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.
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:
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.
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.
There is additional differentiation in passive vs non-passive, but the above is a serviceable distinction for the purpose of this article.
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
We lead with "nonbank trustee" in our comms for those reasons.
"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
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.
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
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.
You can find the IRS application procedures listed here. During its review, the IRS evaluated First Dollar’s documentation of:
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 earliest approved NBT that’s still on the list of approved NBTs is "Stifel, Nicolaus & Co.” They were approved on 9/9/1981.
Here's a listing of HSA platform technology providers alongside their nonbank trustee approval dates:
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