[Federal Register Volume 69, Number 102 (Wednesday, May 26, 2004)]
[Proposed Rules]
[Pages 29907-29910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11903]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 721 and 724


Health Savings Accounts

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The NCUA is proposing to amend its regulations governing a 
federal credit union's (FCU) authority to act as trustee or custodian 
to authorize FCUs to serve as trustee or custodian for Health Savings 
Accounts (HSA). The NCUA is issuing this proposed rule so that FCUs and 
their members can take advantage of the authority granted in the 
Medicare Prescription Drug, Improvement and Modernization Act of 2003 
(Medicare Act). The Medicare Act authorizes the establishment of HSAs 
by individuals who obtain a qualifying high deductible health plan and 
specifies that an HSA may be established and maintained at an FCU. The 
proposed rule would also make a conforming amendment to NCUA's 
incidental powers regulation to include trustee or custodial services 
for HSAs as a pre-approved activity.

[[Page 29908]]


DATES: Comments must be received on or before June 25, 2004.

ADDRESSES: You may submit comments by any of the following methods 
(please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Rule 721 and 724, Health Savings Accounts'' 
in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Becky Baker, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Ross P. Kendall, Staff Attorney, at 
the above address, or telephone: (703) 518-6562.

SUPPLEMENTARY INFORMATION:

Background

    The precursor to the HSA was the Medical Savings Account, a tax-
advantaged savings plan that was available only to certain individuals 
who were either self-employed or employees of small companies. The law 
authorizing the creation of these accounts contained other limitations 
as well, including a ceiling on the number of persons nationwide who 
could establish such an account, as well as an expiration provision. 26 
U.S.C. 220. The limitations raised doubt about whether these accounts 
would become a permanent, viable alternative for Americans seeking 
relief from the high cost of health insurance. For these reasons, the 
NCUA elected not to include Medical Savings Accounts in its 1998 
amendment expanding the scope of part 724 to include Roth IRAs, 
Coverdell Education Savings Accounts and Savings Incentive Match Plans 
for Employees. 63 FR 14025 (March 24, 1998).
    Title XII of the Medicare Act makes permanent and broadens the 
authority for individuals to establish tax-advantaged savings accounts 
at financial institutions to support their payment of medical expenses 
not covered by health insurance. Under the new law, anyone who has a 
qualifying high deductible health plan is eligible to establish and 
maintain an HSA. A health plan with a minimum deductible of at least 
$1,000 (for individual coverage) or $2,000 (for family coverage) may 
qualify under the HSA rules even where certain preventive care 
services, as well as coverage for accidents, disability, dental care, 
vision care, and long-term care, are not subject to the deductible.
    Contributions to an HSA qualify for an ``above the line'' tax 
deduction, whether or not the taxpayer itemizes other expenses on 
Schedule A. Income earned on funds in the account accrues tax-free, and 
withdrawals for qualified medical expenses are not taxable. 
Contributions to an HSA may be made by the individual or his or her 
employer, and employer contributions are not taxable as income to the 
individual. Contributions to the account for 2004 may not exceed the 
lesser of the annual deductible under the health plan or $2,600 (for 
individuals) or $5,150 (for family coverage). Contribution limits are 
indexed annually, and special ``catch up'' rules apply for individuals 
between ages 55 and 65. Funds in the account may be withdrawn tax-free 
if used to pay for qualified medical expenses. Unlike Flexible Spending 
Accounts, any unused balance in an HSA may be rolled over and 
accumulated from year to year, and the account is portable. After 
retirement but before eligibility for Medicare, an account owner may 
use funds in the account to purchase health insurance, including long-
term care insurance. After an individual reaches age 65 and is 
qualified for Medicare coverage, any funds remaining in the account may 
be used for any purpose, although such withdrawals are taxed as 
ordinary income. Non-qualified withdrawals before age 65 are taxable as 
income, and are also assessed a 10% penalty. Upon death, HSA ownership 
may transfer to the spouse of the account owner on a tax-free basis.
    Additional information about HSAs, including important details 
concerning the type of high deductible health plan an individual must 
obtain to qualify for an HSA, is available from the Public Affairs 
Office of the U.S. Department of the Treasury. The information is 
directly accessible from the Treasury Web site, http://www.ustreas.gov.

