Case of the Week: Is Rendering Advice to an HSA Owner Considered a Fiduciary Act?

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and executive compensation arrangements.

A recent call with a senior financial advisor from Cafaro Greenleaf in New Jersey is representative of a common inquiry involving health savings accounts (HSAs).  The advisor asked:

“Is rendering advice to an HSA owner considered a fiduciary act?”

Highlights of Discussion

In addition to covering advice given to IRA owners and to participants and sponsors of ERISA plans like 401(k)s, the Department of Labor’s final rule governing investment advice fiduciaries also covers advice offered to participants in certain non-ERISA plans such as HSAs.1 Financial advisors who work with HSA owners could become subject to the fiduciary rules if they are providing advice for a fee. The rule may impact employers who offer HSAs if they provide information to their employees about HSAs that crosses the line from general educational information to investment advice, or if they benefit in some way from the advice being given.

Advice in this context means virtually all “recommendations” individualized or specifically directed to an HSA owner in return for a fee. A recommendation is a communication that a reasonable person would view as a suggestion to engage in or refrain from taking a particular course of action.

Under the fiduciary rule, if an advisor, for example, chooses to provide advice to an HSA owner, he or she must satisfy a prohibited transaction exemption under the fiduciary rule, under which the advice is given:

  • in the best interest of the HSA owner;
  • in exchange for a reasonable fee; and
  • with clearly understood disclosures that are not misleading.

An advisor’s failure to adhere to a fiduciary best-interest standard of conduct when providing advice to HSA clients could expose him or her to penalties under IRC Sec. 4975 (relating to prohibited transactions) (see DOL Field Assistance Bulletin 2006-02).

Providing general HSA education is not advice and, therefore, would not expose an advisor or employer to the fiduciary rule. Education would consist of providing:

  • general HSA information;
  • general financial, investment and retirement information;
  • asset allocation models; and
  • interactive investment materials.

If advice will be provided, then three voluntary ways, among others, to safeguard against fiduciary liability are to:

  • develop an investment policy statement (IPS);
  • implement an education policy; and
  • obtain fiduciary liability insurance.

Advisors need a process to help employers select a provider and then the fund lineup for HSAs. The purpose of an IPS is to establish a clear understanding as to the investment goals and objectives applicable to an HSA investment program. An IPS will establish reasonable expectations, objectives and guidelines in the selection of investments.

An education policy statement is not required, but it is a natural extension of the IPS. The education policy statement articulates an employer’s commitment to employee education about HSAs, the methods that will be used to communicate with employees, the goals and success measurements of specific education campaigns, and the parties responsible for various functions related to providing employee education on an ongoing basis.

Fiduciary liability insurance protects fiduciaries in the event they breach their fiduciary responsibilities. Fiduciary liability insurance — while not required — could be an important financial safety net for HSA fiduciaries. If audited, the agent will likely inquire whether the identified fiduciaries have such insurance. It is important to note that fiduciary liability insurance is separate and distinct from errors and omissions liability (E&O) insurance, and what the contracts will cover is buried in the fine print. Therefore, when seeking fiduciary liability insurance, it is important to read the proposed contract to make sure the HSA coverage the fiduciaries are seeking is included in the contract language.

Conclusion

Recommendations given to HSA owners could subject financial advisors and employers to a best-interest standard of conduct (and the associated liability) under the finalized DOL fiduciary regulations. Offering general educational information is one way to avoid fiduciary status. If advice is provided, then there are strategies to mitigate any potential liabilities.

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“Case of the Week” is the winner of an APEX Award for Publication Excellence for 2017.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.

©2018, Retirement Learning Center, LLC. Used with permission.

Footnote

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