Fiduciary Corner

Include health savings accounts in fiduciary process

The DOL rule that requires acting in clients' best interests will apply to these accounts

May 4, 2017 @ 12:53 pm

By Blaine F. Aikin

It is anyone's guess how the partisan fight in Congress over health care will eventually shake out, but one trend that financial advisers need to pay particularly close attention to is the rise of health savings accounts. HSAs, which are increasingly used by both employers and advisers as a retirement and risk management tool, would have received a significant boost under the failed American Health Care Act. Some observers say the HSA provision would have nearly doubled the current HSA contribution limit for individuals in high-deductible health plans, and they may still go up in whatever legislative formulation is next.

(More: Strict timeline governs health savings accounts and Medicare)

HSAs are not just appealing as a tax-deductible spending account for medical expenses. Unlike flex accounts, HSAs have no 'use it or lose it' requirement. Account holders can carry over their balance from year-to-year and contribute as much as they like up to an annual maximum limit. According to Fidelity Investments, about three-quarters of HSA account holders withdraw less than they contribute each year. In addition, eligible participants in some plans can transfer some or all of their contributions to investment accounts to help pay for medical expenses over the long-term, including retirement. Thus, financial planners can look at HSAs as an important component of retirement planning. Fidelity, for example, estimates that the average couple that retires at age 65 will need $260,000 for health-care expenses. Finally, like 529 plans, withdrawals are not taxed as long as the assets are used for qualified expenses. This amounts to a triple tax benefit for HSAs — contributions are tax-deductible, returns on invested contributions grow tax-free and withdrawals are not taxed if you use them for qualified medical expenses. That's a combination that even a Roth IRA can't match.

But there is a catch. In the Department of Labor's new definition of an investment fiduciary, which is applicable on June 9, 2017, advice on HSAs with investment components, including certificates of deposit, will be a fiduciary act.

(More: Why retirement plan advisers should care about the HSA market)


During the long and drawn-out debate over the fiduciary rule, HSA service providers argued that advice on these accounts shouldn't be included under the new fiduciary rule, but to no avail. The DOL responded in the final rule that HSAs and other accounts under the section of the tax code governing IRAs — which includes medical and education savings accounts — are all entitled to the same protections afforded by the agency's prohibited transaction exemption rules.

That means as of June 9, brokers, insurance producers and investment advisers will be subject to ERISA's restrictions on variable and third-party compensation when providing investment advice to HSAs. The safe harbor available to them will be the same transition rules for all prohibited transaction exemptions through Dec. 31. Called the Impartial Conduct Standards, this principles-based fiduciary standard will require advisers to act in the client's best interest, charge reasonable compensation and not mislead the client in making a recommendation.

Although the Impartial Conduct Standards do not spell out the details for a due diligence process, advisers would be well-served to establish a standard procedure for assessing the investment options available from various HSA providers.

As the first step of the suitability analysis, advisers should ensure that a client is indeed eligible to participate. An HSA must be paired with a high-deductible health plan and meet a minimum deductible.

As fiduciaries, advisers should consider expanding the scope of due diligence beyond the direct analysis of an investment, to the basic strategy of opening an investment account, to ensure they are acting in the client's best interest.

(More: Tips for managing clients' health care expenses in retirement)

Even if Congress is unable to reach agreement on increasing HSA limits, these accounts are still bound to play an increasingly important role in clients' portfolios. Advisers should keep track of this important development through the prism of a fiduciary process.

Blaine F. Aikin is executive chairman of fi360 Inc.


What do you think?

View comments

Recommended next

Upcoming event

Oct 22


San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print