San Francisco Health Care Security Ordinance
In 2006, San Francisco passed its Health Care Security Ordinance (HCSO), which requires employers with 20 or more employees to spend an amount hourly on health care expenditures for every employee who has been employed more than 90 days, working at least 8 hours a week. This law applies to employers operating in San Francisco, regardless of their headquartered location. Additionally, the law uses the overall number of employees associated with an employer, therefore, employees working outside of San Francisco are calculated when determining the size of an employer with regards to this ordinance.
There is lower tier rate for employers between 20 – 99 employees, and a higher rate for those over 100 employees (see chart below). The rate increases annually with the Consumer Price Index (CPI), and the increase is posted on the Office of Labor Standards Enforcement (OLSE) website. OLSE is the enforcement agency for this law (as well as paid sick leave and minimum wage), which requires annual reporting of health care expenditures and quarterly acknowledged payments for health care expenditures. The required hourly spending requirement must be allocated toward health-related benefits, which can include health insurance, excepted benefits health reimbursement accounts (HRAs) or paying into the City Option. The City Option is a program where an employer pays their hourly spending requirement for all or some of their employees to the City for them to manage their employees’ healthcare funds. The City Option is not health insurance and therefore, does not satisfy the Employer Mandate for a business subject to the Affordable Care Act.
|Employer Size||Number of Employees||2016 Expenditure Rate||2017 Expenditure Rate|
|Large||All employers w/100+ employees||$2.53 per hour payable||$2.64 per hour payable|
|Medium||Businesses w/20-99 employees & Nonprofits w/50-99 employees||$1.68 per hour payable||$1.76 per hour payable|
|Small||Businesses w/0-19 employees & Nonprofits w/0-49 employees||Exempt||Exempt|
In 2017, GGRA launched a partnership with Dignity Health-Go Health Urgent Care to offer our members an HCSO compliant plan, specifically focused on those employees who work between 8 and 20 hours a week in San Francisco. The plan was created in light of full irrevocability as an alternative to simply paying into the City Option. For more information, please click here.
A business has the discretion to charge a surcharge for any purpose as long as it is disclosed to the customer prior to purchase. Businesses that choose to label a surcharge for health care expenses, HCSO, etc., will need to report to OLSE what percentage of that surcharge was allocated to health care expenditures and will need to report their expenditures, which need to be equal to or less than the amount collected. If the amount collected from the surcharge for employee health care is greater than the amount spent on employee health care, the employer must irrevocably pay or designate an amount equal to that difference for employee health care. Surcharges are sales taxable.
The surcharge disclosures are designed to prevent consumer fraud; you should include any surcharges on your menu as well as label them on the bill representing the percentage or fee amount. If you have a surcharge for “Healthy SF” or “Health Care”, your customers (and the City) expect 100% of that money to be spent on healthcare. If you have an “SF Employer Mandate(s)” surcharge and some portion of that surcharge is used to cover the cost of the ordinance, you will need to allocate the appropriate percentage of the surcharge to cover costs of the Health Care Security Ordinance and report that on your annual form to the City.
Health Reimbursement Accounts
Prior to 2014, health reimbursement accounts (HRAs) covered a wide range of medical expenses, but due to the market reforms related to the Affordable Care Act, HRAs are now considered excepted benefits (see the OLSE’s FAQs for full information). Unspent funds placed in HRAs can revert back to the employer after 24 months. However, in 2015, all health care expenditures began phasing into irrevocability, which means that there is now a limit to the amount of unspent expenditures that can revert back to the employer. In 2015, 60 percent of the funds were irrevocable; now in 2016, 80 percent of funds are irrevocable; and 100 percent will be irrevocable in 2017. Irrevocability applies to all health care funds on an employee basis; not just to HRAs. That means that now in 2016, 80 percent of hourly spending requirement funds cannot revert back to the employer after 24 months, and finally increasing to full irrevocability in 2017. See more details below. To understand the rules pertaining to revocable expenditures and how they count toward meeting the HCSO requirements, please see here.
Affordable Care Act
The HCSO spending requirement in San Francisco is unrelated to ACA regulations, therefore, providing ACA-compliant health insurance may not meet HCSO spending requirements. HCSO applies to all employees who work 8 hours or more and the required spend is calculated based upon hours paid multiplied by the required hourly spend. Therefore, the spend under HCSO could be greater than providing ACA-compliant insurance alone.
Starting in 2015, the ACA applied to employers with 100 or more full-time equivalents (FTEs), and now in 2016, employers with 50 or more full-time equivalents are required to provide health insurance for full-time employees (those working 30 hours or more a week) and their dependents, or pay a per month “Employer Shared Responsibility Payment” on their federal tax return. The ACA has, however, made some significant changes to HRAs and their compliance. As stated above, HRAs are now considered excepted benefits, and these do meet the compliance requirements of the HCSO at the city level. The city has provided a list of FAQs discussing the Health Care Security Ordinance in conjunction with the Affordable Care Act.
