New San Francisco Health Care Requirements May Impact Employers With San Francisco Employees
Employee Benefits Law Alert 12/29/11 Sarah L. Fowles, John L. Barlament
The City and County of San Francisco ("San Francisco") Board of Supervisors recently amended the San Francisco Health Care Security Ordinance (the "Ordinance"). The Ordinance is a "pay-or-play" type law that requires covered employers to pay minimum amounts towards its San Francisco employees' health care expenses each quarter; these payments are called "health care expenditures." As a general rule, a covered employer may make the required health care expenditures by paying for a covered employee's coverage through an insured or self-funded group health plan and/or by making contributions to a health reimbursement account ("HRA"), flexible spending account ("FSA") or health savings account ("HSA"). Alternatively, a covered employer may pay the minimum amount to San Francisco to be used on behalf of covered employees through certain public health programs.
The amendments impose new requirements for HRAs, FSAs and HSAs that covered employers use to comply with the Ordinance; practically, these requirements may render it impossible to use FSAs and undesirable to use HRAs to comply with the Ordinance. The amendments also add a new employee notice requirement, regulate an employer's use of surcharges on its customers to cover the required health care expenses, and revise the penalty provisions of the Ordinance.
Overview of the Ordinance. The Ordinance initially went into effect on January 9, 2008 for covered employers with 50 or more employees and on April 1, 2008 for covered employers with 20 or more employees.
Covered Employers. A business is a "covered employer" if it meets the following three requirements, regardless of whether it is headquartered in San Francisco:
- Has 20 or more (50 or more in the case of a not-for-profit employer) employees performing work, regardless of whether they work in San Francisco;
- Has one or more employees who work in San Francisco; and
- Is required to obtain a valid San Francisco business registration certificate pursuant to Article 12 of the San Francisco Business and Tax Regulations Code.
Public sector employers are not "covered employers" and do not have to comply with the Ordinance.
Covered Employees. An employee is a "covered employee" if he or she works at least eight hours per week in San Francisco (including work from home and work that consists of making deliveries and pickups) and has worked for his or her employer for 90 days. Some groups of employees are not "covered employees" even if they work in San Francisco; however, a discussion of these groups is beyond the scope of this alert.
Minimum Health Care Expenditures. For each covered employee, the covered employer must make minimum health care expenditures in an amount equal to the total number of "hours paid" to that employee (but not to exceed 172 in a single month) multiplied by the applicable "health care expenditure rate," which will be $2.20 per hour during 2012 for employers with 100 or more employees. "Hours paid" generally means hours for which a person is entitled to be paid for work performed within San Francisco, including paid vacation and paid sick leave hours.
A "health care expenditure" is an amount paid by a covered employer directly to its covered employees or to a third party on behalf of its covered employees for purposes of providing health care services for covered employees or reimbursing the cost of such services. Amounts paid by employees do not count towards the covered employer's minimum health care expenditures. Examples of health care expenditures include:
- Payments to an insurer for a covered employee's insurance premiums;
- Payments made by a self-insured health plan*;
- Payments to a HRA, FSA, HSA or a similar account;
- Payments directly to covered employees to reimburse them for expenses incurred in the purchase of health care services;
- Payments to health care providers for services rendered to the covered employee; and
- Payments made to San Francisco for a covered employee's participation in certain public health programs.
* Generally, covered employers must calculate the minimum health care expenditure on an employee-by-employee basis. However, employers with self-insured health plans can use certain average spending formulas to comply with the Ordinance and may not be required to perform the calculations on an employee-by-employee basis, which provides such employers with some flexibility when designing an Ordinance compliance strategy.
Reporting Obligations. A covered employer must report its health care expenditures to San Francisco on an annual basis along with its annual business registration submission. Failure to do so might trigger a compliance audit.
Effective Date of Amended Ordinance. The amended ordinance is effective January 1, 2012.
