduciary Liability through HR Outsourcing
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173 (the “Medicare Modernization Act”) was signed by President Bush on Dec. 8, 2003. Under this law, “health spending accounts” (“HSA’s”) are authorized to allow individuals to pay for current health expenses and save for future qualified health expenses on a tax-free basis. Section 1201 of the Medicare Modernization Act added section 223 to the Internal Revenue Code to permit eligible individuals to establish HSAs for taxable years beginning after December 31, 2003. To be eligible for an HSA, an individual must be covered by a High Deductible Health Plan (“HDHP”) and must not be covered by another health plan.
In late April 2004, the U.S. Department of Labor clarified that HSA’s that are offered and managed by third-party providers, independent of an employer’s plan, do not constitute employee welfare benefit plans governed the onerous eligibility, vesting, fiduciary duty and other requirements of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”). However, the employer could be liable as an ERISA fiduciary under certain circumstances.
This administrative legal interpretation opens the door for independently provided HSA’s through insurance companies, healthcare systems, preferred purchasing providers and other organizations that do not directly employ the HSA participant. For professional employer organizations (“PEO’s”) who are co-employers, the opportunity to provide HSA’s is opened up, provided that the PEO is not engaged in activities that would qualify the HSA as an ERISA-covered plan.
The Department of Labor’s guidance makes clear that while private-sector employer-sponsored HDHPs are group health plans subject to ERISA’s reporting, disclosure, fiduciary responsibility and other requirements, HSAs generally will not constitute ERISA-covered employee benefit plans. Instead, HSA’s will be treated as “group insurance” or “group-type insurance” programs that fall within the “safe harbor” of plans that are no deemed employee welfare benefit plans within the meaning of section 3(1) of ERISA.
The guidance also clarifies that an employer can make contributions to the HSA of an eligible individual without being considered to have established or maintained the HSA as an ERISA-covered plan, provided that the employer’s involvement with the HSA is limited.
Why HR Outsourcing Works.
Title I of ERISA imposes reporting, disclosure, fiduciary duty and other requirements upon employers who establish or maintain health or welfare benefits for their employees. Outsourcing the establishment and management of HDHP’s removes the employer (and, in the case of a PEO, the co-employer) from that degree of managerial control and discretion that makes an HDHP a regulated ERISA benefit plan. Employers seeking to make HDHP’s available to their employees should do so only through an independently offered plan that the employer does not manage.
What the Employer Can Do (ERISA).
To avoid coming under ERISA’s scope, the employer (or co-employer) may:
- pay contributions to an HSA that is established and maintained by an independent entity;
- impose terms and conditions on contributions that would be required to satisfy tax requirements under the Internal Revenue Code (the “Code”), and
- limit the forwarding of contributions through its payroll system to a single HSA provider (or permit only a limited number of HSA providers to advertise or market their HSA products in the employer’s workplace).
The employer (and also the HSA provider) may:
- restricts the ability of the employee to move funds to another HSA beyond those restrictions imposed by the Code.
What the Employer Can Do (Tax).
On April 12, 2004, the Internal Revenue Service issued For months before January 1, 2006, an individual who would otherwise be an “eligible individual” under section 223(c)(1)(A), but is covered by both an HDHP that does not provide benefits for prescription drugs and by a separate health plan or rider that provides prescription drug benefits before the minimum annual deductible of the HDHP is satisfied (i.e., the separate prescription drug plan is not an HDHP), will continue to be an “eligible individual” and may make contributions to an HSA based on the annual deductible of the HDHP.
What the Employer May not Do (ERISA).
The employer will run afoul of ERISA if the employer were to play a role in the design or administration of the HSA. Excessive control will occur if the employer does any of the following:
- limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code;
- impose conditions on utilization of HSA funds beyond those permitted under the Code;
- make or influence the investment decisions with respect to funds contributed to an HSA;
- represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or
- receive any payment or compensation in connection with an HSA.
Best Practices in HRO.
Employers and their HR service providers and insurers can adopt some practical “best practices” in order to secure the benefits of the safe-harbor provisions of Section 3(1) of ERISA.
HSA Plan Providers.
To assist the employer in avoiding any implication that the employer (or co-employer) is engaged in any of these ERISA-regulated activities, HSA plan providers should design their plans and promotional and marketing activities to clearly fall within the “safe harbor” and clearly to address these issues.
Employers and PEO’s.
Employers (and PEO’s and other statutory co-employers) should amend their employee welfare benefit plans to clarify that the employer is not engaged in any such activities and that the employees can not rely upon the employer for more than payments as contemplated by the HSA plan.
For further details including citations and detailed best practices, contact email@example.com or one of our attorneys.