QUESTION: Our firm provides third-party administration and consulting services to employers with cafeteria plans. What IRS requirements must we meet to become an HSA trustee?
ANSWER: Banks, insurers, and approved IRA and Archer MSA trustees and custodians are automatically eligible to serve as HSA trustees. Other entities that wish to become HSA trustees must request IRS approval in accordance with the procedures for nonbank IRA trustees. (Individuals are not eligible to seek approval.) IRS regulations require a written application demonstrating in detail that the applicant meets specified requirements, including the following:
- Fiduciary Ability. The applicant must be able to show that it has fiduciary experience, that it maintains an established place of business, and that performance of its fiduciary duties will not be interrupted by the death or change of its owners. It must also demonstrate financial responsibility by exhibiting a high degree of solvency (considering net worth, liquidity, and the ability to pay debts as they become due).
- Capacity to Account. The applicant must demonstrate its experience and competence to account for the interests of a large numbers of individuals, including calculating and allocating income earned and paying out distributions.
- Fitness to Handle Funds. The applicant must show its experience and competence to handle funds, including receiving, issuing receipts for, and safely keeping securities; collecting income; and buying, selling, receiving, and delivering securities on specific directions.
- Other Requirements. The applicant must demonstrate that it will satisfy specified net worth requirements, requirements relating to the allocation of fiduciary powers and bonding, auditing standards, rules regarding investments and funds awaiting investment, and various other requirements set forth in IRS regulations.
Applicants intending to act only as passive trustees (i.e., without discretion to direct the investment of the trust funds or any other aspect of the business administration of the trust) may be relieved of one or more of the requirements if they can establish with clear and convincing evidence that the specific requirements are not relevant to the manner in which they will administer HSAs.
There is no prescribed form for an application to be a nonbank trustee, but additional information (including bonding requirements and application fees) is available on the IRS website. If an application is approved, written notice of the approval will be issued. An applicant must not accept any fiduciary accounts before the effective date of that approval. A copy of the approval notice must be provided to any prospective account holder before the nonbank trustee accepts a fiduciary account from the person. Prospective HSA trustees should also carefully review applicable state laws and consult with experienced legal counsel. While you asked specifically about becoming an HSA trustee, we note that you might discover that your planned services are more accurately characterized as those of a custodian. Counsel can assist you with understanding that distinction and preparing appropriate account documents.
For more information, see EBIA’s Consumer-Drive Health Care manual at Section XVI.B (“Who Can Be an HSA Trustee or Custodian?”).
Contributing Editors: EBIA Staff.