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April 7, 2004 |
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On
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Memorandum for: Virginia C. Smith
Director of
Enforcement, Regional Directors |
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From: Robert J. Doyle
Director of Regulations and
Interpretations |
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Subject: Health Saving Accounts |
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Whether Health Savings Accounts established in
connection with employment-based group health plans constitute
"employee welfare benefit plans" for purposes of Title I of ERISA?
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Section 3(1) of the Employee Retirement Income
Security Act of 1974 (ERISA) defines the term "employee welfare
benefit plan" in relevant part to mean "any plan, fund, or program .
. . established or maintained by an employer . . . to the extent
that such plan, fund, or program was established or is maintained
for the purpose of providing for its participants or their
beneficiaries, through the purchase of insurance or otherwise, (A)
medical, surgical, or hospital care or benefits, or benefits in the
event of sickness . . . ." |
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Section 1201 of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, Pub. L. No. 108-173 (the
Medicare Modernization Act), added section 223 to the Internal
Revenue Code (Code) to permit eligible individuals to establish
Health Savings Accounts (HSAs).(1)
In general, HSAs are established to receive tax-favored
contributions by or on behalf of eligible individuals, and amounts
in an HSA may be accumulated over the years or distributed on a
tax-free basis to pay or reimburse "qualified medical expenses." In
order to establish an HSA, an eligible individual, among other
conditions, must be covered under a High Deductible Health Plan
(HDHP).(2)
Contributions to an HSA established by an eligible individual who is
an employee may be made by the employee, the employee's employer or
both in a given year.(3)
Amounts in an HSA may be rolled over to another HSA.(4)
If an employer makes contributions to HSAs, the employer must make
available a comparable contribution on behalf of all eligible
employees with comparable coverage during the same period.(5)
However, employers that make contributions to an employee's HSA are
not responsible for determining whether HSAs are used for qualified
medical expenses or for investing or managing amounts contributed to
an employee's HSA.(6) |
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It is our understanding that a number of employers
that currently sponsor ERISA-covered group health plans may wish to
add an HDHP option and offer programs designed to enable employees
to establish HSAs to pay for medical expenses not covered by the
HDHP. Questions have been raised about whether, and under what
circumstances, HSAs established in connection with employment-based
programs would constitute "employee welfare benefit plans" within
the meaning of section 3(1) of ERISA. |
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Congress, in enacting the Medicare Modernization
Act, recognized that HSAs would be established in conjunction with
employment-based health plans and specifically provided for employer
contributions. However, neither the Medicare Modernization Act nor
section 223 of the Code specifically address the application of
Title I of ERISA to HSAs. Based on our review of Title I, and taking
into account the provisions of the Code as amended by the Medicare
Modernization Act, we believe that HSAs generally will not
constitute employee welfare benefit plans established or maintained
by an employer where employer involvement with the HSA is limited,
whether or not the employee's HDHP is sponsored by an employer or
obtained as individual coverage. |
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Specifically, HSAs meeting the conditions of the
safe harbor for group or group-type insurance programs at 29 C.F.R.
§ 2510.3-1(j)(1)-(4) would not be employee welfare benefit plans
within the meaning of section 3(1) of ERISA.(7)
Moreover, although contributions or payment of group insurance
premiums by an employer would be a significant consideration in
determining whether a group or group-type insurance arrangement is
an employee welfare benefit plan under section 3(1), such
contributions or payments are not necessarily significant in
analyzing the status of HSAs under ERISA. As noted above, HSAs are
personal health care savings vehicles rather than a form of group
health insurance. For example, funds deposited in an HSA generally
may not be used to pay health insurance premiums,(8)
and the beneficiaries of the account have sole control and are
exclusively responsible for expending the funds in compliance with
the requirements of the Code. Because of these differences, we
regard court precedent on the significance of employer contributions
to group or group-type insurance arrangements as inapposite to HSAs.
In the group health insurance context, the employer, whether by
choosing an insurance policy or creating a self-funded program,
typically establishes the type of benefits provided, the conditions
for their receipt, and the manner in which claims will be
adjudicated. In the context of HSAs, however, the employer may be
doing little more than contributing funds to an account controlled
solely by the employee. |
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Accordingly, we would not find that employer
contributions to HSAs give rise to an ERISA-covered plan where the
establishment of the HSAs is completely voluntary on the part of the
employees and the employer does not: (i) limit the ability of
eligible individuals to move their funds to another HSA beyond
restrictions imposed by the Code; (ii) impose conditions on
utilization of HSA funds beyond those permitted under the Code;
(iii) make or influence the investment decisions with respect to
funds contributed to an HSA; (iv) represent that the HSAs are an
employee welfare benefit plan established or maintained by the
employer; or (v) receive any payment or compensation in connection
with an HSA. |
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The mere fact that an employer imposes terms and
conditions on contributions that would be required to satisfy tax
requirements under the Code or limits the forwarding of
contributions through its payroll system to a single HSA provider
(or permits only a limited number of HSA providers to advertise or
market their HSA products in the workplace) would not affect the
above conclusions regarding HSAs funded with employer or employee
contributions, unless the employer or the HSA provider restricts the
ability of the employee to move funds to another HSA beyond those
restrictions imposed by the Code. |
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HSAs generally will not constitute "employee
welfare benefit plans" for purposes of the provisions of Title I of
ERISA. Employer contributions to the HSA of an eligible individual
will not result in Title I coverage where, as discussed above,
employer involvement with the HSA is limited. Finding that an HSA
established by an employee is not covered by ERISA does not,
however, affect whether an HDHP sponsored by the employer is itself
a group health plan subject to Title I. In fact, unless otherwise
exempt from Title I (e.g., governmental plans, church plans)
employer-sponsored HDHPs will be employee welfare benefit plans
within the meaning of ERISA section 3(1) subject to Title I.
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Questions concerning this matter may be directed to
Suzanne Adelman, Division of Coverage, Reporting and Disclosure at
202-693-8523. |
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The U.S. Department of the Treasury
and the Internal Revenue Service (IRS), which have interpretive
and regulatory authority over HSAs under section 223 of the Code,
issued general guidance concerning HSAs on December 22, 2003, in
I.R.S. Notice 2004-2, and issued additional guidance on March 30,
2004, in I.R.S. Notice 2004-23, I.R.S. Notice 2004-25, Revenue
Ruling 2004-38, and Revenue Procedure 2004-22. The Treasury/IRS
guidance is available on the Internet at
www.treas.gov/offices/public-affairs/hsa.
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See I.R.S. Notice 2004-2, Q&A
Nos. 1 and 2.
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Id. Q&A No. 11.
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Id. Q&A No. 23.
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Id. Q&A No. 32.
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Id. Q&A No. 30.
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Regulation section 2510.3-1(j)
excludes from Title I coverage certain group or group-type
insurance programs. In general, such programs are excluded from
coverage where there are no employer contributions, employee
participation is voluntary, the employer does not endorse the
program, and the employer receives no consideration in connection
with the program, other than reasonable compensation for
administrative services actually rendered in connection with
payroll deductions. See also 29 C.F.R. § 2509.99-1 relating to
payroll deduction IRAs.
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Although the Medicare Modernization
Act excludes health insurance from the qualified medical expenses
that may be paid from an HSA, there are exceptions for the payment
of COBRA premiums, certain insurance for individuals over 65,
long-term care insurance premiums and health insurance during
periods of unemployment. Code section
223(d)(2). |
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