The Affordable Care Act and San Francisco’s Health Care Security Ordinance
With employer responsibilities under the Affordable Care Act and recent amendments to San Francisco’s Health Care Security Ordinance taking effect, employers face a complicated compliance landscape in the coming years. The Golden Gate Restaurant Association has put together the following to outline coming changes and highlight issues and strategies pertinent to restaurant owners.
The Affordable Care Act
In 2016, penalties are in effect for employers with 50 or more “full-time equivalent” employees (FTEs) that don’t make coverage available. For small businesses, the Small Business Health Options Program (SHOP) is available to employers with 100 or fewer employees.
For additional detail on employer responsibilities under the Affordable Care Act (ACA), the Kaiser Family Foundation has put together a helpful infographic.
Key ACA Provisions Affecting Health Care Security Ordinance Compliance
As of January 1, 2014, employer-sponsored stand-alone health reimbursement accounts (HRAs) are no longer permitted under the ACA. This removes a popular compliance mechanism for many employers and also has implications for employees. Any employee with funds in an existing stand-alone HRA will be rendered ineligible for federal advance premium tax credits when purchasing coverage on the state marketplace, Covered California.
As of July 26, 2014, employees may permanently waive the unused portion of existing HRAs to gain eligibility for federal premium assistance without employers having to make replacement contributions (true per ACA and HCSO).
Health Care Security Ordinance Compliance Changes
While stand-alone reimbursement accounts for major medical services are prohibited under the ACA, “excepted benefit” accounts are permitted. Excepted benefits include: adult vision and dental, certain single condition insurance plans and other non- “essential” health benefits. For 2014 only, the Office of Labor Standards Enforcement (OLSE) placed limits on allocating required expenditures to excepted benefit HRAs in excess of 20 hours per week for any covered employee and added reporting requirements. Due to the move to irrevocability, this requirement no longer applies.
Any employer that made contributions to an excepted benefits HRA in 2014 in excess of 20 hours per week per employee were expected to “true-up” at the end of the year those funds that weren’t fully expended by the employee.
Frequently asked questions on the “true up” can be found here.
Amendments to the Health Care Security Ordinance
The San Francisco Board of Supervisors passed an amendment to the HCSO in June 2014 primarily aimed at making all expenditures “irrevocable” beginning January 1, 2017. An irrevocable expenditure is “a Health Care Expenditure that has not been retained by and cannot at any time be recovered by or returned to the employer.” These expenditures are expected to be made quarterly and will impact the cash flow of the business, not simply its balance sheet.
These changes phase in over three years:
- At least 60% of all required expenditures must be irrevocable in 2015
- At least 80% of all required expenditures must be irrevocable in 2016
- All required expenditures must be irrevocable in 2017
How to Comply in 2016?
For-profit employers with 20 or more employees are subject to the Employer Spending Requirements of the HCSO as amended. As in previous years, the HCSO considers an employee to be anyone who works for the business more than 8 hours per week. For employers with 20-99 employees, their required spend is $1.68 per hour in 2016; for businesses with more than 100 employees, the required spend is $2.53.
There are multiple options for compliance for HCSO, including:
- Full Coverage
- Minimum Essential Coverage (MEC) Plans
- Excepted Benefit HRAs
- City Option
Most businesses will use a composite approach to compliance. This table provides a better understanding of the compliance options by business size.
Minimum Essential Coverage Plans and HRAs
Minimum Essential Coverage (MEC) plans are permitted under the ACA and are designed to offer an affordable way to cover preventative and wellness services. They do not provide major medical coverage, and offering an MEC plan does not fully protect an employer from potential ACA penalties. Minimum Essential Coverage plans do allow employers to offer integrated HRAs. However, these HRAs must be “excepted benefit” HRAs.
Warning: Employers pairing MEC plans with standard HRAs risk substantial penalties for offering a non-ACA compliant plan.
Using HRAs Going Forward
Health Reimbursement Accounts have been a popular compliance tool under the HCSO, especially among restaurants. Under current OLSE guidance there is no limit to using excepted benefit HRAs as long as the irrevocability threshold is met each quarter for the compliance year in question (80% in 2016). Employers will not have to “true-up” at the end of each year as long as irrevocable contributions are not at any time “retained by” the employer. Revocable contributions can be made to excepted benefit HRAs in the same fashion HRA contributions were made in previous years.
Compliance in 2017 and Beyond
Beginning in 2017, 100% of the Employer Spending Requirement must be irrevocable. Compliance options largely remain the same – as long as adequate changes have been made to the structure of the accounts – and will depend on business size. However, the implementation of the ACA and the HCSO continues to be a very dynamic and fluid process. Employers would be wise to focus primarily on strategies for 2016.