Financial Services Update

Transcription

1 January 2008 Red Flag Issues for Health Savings Accounts As Health Savings Accounts (HSAs) become an increasingly important part of the financial services landscape, various issues arise as part of the administration of these accounts. These issues, if not handled with appropriate diligence, will lead to significant difficulties. (For an overview of HSAs, see our prior article at cfm?rid= ) Some of the red flag issues for HSA administrators to be aware of include: 1. Banks or other institutions that act as HSA administrators may allow employers to open HSAs on behalf of their employees without the consent of those employees. Nevertheless, HSA administrators must ensure that all employer contributions to an HSA are made either with the consent of the employee account owner, or that a contribution made by an employer on behalf of an employee is not made by way of a reduction in that employee s salary. Doing so is essential for the administrator to avoid problems that may arise under the Employee Retirement Income Security Act (ERISA). In 2004, the U.S. Department of Labor issued FAB stated for an HSA to avoid consideration, as a benefit plan regulated under ERISA an employee s ownership of an HSA must be voluntary. In 2006, the Labor Department issued FAB , which clarified this position, stating that an HSA owned in this issue 3 Red Flag Issues for Health Savings Accounts 6 The Pennsylvania Insurance Producer Licensing Act: Five Years Later Individuals, employers and administrators should be wary of the pitfalls that may arise while working with HSAs and the legal liability that may attach. by an employee is voluntary, even if an employer established the account and the employer contributed to the account. However, if an employer contributes to an employee s HSA by means of a salary reduction that the employee does not consent to, then the HSA may fall within the rubric of ERISA regulation. Administrators need to ensure that any employer contribution to an employee s HSA is made in a manner that avoids the HSA being deemed an ERISA regulated plan. Operating under ERISA requirements increases regulatory and compliance expenses and raises other difficulties for an administrator. Additionally, HSA administrators may not allow employers to make or influence any investment decisions made with HSA funds, and must ensure that they do not give any compensation to an employer in return for administering the HSAs of that employer s employees. The occurrence of any of these circumstances may give rise to an HSA being deemed by the Labor Department to be a plan regulated under ERISA, which would also result in additional regulatory and compliance expenses and related difficulties for an administrator.

2 2. HSA administrators should have a standard process to ensure that any employer or individual who wishes to establish an HSA is qualified to do so. HSA administrators are not responsible for ensuring that employers or individuals who open HSAs or contribute funds to HSAs are eligible to do so. However, it is advisable for HSA administrators to set up a process to verify the qualifications of persons seeking to establish or contribute to an HSA. For example, such a process may include requiring an employer to provide a copy of its insurance policy cover sheet to the administrator. This would ensure that an employer seeking to make available HSAs to its employees in fact provides its employees with insurance, which includes a High Deductible Health Plan (HDHP) or exclusively provides HDHP coverage, before going forward. This type of process will also help an administrator ensure that an individual who wants to open his or her own HSA is qualified to do so. Ensuring that those persons seeking to open HSAs are qualified to do so enables the administrator to avoid burdens that may arise as a result of opening HSAs for ineligible persons. Additionally, HSA administrators should have in place procedures that ensure that persons who own HSAs maintain their HSA eligibility. HSA administrators are required to report to the Internal Revenue Service contributions made to the HSAs. This requirement ensures that the HSAs are owned by eligible persons, which may simplify the administrator s reporting burden. 3. Unlike 401(k) plans, funds contributed to an HSA may not be pledged or borrowed against by an HSA owner. HSA administrators should have procedures in place to protect against this. The IRS has issued guidance permitting eligible individuals to use debit, credit or stored-value cards to receive distributions from an HSA for qualified medical expenses. Subsequent guidance by the IRS, under section 223(e)(2) of the Internal Revenue Code, forbids HSA owners and administrators from entering into certain prohibited transactions using HSA funds. A prohibited transaction of this kind includes an account beneficiary borrowing against or pledging the funds in an HSA or receiving a benefit in his or her own individual capacity as a result of opening or maintaining an HSA. However, administrators may permit provide lines of credit to an HSA. Such lines of credit allow HSA owners to pay for qualified medical expenses whose costs exceed the funds available in the HSA. An HSA debit or credit card provided by the HSA administrator grants access to these lines of credit. This credit option is available when the HSA lacks adequate funds to pay for qualified medical expenses. 4. HSA administrators should be certain to inform HSA owners when opening HSAs that the owner, not the administrator, is responsible for distributions made from their HSAs, and that the owners alone are responsible for any improper distributions of HSA funds. HSA administrators are not required to determine whether HSA distributions are used for qualified medical expenses. Persons who establish and maintain HSAs make that determination. The owners should maintain records of their medical expenses. These records should show that the distributions are exclusively for qualified medical expenses and are therefore excludable from gross income. HSA administrators are required to report to the IRS all distributions made from the HSAs they administer. However, since HSA administrators are not required to monitor whether distributions made from those HSAs are for qualified medical expenses, any consequences that result from improper distributions are borne solely by the account s owner. HSA administrators should make this clear to HSA account owners when the accounts are established. 5. Funds coming into HSAs from Archer Medical Savings Accounts (MSA), Flexible Spending Accounts (FSA) and Health Reimbursement Arrangements (HRA) are viewed differently by the IRS than are funds from an Individual Retirement Account. When consolidated, HSA administrators need to treat funds from these different accounts accordingly. For 2008, the maximum contribution permitted by the IRS to an HSA is $2,900 for single coverage or $5,800 for family coverage. An HSA owner can -2-

