NBT 101: A guide to the nonbank trustee designation for health savings accounts

An overview of the nonbank trustee designation for HSAs.

The Internal Revenue Service approved First Dollar to act as a passive nonbank trustee (NBT) for health savings accounts (HSAs).

"Wait. What's an NBT?"
- Probably You

Fair question. We'll answer that question (and more) in this post.

What’s a nonbank trustee or custodian?

First, the IRS is the regulatory body that approves nonbank trustee and custodian applicants, and the Treasury Regulation Section 1.408-2(e) is the government code that regulates this designation. Here’s what the IRS says about nonbank trustees and custodians on its website:

“An entity that is not a bank (or an insurance company in the case of Archer Medical Savings Accounts and health savings accounts) can request to be a nonbank trustee/custodian by applying in writing and demonstrating that certain requirements will be met to handle any of the following fiduciary accounts:

  • Archer medical savings account (MSA)
  • Coverdell education savings account
  • Deferred compensation plan of state & local government and tax-exempt organizations' custodial accounts
  • 403(b)(7) custodial account
  • Health savings account ←us!
  • Individual retirement arrangement (IRA)
  • Qualified retirement plan custodial account
  • Roth IRA

Summary: The IRS authorizes nonbank entities to provide fiduciary services to a few specified accounts. Earning approval from the IRS highlights an organization's maturity and grants the organization additional abilities as a trustee and custodian for that account.

"Our commitment to compliance and our earned trust has made this achievement possible. We're excited to serve our partners in our expanded capacity as a nonbank trustee."
- Jason Bornhorst, CEO and co-founder at First Dollar. 

What’s the difference between a nonbank trustee and a nonbank custodian?

You will find very little information about the difference between these two designations online, but here's some information we learned during the application process. 

A nonbank custodian and a nonbank trustee both play roles in managing assets or financial transactions, but they can perform different functions. 

  • A nonbank custodian primarily holds and safeguards cash on behalf of clients, ensuring their safekeeping and facilitating transactions. 
  • A nonbank trustee, in addition to the above, may safeguard securities and make investment decisions for the benefit of plans and/or beneficiaries.

There is additional differentiation in passive vs non-passive, but the above is a serviceable distinction for the purpose of this article.

How First Dollar Applied

We were advised to apply as a nonbank custodian, given our plan to only custody HSAs without directing plan assets. The key thing to recognize is that, as a passive nonbank custodian, First Dollar can’t invest client assets on their behalf and instead need them to decide how to invest those assets.

"Earning IRS approval demonstrates our maturity and credibility in a space where those qualities are essential. We're excited to continue earning the trust of our partners as a nonbank trustee."
- Suzanne Eaton, Director of Benefits Compliance

Why did First Dollar lead with “nonbank trustee”?

  1. Our approval letter from the IRS states, "passive nonbank trustee or custodian with respect to health savings accounts." 
  2. Industry experts are more likely to be familiar with "nonbank trustee," and few know that there are two terms. 
  3. On its website, the IRS refers to NBT as a general category term that captures nonbank trustees and custodians.

We lead with "nonbank trustee" in our comms for those reasons.

What can First Dollar do now?

As NBT, First Dollar can:

  • Act as an HSA custodian. Consumers can sign up directly via First Dollar. We still need to work with a bank for deposit insurance and money movement, but we have more options for member signup. 
  • Demonstrate to clients and investors the maturity of our organization. Receiving IRS approval establishes credibility and trust in a space where those qualities are deeply valued. 
  • Enable faster go-to-market paths for clients who may not want to serve as the custodian themselves. Many rules and regulations associated with health savings accounts are distinct from those applicable to more standard banking. So banks with NBT or NBC authority via their banking charters might need to complete operational and compliance work to comply with HSA laws—even if they don’t have to get regulatory approval. With our approval, we can save these banks that burden and uncertainty.
  • Reduce liquidity risk by strategically placing deposits at diversified and well-capitalized financial institutions. With the recent, somewhat surprising, and highly visible failures of institutions like SVB and First Republic Bank due to bank runs, ensuring we deposit funds at strong financial institutions is more important than it’s been in quite a while. Our NBT designation makes that much easier.
"Implementing first-class compliance and security standards are integral when building technology solutions at the intersection of healthcare and finance. With intentional planning and mutual respect across the table, our teams complement each other's goals, help each other navigate the complexity across two highly regulated industries, and act as one to minimize the risks facing our business, customer data, and deposits."
- Colin Anawaty, Chief Product Officer at First Dollar

What's the difference between First Dollar and a bank?

Even with the new designation, there are still some significant differences between First Dollar and a bank. For example, First Dollar doesn't have deposit insurance, so we need to partner with a bank to insure HSA deposits. We'd also need to partner with a bank to do bulk funds movement. And obviously, we can't lend.

How long does the designation last? Is there a renewal or maintenance process?

The IRS says the following on its website

 “Annually, the Employee Plans Compliance Unit (EPCU) contacts the approved NBTs for an affirmation that the organization continues to serve as a nonbank trustee/custodian.”
- The Internal Revenue Service

How does this impact the member experience of our partners?

First Dollar’s ability to more easily sign up members and move money will enable us to offer future platform migration and signups with less friction for members. 

What’s the process for being approved as a nonbank trustee or custodian?

You can find the IRS application procedures listed here. During its review, the IRS evaluated First Dollar’s documentation of: 

  • Commitment to and understanding of relevant IRS rules and regulations
  • Internal security and compliance processes and standards
  • Custodianship over the course of a year, and
  • Staff experience and credentials.
Much thanks to Office Max for its supplies during our nonbank trustee application.

Can you share some fun NBT trivia?

Here is some fun NBT trivia. It's all based on the IRS list of approved nonbank trustees and custodians; you can find it here. Its last update was on October 1, 2022, so you’ll notice it’s not updated with our news (yet).

The first NBT

The earliest approved NBT that’s still on the list of approved NBTs is "Stifel, Nicolaus & Co.” They were approved on 9/9/1981. 

Approved HSA Platform Providers

Here's a listing of HSA platform technology providers alongside their nonbank trustee approval dates:

  • Alegeus (6/6/2017)
  • Wex (11/20/2019)
  • First Dollar (10/26/2023)
  • Datapath (11/7/2023)

First mention of HSAs for NBTs

We can find the first mention directly from the Treasury Department on December 22, 2003, when it announced that HSAs would be eligible to be approved under "IRA nonbank trustee rules." (The Medicare Prescription Drug Improvement and Modernization Act, which created the existence of HSAs, was passed in 2003.)

“Like MSAs, in addition to banks and insurance companies, persons may be approved as HSA custodians under the IRA nonbank trustee rules – and existing IRA or Archer MSA trustees or custodians are automatically approved.”  - Treasury Department

Learn how First Dollar's NBT designation can help you offer an HSA to your members

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