Medical Savings Accounts Under Montana Law

Robert C. Pyfer, Senior Vice President, Government and Public Relations
Montana Credit Union Network
1236 Helena Avenue
Helena, Montana 59601-2990

Re: Medical Savings Accounts Under Montana Law.

Dear Mr. Pyfer:

You ask whether federal credit unions (FCUs) may act as account administrators for Montana medical care savings accounts (MSAs) as a result of legislative amendments made to the Montana MSA statute, effective October 1, 1999. In my letter to you dated February 11, 1999, we noted that FCUs cannot act as trustees or custodians of MSAs. Despite the amendments to Montana’s MSA statute, we continue to maintain that FCUs in Montana may not act as account administrators for MSAs.

Montana’s MSA statute currently provides that, except for financial institutions, account administrators have a fiduciary duty to the person for whose benefit the account is administered. MONT. CODE ANN. §15-61-204(1)(a). The statute provides: "[a] financial institution shall administer a medical savings account as a regular deposit or share account and has the same rights and duties pertaining to the account as pertain to a regular deposit or share account." §15-61-204(1)(b). The term "financial institution" is not defined; however, we will assume these provisions apply to credit unions. The amendment also states that financial institutions are not responsible for determining whether a claim is an eligible, nonreimbursable medical expense if the account holder provides an attestation that the expense is permissible. Id. This is consistent with the treatment of other account administrators because account holders have the burden of proving eligible medical expense withdrawals. §15-61-204(4).

Generally, account administrators, including financial institutions, may use funds in an MSA only for paying eligible medical expenses or paying the expenses to administer the account. §15-61-204(3). The law also requires account administrators to assess a ten percent penalty against an MSA account for early withdrawals and forward those penalties to the Montana Department of Revenue. §15-61-203. Although Montana's law does not hold financial institutions to the high standard of fiduciary duty to their account holders, their responsibilities still evidence a role as custodian of the MSA.

As an MSA administrator, an FCU’s responsibilities would extend beyond effecting share account transactions. The account administrator’s fundamental role is to possess and administer the account. As such, the account administrator has custody over an MSA. "Custody" is defined as the "immediate charge and control, and not the final, absolute control of ownership, implying responsibility for the protection and preservation of the thing in custody." BLACK’S LAW DICTIONARY 384 (6th ed. 1990). The statutory provision requiring financial institutions to administer these accounts like regular share accounts offers little clarification. The FCU would be responsible to third-parties, particularly the State of Montana, by permitting withdrawals only after receiving attestations from the account holder, filing reports and forwarding penalties to the Montana Department of Revenue. Therefore, account administrators, at a minimum, are custodians.

Although FCUs may establish trust accounts as types of share accounts, they have limited powers to act as trustees and custodians. Part 724 of NCUA Regulations specifically authorizes FCUs to act as trustees or custodians for qualified plans under Sections 401(d), 408, 408A, and 530 of the Internal Revenue Code. Because FCUs currently do not have express statutory or regulatory authority to act as trustees or custodians in other circumstances, FCUs cannot serve as account administrators under Montana’s MSA laws. However, custodians of MSAs perform similar responsibilities to custodians for individual retirements accounts (IRAs). FCUs acting as custodians for IRAs under Part 724 do not exercise any discretionary, decision making or advisory functions. Their role is limited to specific bookkeeping duties imposed by the Internal Revenue Code.

Recently in a final rulemaking, the preamble noted that the NCUA Board might consider a further amendment of Part 724 to include MSAs. However, it was noted that the Board is waiting for the Internal Revenue Service’s MSA pilot program to conclude. "The IRS pilot program will be completed in 2000, and it is possible in the near future legislation authorizing it on a permanent basis may be adopted. If and when the full contours of a permanent MSA program are announced, the NCUA Board will determine whether it will make any additional amendments to the regulations." 64 Fed. Reg. 55,871 (1999). Therefore, due to the similarity of a custodian’s role in administering IRAs and MSAs, we will consider placing this issue on our regulatory review agenda as legislation concerning MSAs develops.