3 make a one-time contribution to an HSA of amounts distributed from an IRA. An IRA transfer is limited to once per lifetime, the contribution must be a direct administrator-to-administrator transfer and subject to the annual contribution limit. Rollover contributions from MSAs are permitted, and not subject to the annual contribution limits. Additionally, employers can transfer funds from an HRA or FSA to an HSA for employees switching to coverage under an HSA-compatible plan. HRA and FSA rollover amounts are also not subject to the annual contribution limits. Although it is the final responsibility of the HSA owner, not the administrator, to determine if contributions made to an HSA have exceeded the maximum allowable contribution limit, HSA administrators need to be aware of the different ways to treat funds from different sources contributed to HSAs. Administrators may provide to HSA owners appropriate guidelines explaining the proper transfer of these various fund types. Doing so may help both the HSA owners and administrator avoid administrative burdens going forward. 6. HSA administrators should ensure that all funds contributed to an HSA by an account owner remain available to the account owner for payment of qualified medical expenses, but if an HSA owner becomes HSA-ineligible, then the HSA administrator must not allow additional contributions to that person s HSA. If an HSA owner, who was HAS-qualified when the account was established, becomes HSA-ineligible (for instance, when an HSA owner becomes covered by health insurance which is not a HDHP), the HSA administrator may not liquidate the HSA. The HSA account owner may continue to pay for qualified medical expenses with funds in the HSA, but the account owner may not make any additional contributions to the HSA. There is no time limit on the use of funds in an HSA. 7. As HSAs have grown, they have attracted different types of account owners. HSA administrators should consider carefully which type of account owner they want to attract as different types of account owners may require different kinds of administrative diligence. Administrators need to ensure that any employer contribution to an employee s HSA is made in a manner that avoids the HSA being deemed an ERISA regulated plan. Exante Financial Services conducted a study of the various types of account holders who maintain HSAs with it (Exante Financial Services - Emerging Use Patterns for Health Savings Accounts: Understanding Behavior of Spenders, Savers, and Investors, April 30, 2007, results of the study are available at exantefinancialservices.com/pdfs/hsa Usage White Paper.pdf). In this study, Exante concluded that there are three distinct types of HSA owners: spenders, savers and investors. Spenders The largest group is the HSA spenders. Spenders, who comprise roughly half of all HSA owners, typically carry balances in their HSAs of between $400 and $600 and spend about 80 percent of their contributions on current medical expenses. As a group, spenders contribute an average of $133 per month to their HSAs, which is more money than savers contribute. However, spenders generally make 12 withdrawals per year. Savers HSA savers are the second largest group of HSA owners, comprising slightly less than half of all HSA owners. Savers typical carry balances in their HSAs ranging between $1,500 to $3,000. In certain instances, those HSA owners who rolled over their MSAs have balances as high as $50,

