Memorandum for: Virginia C. Smith
Director of Enforcement, Regional Directors
From: Robert J. Doyle
Director of Regulations and Interpretations
Subject: Health Saving Accounts
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?
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 . . . ."
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)
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.
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
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.
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.
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.
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.
Questions concerning this matter
may be directed to Suzanne Adelman, Division of Coverage,
Reporting and Disclosure at 202.693.8523.
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.
See I.R.S. Notice 2004-2,
Nos. 1 and 2.
Id. Q&A No.
Id. Q&A No.
Id. Q&A No.
Id. Q&A No.
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.
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.