2024 Fiduciary Rule – Impact on HSAs and Health & Welfare Plans

The Department of Labor (“DOL”) recently released a final regulation (the “Fiduciary Rule”) redefining “investment advice” under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”).  Although the Fiduciary Rule is largely aimed at retirement plans, DOL declined to provide an express exception for health and welfare plans as requested by many commentators.  As a result, the Fiduciary Rule is applicable to ERISA-covered health and welfare plans that include investments and Health Savings Accounts (“HSAs”).  Coming into compliance may require material changes to distribution, contracting, and administrative practices before the September 22, 2024 effective date.

This alert summarizes the impact of the Fiduciary Rule on health and welfare plans and HSAs.  Groom’s Investment Advice Resource Hub has detailed summaries of the Fiduciary Rule and the related amendments to certain prohibited transaction exemptions (“PTEs”).

Background

Under ERISA and the Code, a person becomes a fiduciary when they render investment advice for a fee or other compensation, direct or indirect, with respect to moneys or other property of a plan or have authority or responsibility to do so.  A 1975 DOL regulation interpreting the investment advice definition established a five-part test under which a person is an “investment advice” fiduciary if, for a fee, they:

1. Render advice to a plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
2. On a regular basis;
3. Pursuant to a mutual understanding;
4. That such advice will be a primary basis for investment decisions; and
5. That the advice will be individualized to the needs of the plan. 

The new Fiduciary Rule replaces this five-part test with a new definition under which a person is an investment advice fiduciary if, for a fee or other compensation, they: 

1. Make a recommendation; 
2. Of any securities transaction, any other investment transaction or any investment strategy involving securities or other investment property; 
3. To a Retirement Investor; and
4. The person making the recommendation either: 
   1. Makes professional investment recommendations to investors as a regular part of their business; under circumstances that a reasonable investor would view as indicating the recommendation is based on a review of, and reflects the application of professional judgment to, the investor’s particular needs or individual circumstances and which may be relied upon as intended to advance the Retirement Investor’s best interest; or
   2. Acknowledges or represents that they are acting as a fiduciary under ERISA or the Code with respect to the recommendation.  

DOL intends for the Fiduciary Rule to apply to a broad range of financial institutions and financial professionals in the business of providing investment advice to retirement investors, including, but not limited to, discretionary asset managers (institutional and retail), banks (including institutional, retail, and private banking), insurance companies and their employee and statutory employee agents, independent insurance agents, broker-dealers and their representatives, state and federally registered investment advisers and their representatives, and solicitors.     

The statutory definition of fiduciary advice has never had a broad carve-out for health and welfare plans and neither have the regulations.  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.

Implications for HSAs and Health & Welfare Plans

HSAs, MSAs and Coverdells

The most significant impact of the Fiduciary Rule in the health and welfare plan context will be on the distribution and administration of HSAs, Archer Medical Savings Accounts (“MSAs”), and Coverdell Education Savings Accounts (“Coverdells”).  Although these accounts are typically exempt from ERISA, they are subject to the prohibited transaction rules under section 4975 of the Code.  The prohibited transaction rules bar a fiduciary from receiving a fee in connection with providing investment advice, which could occur where, for example, an individual recommends an HSA investment, investment strategy or rollover and receives a commission. 

The Fiduciary Rule treats HSAs, MSAs, and Coverdells as “Retirement Investors.” Consequently, communications with account holders and fiduciaries will be subject to review under the new definition of investment advice.  Financial institutions, consultants, and advisers seeking to avoid fiduciary status will want to carefully review their HSA, MSA, and Coverdell sales and marketing materials.  It also may be necessary to put guardrails in place to ensure that sales teams and call center employees do not unintentionally provide investment advice when speaking with employers and account holders.   

Importantly, DOL acknowledged in the preamble to the Fiduciary Rule that merely offering an HSA does not, in and of itself, make an HSA provider an advice fiduciary.  This is the case even if the provider helps the employer identify, select, and monitor investment alternatives by screening funds using objective criteria, such as asset type, expense ratio, or fund size.  

It is worth noting that there is a long-standing exception from fiduciary status under the DOL rule for the provision of so-called “investment education.”  Under this exception, HSA providers, employers or others can provide a wide range of information about the HSA program and its investments without assuming fiduciary status.  The “investment education” exception would allow an HSA provider or another entity, such as the employer, to provide the following information and materials to HSA holders, among others:

• Information about the features, terms or operation of the HSA;
• Information about the benefits of HSA participation;
• Information about the benefits of increasing contributions; and
• Information about the investment alternatives offered under the HSA including information about fund strategies and objectives, fees and expenses, trading restrictions, return information, and prospectuses.

For those willing to accept fiduciary status, DOL’s PTE 2020-02 provides relief from the prohibited transaction rules in ERISA and the Code for the receipt of prohibited compensation in connection with the provision of non-discretionary investment advice.  This provides an avenue for advice fiduciaries to receive compensation in connection with the recommendation of, for example, HSA investments or rollovers.  PTE 2020-02 applies to bank HSA trustees and custodian, and, in response to comments, DOL amended PTE 2020-02 to make the relief available to IRS-approved, non-bank HSA trustees and custodians, which were not covered when the PTE was first issued. 

Health, Disability, Term Life Policies

The Fiduciary Rule excludes health, disability, and term life insurance policies (and other property) from the definition of “investment property” to the extent the policies or other property  do not contain an “investment component.”  This means that one can recommend a policy to an ERISA-covered health, disability, or term life insurance plan without becoming an advice fiduciary, provided the policy does not have an investment component. This is helpful for brokers and agents that recommend non-investment group health, dental, vision, disability, life and other insurance contracts to ERISA welfare plan customers.

Nonetheless, DOL declined to provide additional clarity as to what constitutes an investment component, taking the position that it would depend on the specific facts and circumstances.  However, some health and welfare policies and products may very well have investment components.  For example, some policies and administrative arrangements permit or contractually require the use of provider-facilitated disbursement accounts, and the assets held in those accounts may be invested (e.g., in short-term, low-risk funds) or subject to interest crediting while pending disbursement.  Similarly, some health reimbursement arrangements (“HRAs”) give participants the right to grow their notional benefit by providing account interest crediting, the amount of which is sometimes based on an index or other market-based measure.  It is not clear whether the recommendation of these HRA products to an employer could trigger fiduciary status on the part of the adviser.  

Takeaways

1. In order to avoid fiduciary status, HSA providers should avoid recommending how HSA account holders should invest their HSA funds.  In addition, HSA providers should generally avoid recommending that an HSA account holder transfer funds from one HSA custodian to another because that type of advice may also constitute investment advice under the final rule. 
2. Employers should understand whether their providers of HSAs, MSAs, and Coverdells may provide investment advice regarding these accounts, and if so, whether the provider has a strategy to avoid violating ERISA’s prohibited transaction rules.
3. Insurance agents and brokers may wish to review the insurance policies and other products they typically recommend to insured life, disability, and group health plans as well as HRAs to evaluate whether the contract includes an “investment component” and thus whether they may need a strategy, such as relying on PTE 84-24, in order to earn commissions in connection with the sale.  (See our separate alert on recent amendments to PTE 84-24.)
4. Funded welfare plans, such as plans funded through VEBAs, that have investment programs should review whether any advisers that they use to invest plan assets qualify as or acknowledge fiduciary status and whether they comply with an exemption strategy in order to receive commissions and other fees in connection with investment recommendations.

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