4 On average, savers spend only 8 percent of their contributions each year and make about one withdrawal every five months. About half of all savers have never withdrawn from their account; those who do use the account for current medical expenses generally carry higher balances, and contribute more each month than those who never distribute funds from their HSA. Savers, on average, contribute $124 per month, slightly less than spenders. Investors HSA investors are the smallest group of HSA owners, comprising less than 5 percent of all HSA owners. Investors typically carry balances in their HSAs of more than $2,000, and have invested additional money in mutual funds, stocks, bonds or other investment options offered by the administrator. HSAs, which attract different kinds of HSA owners, may require different kinds of disclosure on the part of HSA administrators. For instance, administrators who work with accounts owned by spenders likely will have greater distribution disclosure obligations. Conversely, administrators who administer accounts owned primarily by savers likely will have greater contribution disclosure obligations. Other considerations for administrators may include which kind of HSA owner presents the administrator with the greatest opportunity for HSA growth or which type of owner best fits within the administrator s overall business model. 8. HSAs continue to be a favorite topic among policy makers. This year s presidential election may have a significant impact on the growth potential of HSAs. The kind of impact will depend largely on how HSAs fit in with the new president s overall health care policy. Republican presidential candidates John McCain, Mitt Romney, Mike Huckabee and Rudy Giuliani are on record as favoring HSAs and each has expressed a desire to expand accessibility to HSAs, though none has presented exact details. For the Democrats, Hillary Clinton, John Edwards and Barack Obama have each supported increasing the role of employers and the federal government in the provision of health insurance. While neither Obama nor Edwards have directly addressed what role, if any, they envision for HSAs in the future, Clinton has previously expressed a negative view of HSAs. If a Republican is elected president, it seems likely that the present growth trends of HSAs will accelerate even more, but if a Democrat Peppercast: High Cost Loans to Military Personnel President Bush recently signed into law an amendment to the Miscellaneous Prohibitions and Penalties chapter of the General Military Law which prohibits creditors from entering into payday loan and title loan agreements with active duty service members. Listen to a short podcast with Rick Eckman and Albert Manwaring. Mr. Eckman chairs Pepper s Financial Services Practice Group and Mr. Manwaring is a Pepper partner and lieutenant colonel in the Judge Advocate General Corps of the U.S. Army Reserves. This podcast discusses the host of issues this amendment raises and why it is very troubling for the entire consumer credit industry. Listen today by visiting the Financial Services section of -4-

5 is elected president, HSA growth trends may stay the same or possibly slow. Pepper Points The above are only a few of the issues that may arise in the wake of the growth of HSAs. Individuals, employers and administrators should be wary of the pitfalls that may arise while working with HSAs and the legal liability that may attach. HSA administrators must also be aware of their reporting obligations and ensure that information is reported properly to both their HSA owners and to the IRS. Authors: Timothy R. McTaggart mctaggartt@pepperlaw.com Andrew C. Maher mahera@pepperlaw.com Gregory J. Nowak to Speak at Managing Risks Associated with Complex Securities Conference - March 17-18, 2008 Financial Research Associates and The Hedge Fund Business Operations Association are hosting the Compliance & Operational Best Practices for Hard-to-Value Securities & Portfolios Conference on March 17-18, 2008 at The Harvard Club in New York city. This conference will showcase a comprehensive legal, compliance and operational framework for managing risks associated with complex securities. Pepper partner Gregory J. Nowak will be on a panel discussing A Review of SEC Enforcement Actions Stemming from Pricing Irregularities. For more information on this conference or to register, please visit RSS on Subscribe to the latest Pepper articles via RSS feeds. Visit com today and click on the RSS button to subscribe to our latest articles in your news reader. -5-