FCUs as Trustees or Custodians for HSAs

    Title XII of the Medicare Act will be codified as new section 223 
of the Internal Revenue Code (IRC). The proposed rule would amend Sec.  
724.1 of NCUA's regulations by inserting a reference to section 223 of 
the IRC into its text, to go along with the other IRC references that 
authorize retirement, pension and education savings accounts. The 
proposed rule would also make changes to the section heading and the 
caption of this part to reflect that trustee and custodial authority 
for FCUs is no longer limited to pension and retirement plans. In this 
respect, the NCUA proposes to use the term ``tax-advantaged savings 
plans'' as a more descriptive and inclusive way to refer to the types 
of accounts and savings plans that members may establish and for which 
FCUs may fulfill trustee or custodial responsibilities.
    As with an IRA, an individual who maintains an HSA has an option to 
direct the investment choices. At present, however, both the text and 
the heading for Sec.  724.2 refer only to retirement plans in 
describing the role that an FCU may fulfill in assisting a member who 
elects to make investment choices outside the credit union. Therefore, 
NCUA proposes to delete the reference to retirement from both the 
section heading and the first sentence of Sec.  724.2, to clarify that 
members may determine investment options for HSAs as well. The 
amendment would not alter any of the procedural limitations and 
safeguards presently in the rule concerning either the extent of the 
actions an FCU may take or the notice requirements relating to the 
absence of share insurance for investment choices outside of share or 
share certificate accounts the FCU maintains.
    The proposed rule would also amend NCUA's incidental powers 
regulation by adding language to Sec.  721.3, describing those 
activities that are pre-approved for FCUs. Subsection (l) discusses the 
role an FCU may fulfill as trustee or custodian. The proposed rule 
would simply add HSAs to the types of plans for which an FCU may 
fulfill trustee or custodian responsibilities. A conforming amendment 
is proposed for the first sentence in this subsection, substituting 
``tax-advantaged savings plans'' for the current reference to pension 
and profit-sharing plans, to describe more clearly the types of 
accounts for which an FCU may serve as trustee or custodian.
    The proposed rule would authorize FCUs to serve as trustee or 
custodian for member HSAs. Whether similar authority exists for State 
chartered, federally insured credit unions is a matter of applicable 
State law.

Obligations of Trustee or Custodian

    NCUA understands that the Internal Revenue Service (IRS) will 
prepare and distribute comprehensive guidelines for HSA trustees or 
custodians, including model forms, in the near future. The

[[Page 29909]]

Department of the Treasury has already issued some guidance, including 
that an HSA trustee will not be responsible for monitoring or 
determining if a withdrawal from an HSA is for a qualified medical 
purpose. See U.S. Treasury Notice 2004-2--Guidance on Health Savings 
Accounts. NCUA anticipates that HSA trustees and custodians will be 
required to provide initial disclosures and monitor deposits made to 
the account to assure they do not exceed permissible annual 
contribution limitations, and we expect the guidelines will also 
require certain reporting to the IRS and to the account owner.
    NCUA anticipates and expects that FCUs will comply with all 
applicable guidelines once established by the IRS. NCUA does not 
anticipate that the obligations will be burdensome. NCUA notes that 
FCUs have been providing IRA trustee and custodial services for over 25 
years. In its examination and supervision of FCUs during this time, 
NCUA has seen no indication of regulatory problems or safety and 
soundness concerns arising from this activity. This historical 
performance suggests that FCUs can safely provide the same services for 
HSAs.

Separate Share Insurance Coverage for HSAs

    The Board notes that, although it is set up as a trust account, an 
HSA is an account a member maintains for his or her own benefit. In 
view of the statutory limits on maximum annual contributions, as well 
as the likelihood of frequent withdrawals from the HSA to pay for 
medical expenses, the Board does not anticipate that substantial 
balances in HSAs will accumulate in the short term. Also, the Federal 
Deposit Insurance Corporation, with which the NCUA has traditionally 
maintained parity on matters involving the scope of account insurance 
coverage, has indicated it does not consider HSAs to be a separate 
category for insurance coverage purposes. As with other types of 
revocable trust accounts, the interests of person(s) designated by the 
owner of an HSA to receive any balance in the account remaining after 
the owner's death may qualify for separate insurance coverage under 
existing rules. To qualify for separate insurance, the designated 
beneficiary must be the spouse, child, grandchild, parent or sibling of 
the account owner and the other requirements in our rule must be 
satisfied. 12 CFR 745.4. For these reasons, the Board is not proposing 
an amendment to NCUA's share insurance rules at present. The Board 
intends to monitor developments in this area and may reconsider its 
position at a later time if circumstances warrant.

