Where the DOL’s fiduciary rule intersects with HSAs

Alex Lakatos, partner at Mayer Brown, and David Levine, principal at Groom Law Group.

For those who want to avoid becoming fiduciaries, be wary of the line between education and advice, lawyers warn.

Much has been said about the Department of Labor’s fiduciary rule and its implications for IRA rollovers – but there is another area that could make certain recommendations fiduciary in nature: Health Savings Accounts.

HSAs haven’t received much attention in context of the new rule, which is facing challenges by opponents in court and in Congress. However, the DOL was intentional in making sure that advice given around HSAs is fiduciary.

That will not affect advice anywhere near the scale as with IRA rollovers, but it could apply to advisors who focus on retirement plans and increasingly are giving a range of services that cover health and wealth.

“This weaves into the expanding activities of advisors who are providing total wellness advice, where they advise on a whole bunch of assets,” said David Levine, principal at Groom Law Group. “Some advisors will say they’re providing education… just like with the 401(k), that might stepped over the [fiduciary] line.”

Since HSAs were established 20 years ago, they have typically been exempt from the Employee Retirement Income Security Act, Groom Law stated in an overview this week of the effect of the fiduciary rule change on the account type.

“The statutory definition of fiduciary advice has never had a broad carve-out for health and welfare plans and neither have the regulations,” the firm said. “The fiduciary rule does not specifically change whether or not advice about or to health and welfare plans or HSAs is fiduciary advice. Rather, it expands the definition of fiduciary advice to cover more one-time recommendations that may more commonly apply to health and welfare plans that include investments and HSAs.”

Most often, HSAs are used like checking accounts to help pay for eligible medical expenses, as most people do not use them as retirement investment accounts. However, the strongest benefit from the accounts from a tax perspective is the investment aspect, as money put into the accounts is pre-tax and account growth and distributions for eligible expenses are tax free.

Of the $123 billion in HSAs among a total of 37 million accounts at the end of 2023, about 38 percent, $46 billion, was invested, according to data from Devenir. However, average account balances are more than seven times higher among people who invest their HSAs.

In its preamble to the new rule, the DOL noted that some commenters asked it to make an exception for HSAs, given that they are most often not used as investment accounts.

The agency noted that financial professionals, including HSA providers, that “who merely identify investment alternatives using objective third-party criteria (e.g., expense ratios, fund size, or asset type specified by the plan fiduciary) to assist plan sponsors and plan fiduciaries in selecting and monitoring investment alternatives, without additional screening or recommendations based on the interests of the retirement investor, would not be considered under the final rule to be making a recommendation.”

But, the regulator said, “to the extent that a person makes a covered recommendation and satisfies the rest of the rule’s requirements to any of these retirement investors, the department does not see a reason to treat them differently or provide a lower level of protection for them than other plans covered by ERISA Title I or Title II.”

Because the fiduciary rule treats HSAs, medical savings accounts, and Coverdell Education Savings Accounts as retirement investors, the communications provided to account owners and fiduciaries “will be subject to review under the new definition of investment advice,” Groom Law stated. While the rule allows for “investment education” that is not subject to fiduciary status, those who are willing to act as fiduciaries may be able to rely on Prohibited Transaction Exemption 2020-02 for receiving compensation in connection with recommendations for HSA investments or rollovers, the firm stated.

The change in fiduciary status for HSA recommendations “absolutely is an issue,” said Alex Lakatos, partner at Mayer Brown. Financial professionals who give advice to plans and participants will have to pay attention to the line between education and recommendations, he said. Giving investment advice for HSA assets would obviously cross that, he noted.

“If you hold yourself out as a trusted advisor, it’s going to get you,” he said. Similarly, “if someone is saying, ‘move your HSA to a different provider’… that’s also going to move you across the line into being a fiduciary.”

Financial professionals should be careful to avoid prohibited transactions, putting plan participants’ interests first and being able to defend the fees they receive as being reasonable, he said.

For those who are already happily working as fiduciaries, the new rule could only help business, he noted.

“DOL realized that some of the most important decisions people make are based on one-time advice,” he said. “Being a fiduciary isn’t necessarily such a bad thing… that’s good for you from a consumer perspective.”