IBA Compliance Connection

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We plan to start offering health savings accounts (HSAs), initially to employees, and later to the public. Do we need to list the bank as custodian on HSAs? Do we need to list the bank as a custodian on individual retirement accounts (IRAs)?

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We recommend consulting with a tax professional, but in our view, your bank can serve as either a custodian or trustee of an HSA, but it must serve as a trustee of an IRA.

Under the Internal Revenue Code and IRS guidances, an HSA is a “trust” that must be established with a “qualified trustee” under state trust laws. Banks are expressly listed as qualified trustees who may establish HSA accounts. However, in various guidances, the IRS also states that banks may serve as either trustees or custodians of HSAs. In fact, the IRS has promulgated two different forms for establishing an HSA — Form 5305-B to establish a trust account, and Form 5305-C to establish a custodial account. Consequently, we believe that whether a bank is a “trustee” or “custodian” of an HSA depends on the type of agreement the bank enters into with the customer.

Unlike HSAs, however, the Internal Revenue Code states that IRA custodial accounts held by banks generally should be treated as trusts, with the banks as trustees. In addition, the FDIC has opined that because banks are trustees of custodial IRA accounts, the bank is a fiduciary with respect to these accounts. Consequently, regardless of whether an IRA is labeled as a trust account or a custodial account, the bank would be considered a trustee.

For resources related to our guidance, please see:

HSA Resources

  • Internal Revenue Code, 26 USC 223(d) (“The term ‘health savings account’ means a trust created or organized in the United States as a health savings account exclusively for the purpose of paying the qualified medical expenses of the account beneficiary, but only if the written governing instrument creating the trust meets the following requirements: . . . The trustee is a bank (as defined in section 408(n)), an insurance company (as defined in section 816), or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.”)

  • Internal Revenue Bulletin: 2008-29 (July 21, 2008) (“Q-38. When is an HSA established? A-38. An HSA is an exempt trust established through a written governing instrument under state law. Section 223(d)(1). State trust law determines when an HSA is established. Most state trust laws require that for a trust to exist, an asset must be held in trust; thus, most state trust laws require that a trust must be funded to be established. Whether the account beneficiary’s signature is required to establish the trust also depends on state law.”)

  • Internal Revenue Bulletin: 2004-2 (January 12, 2004) (“Q-9. Who is a qualified HSA trustee or custodian? A-9. Any insurance company or any bank (including a similar financial institution as defined in section 408(n)) can be an HSA trustee or custodian. In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is automatically approved to be an HSA trustee or custodian. Other persons may request approval to be a trustee or custodian in accordance with the procedures set forth in Treas. Reg. § 1.408-2(e) (relating to IRA nonbank trustees). For additional information concerning nonbank trustees and custodians, see Announcement 2003-54, 2003-40 I.R.B. 761.”)

  • IRS Publication 969 (2016), Health Savings Accounts and Other Tax-Favored Health Plans (“Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.”)

IRA Resources

  • Internal Revenue Code, 26 USC 408 (“For purposes of this section, the term ‘individual retirement account’ means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements: . . .”)

  • IRA Regulations, 26 CFR 1.408-2(a) (“An individual retirement account must be a trust or a custodial account (see paragraph (d) of this section). It must satisfy the requirements of paragraph (b) of this section in order to qualify as an individual retirement account. It may be established and maintained by an individual, by an employer for the benefit of his employees (see paragraph (c) of this section), or by an employee association for the benefit of its members (see paragraph (c) of this section).”)

  • IRA Regulations, 26 CFR 1.408-2(b) (“An individual retirement account must be a trust created or organized in the United States (as defined in section 7701(a)(9)) for the exclusive benefit of an individual or his beneficiaries. Such trust must be maintained at all times as a domestic trust in the United States. The instrument creating the trust must be in writing and the following requirements must be satisfied.”)

  • IRA Regulations, 26 CFR 1.408-2(b)(2)(i) (“The trustee must be a bank (as defined in section 408(n) and the regulations thereunder) or another person who demonstrates, in the manner described in paragraph (e) of this section, to the satisfaction of the Commissioner, that the manner in which the trust will be administered will be consistent with the requirements of section 408 and this section.”)

  • Internal Revenue Code, 26 USC 408(h) (“For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in subsection (n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.”)

  • IRA Regulations, 26 CFR 1.408-2(d) (“For purposes of this section and section 408(a), a custodial account is treated as a trust described in section 408(a) if such account satisfies the requirements of section 408(a) except that it is not a trust and if the assets of such account are held by a bank (as defined in section 401(d)(1) and the regulations thereunder) or such other person who satisfies the requirements of paragraph (b)(2)(ii) of this section. For purposes of this chapter, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account will be treated as the trustee thereof.”)

  • FDIC Trust Examination Manual, Individual Retirement Accounts (“Under IRC Section 408(h) – bank custodians of IRAs are considered trustees, hence fiduciaries.”)