Request for Comments

    The Board's standard policy is to issue proposed regulations with a 
60-day comment period. See NCUA Interpretative Ruling and Policy 
Statement 87-2 (52 FR 35231, Sept. 18, 1987; as amended by IRPS 03-2, 
68 FR 31949, May 29, 2003). In this case, however, the Board finds that 
a shorter comment period is warranted. The Medicare Act is already 
effective, and the Board anticipates the IRS will produce and 
distribute model forms and related guidance for institutions acting as 
trustee or custodian on or before the end of June 2004. A shorter 
comment period will minimize delays for FCUs seeking to offer this 
service to their members.

Regulatory Procedures

Regulatory Flexibility Act

    This proposed rule conforms current regulations to recent changes 
in the federal tax law and implements authority for FCUs to offer HSAs 
to their members. The Board has determined and certifies that the 
proposed rule would not have a significant economic impact on a 
substantial number of small credit unions. Accordingly, the NCUA Board 
has determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the proposed rule would not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on State and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The proposed rule would not have substantial 
direct effects on the states, on the connection between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

List of Subjects

12 CFR Part 721

    Incidental Powers.

12 CFR Part 724

    Pensions, Reporting and recordkeeping, Trusts and trustees.

    By the National Credit Union Administration Board, this 20th day 
of May, 2004.
Becky Baker,
Secretary, NCUA Board.
    For the reasons stated in the preamble, NCUA proposes to amend 12 
CFR chapter VII as follows:

PART 721--INCIDENTAL POWERS

    1. The authority citation for part 721 continues to read as 
follows:

    Authority: 12 U.S.C. 1757(17), 1766 and 1789.

    2. Amend Sec.  721.3 by revising paragraph (l) to read as follows:


Sec.  721.3  What categories of activities are preapproved as 
incidental powers necessary or requisite to carry on a credit union's 
business?

* * * * *
    (l) Trustee or custodial services. Trustee or custodial services 
are services in which you are authorized to act under any written trust 
instrument or custodial agreement created or organized in the United 
States and forming part of a tax-advantaged savings plan, as authorized 
under the Internal Revenue Code. These services may include acting as a 
trustee or custodian for member retirement, education and health 
savings accounts.

PART 724--TRUSTEES AND CUSTODIANS OF PENSION PLANS

    3. The authority citation for part 724 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 1765, 1766 and 1787.

    4. Revise the part heading for part 724 to read as follows:

[[Page 29910]]

PART 724--TRUSTEES AND CUSTODIANS OF CERTAIN TAX-ADVANTAGED SAVINGS 
PLANS

    5. Amend Sec.  724.1 by revising the section heading and first two 
sentences to read as follows:


Sec.  724.1  Federal credit unions acting as trustees and custodians of 
certain tax-advantaged savings plans.

    A federal credit union is authorized to act as trustee or 
custodian, and may receive reasonable compensation for so acting, under 
any written trust instrument or custodial agreement created or 
organized in the United States and forming part of a tax-advantaged 
savings plan which qualifies or qualified for specific tax treatment 
under sections 223, 401(d), 408, 408A and 530 of the Internal Revenue 
Code (26 U.S.C. 223, 401(d), 408, 408A and 530), for its members or 
groups of its members, provided the funds of such plans are invested in 
share accounts or share certificate accounts of the Federal credit 
union. Federal credit unions located in a territory, including the 
trust territories, or a possession of the United States, or the 
Commonwealth of Puerto Rico, are also authorized to act as trustee or 
custodian for such plans, if authorized under sections 223, 401(d), 
408, 408A and 530 of the Internal Revenue Code as applied to the 
territory or possession under similar provisions of territorial law. * 
* *
    6. Amend Sec.  724.2 by revising the section heading and 
introductory text to read as follows:


Sec.  724.2  Self-Directed Plans.

    A federal credit union may facilitate transfers of plan funds to 
assets other than share and share certificates of the credit union, 
provided the conditions of Sec.  724.1 are met and the following 
additional conditions are met: * * *

[FR Doc. 04-11903 Filed 5-25-04; 8:45 am]
BILLING CODE 7535-01-P