DOL’s new fiduciary rule – and its unexpected impact on HSAs

Much has been said about the Department of Labor’s controversial new Fiduciary Rule, which has been facing a series of legal challenges.  The rule is largely aimed at retirement plans; however, the DOL did not provide sufficient guidance for health plans that include health savings accounts – and if HSAs have an investment component, these plans will need to be in compliance before the September 22, 2024 effective date.

The Fiduciary Rule, under the Employee Retirement Income Security Act of 1974, is applicable to ERISA-covered health and welfare plans that include HSAs.  Under ERISA, a person becomes a fiduciary when they offer investment advice for a fee.

“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 ERISA, but the new fiduciary rule bars a fiduciary from receiving a fee in connection with providing investment advice, which could occur when, for example, an individual recommends an HSA investment, investment strategy or rollover and receives a commission. The new rule essentially expands the definition of fiduciary advice to cover more one-time recommendations that may commonly apply to HSAs.

Offering an HSA does not, in and of itself, make an HSA provider an advice fiduciary, according to the DOL.  There is a long-standing exception from fiduciary status, under the DOL rule, for “investment education.” In other words, employers can provide a wide range of information about the HSA program and its investments without assuming fiduciary status, including information about the benefits of participation and increasing contributions and about the investment fund strategies and objectives, as well as fees and expenses.

To avoid fiduciary status, HSA providers or employers should avoid recommending how HSA account holders should invest their HSA funds – and should have knowledge of whether their HSA provider provides investment advice regarding their accounts.

Health insurance agents and brokers may need to review their insurance policies to evaluate whether the contract includes an “investment component.”

Related: 10 things your employees might not know about HSAs

Most often, HSAs are used to help employees pay for eligible medical expenses, while 25% of employees use the HSA to save for future health care expenses. However, the strongest benefit  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 saved in over of 37 million HSAs at the end of 2023, about 38%, or $46 billion, was invested, according to Devenir. Average account balances are more than seven times higher among people who invest their HSAs.