6 The Pennsylvania Insurance Producer Licensing Act: Five Years Later It has been almost five years since the enactment of Act 147 of 2002 (the Insurance Producer Licensing Act or Act) which governs the licensing and regulation of Insurance Producers in the Commonwealth. This legislation was enacted in response to the mandate set forth in the Gramm-Leach-Bliley Act of 1999 (GLBA) that at least 29 states must pass uniform legislation by November of 2002 or the federal government would assume all state insurance licensing functions. This article will focus on certain ambiguities in the provisions which impact bank insurance sales activities, and discuss, where appropriate, the impact of subsequent legislation on those provisions. Sales on or from the Premises of a Financial Institution Sales of insurance (except credit insurance) shall take place in a location which is distinct from the area where deposits are taken and loan applications are discussed and accepted. Under the Act, compliance with the Interagency Statement of Policy on the Retail Sale of Nondeposit Investment Products (issued February 15, 1994) will satisfy this requirement. The Interagency Statement, however, applies only to retail deposit-taking activities, and not to lending activities. The enforcement of this restriction to the extent that it requires segregation of insurance sales from lending activities would appear to be problematic under the anti-discrimination standards set forth in the GLBA. A financial institution must formally apply to the Insurance Commissioner for exemptive relief if the number of staff or size of the facility prevents compliance. To date, I am not aware of any financial institution that has applied to the Insurance Commissioner for relief from this restriction. License Requirements Generally, a person must be licensed as an insurance producer if he or she sells, solicits or negotiates a contract of insurance unless certain exceptions apply. The two most notable exceptions for financial institutions are the clerical and group plan exemptions. The Department of Insurance has never defined a one-time nominal fee and it is not clear whether it would defer, by analogy, to the definition of this term set forth in the recently enacted Regulation R with respect to referrals by unlicensed bank employees to a securities broker. The practical application of these exceptions has never been clarified by the Department of Insurance. For example, since these exceptions apply only if no commissions are paid for these services, it s not clear whether bank employees must be licensed in order to receive points or credits for credit insurance sales. It s also not clear whether a financial institution may accept premium payments at its branch offices on behalf of its insurance affiliate. Referral Fees The Act permits the payment of referral fees to unlicensed persons if the referring person does not discuss specific terms and conditions of any insurance product and, in the case of a referral for insurance that is primarily for personal, family or household use, the referring person does not receive more than a onetime nominal fee of a fixed dollar amount that does not depend upon whether the referral results in a sale. The Department of Insurance has never defined a one-time nominal fee and it is not clear whether it would defer, by analogy, to the definition of this term set forth in the recently enacted Regulation R with respect to referrals by unlicensed bank employees to a securities broker. Referrals from bank personnel who do not accept deposits, such as trust or loan officers, may also be -6-

7 limited to a one-time nominal fee, if the referral relates to insurance that is primarily for personal, family or household use. Under the banking rules, the nominal fee restriction only applies to deposit-taking employees. Referrals for commercial insurance are not restricted to a one-time nominal fee, and may be based on revenues, as long as the person making the referral does not discuss the specific terms of the insurance coverage. Privacy A financial institution may not share with any third party any insurance coverage information obtained in making a loan unless the customer has the ability to preclude, or opt-out of, such sharing arrangement This would include any information concerning the terms and conditions of insurance coverage, expiration dates, claims or history obtained in the loan process. This provision is more restrictive than the related rule under GLBA, which permits the sharing of insurance coverage information among affiliates without restriction, and applies only to non-public personal information. Under the affiliate marketing rules recently issued by the federal banking agencies, a financial institution also would be prohibited under the Fair Credit Reporting Act from using this information for marketing purposes unless the consumer is given the opportunity to opt out of such solicitation. Lisa R. Jacobs to Speak at PBI Do-It-Yourself Course on Acquisition Agreements - March 26, 2008 Pepper partner Lisa R. Jacobs will speak at a Pennsylvania Bar Institute do-it-yourselfer course on March 26, The Commercial Documents Series Acquisition Agreements course will be held at The CLE Conference Center in the Wanamaker Building in Philadelphia from 12:30-2:30 pm. All DIYers live by one steadfast rule: learning is best accomplished by rolling up your shirt sleeves and digging right in. This 2-hour class will dissect some of the most frequently used document types so that you will understand the ins and outs when you sit down to draft your own forms. Visit for more information and to register. Author: Victor M. DiBattista dibattistav@pepperlaw.com -7-

8 Don t Miss Future Issues Be sure to receive future issues of Financial Services Update. Please subscribe online at or you may fill out the form below and mail it to Pepper Hamilton llp, Attn: Kathy Rebechi, 3000 Two Logan Square, Eighteenth and Arch Streets, Philadelphia, PA , or fax it to Kathy Rebechi at How would you like to receive this newsletter: * Mail Name Title Company Address Phone Fax * The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Berwyn Boston Detroit Harrisburg New York Orange County Philadelphia Pittsburgh Princeton Washington, D.C. Wilmington 2008 Pepper Hamilton llp. All Rights Reserved. This publication may contain attorney advertising. -8-