The Latest Action Regarding the DOL's Fiduciary Rule and HSAs

Department of labor requests an 18-month delay

On August 9th, the Department of Labor (DOL) sent a request to the Office of Management and Budget (OMB) to delay the implementation date for the fiduciary rule from January 1, 2018 to July 1, 2019. The DOL also sought further industry comments regarding the fiduciary rule and prohibited transaction exemptions, with a specific request for comments on health savings accounts (HSAs).

The OMB has at least 60 days – possibly 90 days is they seek an extension – to either approve or reject the DOL’s request for an additional 18-month delay. In order to approve the delay, the OMB needs to determine that the DOL has “substantial new reasons” for delaying the rule and cannot approve the request based on political/partisan grounds. We will provide an update once the OMB issues its decision.

Read more: DOL Fiduciary Rule: Actions in 2017

The HSA Council’s request for comments letter includes health savings accounts

The HSA-industry supports the comment letter from the Health Savings Account Council (HSAC), that details the industry’s position that “by exempting HSAs from the fiduciary rule, the DOL will help promote robust competition among HSA trustees and custodians, reducing their cost to employers and individuals, and allowing these instruments to achieve their primary goal of creating a consumer market for medical care.”

The HSA Council letter included a few validating messages for their position:

It explained how HSAs are different from other investment accounts

  • HSAs should be exempt from the rule because they are distinguishable from IRAs and other retirement investment arrangements. Under Section 223 of the Code, HSAs are trust or custodial arrangements established ‘exclusively for the purpose of paying qualified medical expenses.’ Thus, unlike IRAs which serve solely as investment-oriented retirement arrangements, HSAs serve as deposit arrangements maintained by account holders for current health care expenses.
  • While incorporating some of the rules applicable to IRAs, Congress recognized that HSAs are different, and thus subject to different rules. By way of example, while Congress incorporated certain prohibited transaction rules applicable to IRAs in Section 408(e)(2) and (e)(4), HSAs are required to be kept separate from retirement assets and cannot be commingled with retirement assets (as is allowed for IRAs under Section 408(e)(6).
  • Likewise, in FAB 2006-2, the Department acknowledged that even though HSAs were subject to the tax prohibited transaction rules, HSAs were significantly different from IRAs so as not to allow wholesale adoption of the IRA prohibited transaction exemptions (PTEs). Further, unlike IRAs, HSAs do not accept rollovers from other types of retirement accounts regulated by ERISA. As a result, blanket application of the investment rules applicable to deferred compensation plans (and for that matter even IRAs) is inappropriate. The final rule should specifically exclude HSAs since HSA accounts operate more like retail accounts than depositories of retirement plan funds.

It detailed why ERISA investment rules are not applicable to HSAs

  • The application of ERISA-type investment rules is inappropriate for HSA deposit-type arrangements. The Department implicitly acknowledged that ERISA is ill-suited for application to HSAs when it adopted specific rules carving the vast majority of HSA arrangements out of ERISA coverage in FAB 2004-1 and FAB 2006-2. "Indeed, we are unaware of any HSA arrangements that are currently subject to ERISA regulation." This broad exception is fitting as the vast majority of HSA assets (82%) are held in deposit-type arrangements.
  • These arrangements are already subject to federal and state banking requirements and regulations, and the imposition of an additional layer of regulation will unnecessarily increase costs and reduce the effective rate of return. Congress has already concluded that the imposition of investment requirements is unnecessary to deposit-type arrangements (IRC 4975(d)(4)). Consequently, the option to deposit HSA funds in two or more interest-bearing accounts shouldn’t be considered ‘investments’ or ‘investment advice’ for purposes of these rules. Choosing such an account is no different than choosing which checking account to establish – an activity in which most, if not all, HSA account holders have sufficient experience.
  • Therefore, the investment protections need not be extended to such actions, and language should be added to clarify that the final rule does not apply to funds held in deposit arrangements with an HSA custodian or trustee.

It reasoned that merely providing a menu of pre-selected investment options does not constitute “Individual Investment Advice”

  • The final rule should clarify that HSA trustees/custodians do not provide individualized investment advice merely by providing a menu of pre-selected HSA investment options. As noted above, the vast majority of HSA assets are kept in deposit-type accounts and should not be subject to the investment-related requirements of the proposed rule. Nonetheless, even if the final rules are applicable to HSAs, HSA trustees/custodians that provide a menu of investment options for employer groups are not providing individual investment advice.
  • The preamble to the proposed rule makes it clear that the DOL intentionally intended to move away from assigning fiduciary status with respect to investment decisions based on nominal fiduciary status (as was the case under the 2010 proposed rule) and move toward a more functional definition. The key elements under this new functional definition are the provision of investment advice and that it is individualized or directed to a specific individual. In stark contrast to providing individualized advice, HSA custodians and trustees generally make available a reasonable menu of investment options (typically mutual funds regulated under the Investment Company Act).
  • Instructive in this regard is the DOL's prior guidance under FAB 2006-2. In that guidance, the department carefully considered the role of selecting a menu of HSA investment options and determined that an employer would not be “influencing or making an investment decision” when it selected an HSA trustee or custodian that offered its own proprietary menu of investment options.
  • It was determined that the mere fact that an employer selects an HSA provider to which it will forward contributions that offers a limited selection of investment options or investment options that replicate the investment options available to employees under their 401(k) plan would not, in the view of the department, constitute the making or influencing of an employee's investment decisions giving rise to an ERISA-covered plan, so long as employees are afforded a reasonable choice of investment options and employees are not limited in moving their funds to another HSA. The selection of a single HSA provider that offers a single investment option would not, in the view the department, afford employees a reasonable choice of investment options.
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