New Requirements for Health Reimbursement Accounts and Health Savings Accounts. If a covered employer uses a HRA, FSA or HSA to comply with the Ordinance, then its contributions to the HRA, FSA or HSA must be irrevocable (i.e., the contributions cannot revert to the employer) unless the HRA or HSA meets certain requirements listed below. As a practical matter, the 'use it or lose it' rules that apply to FSAs appear to make it difficult, if not impossible, to use a FSA to comply with these requirements. Also as a practical matter, an employer's contributions to an employee's HSA cannot be revoked except under very narrow circumstances; these new requirements will primarily affect HRAs.
These requirements are:
- The contribution to the account must be reasonably calculated to benefit the employee;
- The contribution to the account must remain available to the employee for reimbursement for at least two years after the employer funds the contribution;
- Any unused balance in the account as of December 31, 2011 must carry over to 2012;
- The employee must receive a summary of each contribution to the account within 15 days of the contribution;
- The account balance remains available to the employee for at least 90 days after separation from employment; and
- An employer must report the terms of an HRA being used to comply with the Ordinance to the San Francisco Office of Labor Standards Enforcement (the "OLSE").
New Employee Notice Requirement. A covered employer must post a notice, published by the OLSE, at any workplace or job site where any covered employee works that informs covered employees of their rights and the covered employer's obligations under the Ordinance. The notice must be posted in English, Spanish, Chinese and any other language spoken by at least 5 percent of the employees at the workplace or job site. The amendment does not address the posting requirement as it applies to workers who work from home or on the road.
New Regulation of Customer Surcharges. If a covered employer imposes a surcharge on its customers to cover the costs of the health care expenditures, the covered employer must report these surcharges to the OLSE. Also, if the surcharges exceed the amount the covered employer spent on health care, the covered employer must dedicate the difference to health care expenditures for its covered employees.
New Penalty Provisions. The Ordinance is clarified to provide that a covered employer who fails to comply with the Ordinance may be required to pay restitution to employees where appropriate. In addition to any required restitution, administrative penalties for failure to make required health care expenditures will be mandatorily assessed, imposed on a quarterly basis, and capped at $100 (as adjusted for increases in the Consumer Price Index) per employee for each quarter that the required expenditures were not timely made.
A Note Regarding ERISA Preemption. Generally, ERISA will preempt state or local laws that attempt to regulate private sector, self-funded group health plans. However, the Ordinance, prior to its recent amendment, was found not to be preempted by ERISA by the federal Ninth Circuit Court of Appeals in a decision that the Supreme Court of the United States decided not to review. Thus, the Ordinance, prior to amendment, appears not to be preempted by ERISA.
The amendments to the Ordinance, particularly those applicable to HRAs, might be found to be preempted by ERISA because they contain specific rules about how HRAs must be designed and administered. However, the amendments address an ERISA preemption challenge and include fairly punitive alternate provisions that spring into effect if an ERISA preemption challenge is successful. These alternate provisions would result in a covered employer's revocable HRA contributions being made available to the employee for an 18-month period following termination of employment, which is a longer period than the 90-day period otherwise in effect under the amendment.
Links to Further Guidance. The amended Ordinance is here: http://www.sfbos.org/ftp/uploadedfiles/bdsupvrs/ordinances11/o0232-11.pdf. The regulations interpreting the Ordinance prior to amendment are here: http://sfgsa.org/Modules/ShowDocument.aspx?documentid=1246. A set of Frequently Asked Questions is here: http://sfgsa.org/Modules/ShowDocument.aspx?documentid=7615.
For more information contact the authors of this alert, John Barlament, at (414) 277-5727 / email@example.com or Sarah Fowles at (414) 277-5287 / firstname.lastname@example.org. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 / email@example.com, Amy Ciepluch at (414) 277-5585 / firstname.lastname@example.org, Angie Hubbell at (312) 715-5097 / email@example.com, Paul Jacobson at (414) 277-5631 / firstname.lastname@example.org, David Olson at (414) 277-5671 / email@example.com, Robert Rothacker at (414) 277-5643 / firstname.lastname@example.org or your Quarles & Brady attorney.