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Labor Department issues guidance on ERISA exemptions for HSAs

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WASHINGTON—A recent Labor Department bulletin provides long-awaited guidance on how employers can offer health savings accounts without the arrangements becoming subject to stringent federal regulations.

Bulletin 2006-02 builds on earlier Labor Department guidance issued after the 2003 law that authorized HSAs went into effect. That earlier bulletin outlined when HSAs would not be considered employee benefit plans under the Employee Retirement Income Security Act and thus exempt from ERISA's numerous requirements. In general, employer involvement must be very limited for an employee benefit arrangement to be exempt from ERISA.

Building on that general rule, the 2004 bulletin said, for example, an HSA would not be considered a benefit plan under ERISA if the employee establishment of an HSA was completely voluntary, even if the employer contributed to the HSA.

Since that bulletin, thousands of employers have adopted HSA-based health care plans. With the spread of the arrangements, more questions have been raised on the actions employers can take without HSAs losing their ERISA-exempt status, said Andy Anderson, of counsel with Morgan, Lewis & Bockius L.L.P. in Chicago.

"These were general principles," said Sharon Cohen, an attorney with Watson Wyatt Worldwide in Arlington, Va., referring to the 2004 bulletin.

"The initial guidance was at a very high level. This is much more detailed," said Jeff Munn, a consultant in the Falls Church, Va., office of Hewitt Associates Inc.

Indeed, the latest bulletin resolves several issues not addressed in the 2004 bulletin.

"They have done a good job of addressing some of the most pressing issues," said Jay Savan, health and welfare group leader with Towers Perrin in St. Louis.

For example, one question that has frequently arisen over the past couple of years is whether employers can open HSAs for employees and contribute to them without violating the earlier Labor Department bulletin that the establishment of the HSA by an employee be "completely voluntary."

Such situations come up when employers, as part of their plan design, automatically agree to contribute a certain amount of money to employees' HSAs, but those employees opting for HSAs end up not establishing the HSAs.

In that situation, the employer could open the HSA and make a contribution without running afoul of the completely voluntary requirement, the Labor Department said.

"The intended purpose of the 'completely voluntary' condition... is to ensure that any contributions an employee makes to an HSA, including salary reduction amounts, will be voluntary," the Labor Department said.

Additionally, employers can-without the HSA being considered an ERISA-covered employee benefit plan-limit to one the number of HSA providers to which it will forward contributions.

While employers cannot "endorse" an HSA provider, endorsement would not result "merely by limiting the HSA providers that it allows to market their HSA products in the workplace or by selecting a single HSA provider to which it will forward contributions," the DOL said.

However, an employer that does limit the number of HSA vendors to which it will forward contributions cannot receive a discount, in turn, from other products offered by that vendor, the Labor Department bulletin says.

Such an arrangement "would constitute the employer receiving a 'payment' or 'compensation' in connection with the HSA. In the department's view, the arrangement would also give rise to fiduciary and prohibited transaction issues."

The bulletin also explains that employers can pay fees charged by HSA providers, noting that the "mere fact that an employer contributes to an HSA does not result in the HSA being an ERISA-covered plan."