San Francisco-Based Employees: Health Care Expenditures May Be Required

The San Francisco Health Care Security Ordinance (HCSO) is a local ordinance that uniquely applies to employers with workers in the city of San Francisco. The HCSO requires employers to make certain health care expenditures—claims paid under an insurance plan—on behalf of their San Francisco-based employees. To the surprise of many employers, the HCSO also applies to remote workers who reside in San Francisco even if the employer has no other presence in or connection to the city of San Francisco.

Is Your Company a ‘Covered Employer’ Under the HCSO?

The HCSO applies to for-profit employers with 20 or more employees worldwide and nonprofit employers with 50 or more employees worldwide, if the company:

        1. Has one or more employees who work within the boundaries of San Francisco proper.

        2. Is required to obtain a license to do business in San Francisco.

Here are some tips for compliance with the HCSO:

• The number of employees also includes those employed by members of the same controlled group of companies.
• If the employer has even one remote worker in the city of San Francisco, it is required to obtain a license to do business in San Francisco.

Which Employees Are Entitled to the Expenditures?

The HCSO requires that covered employers make health care expenditures on behalf of employees who:

1. Are entitled to be paid at least the minimum wage.
2. Have been employed for at least 90 calendar days.
3. Perform at least eight hours of work per week within San Francisco’s geographic boundaries during any calendar quarter.
4. Do not meet one of the five employee exemption categories.

The two main exemption categories are employees who voluntarily waive their right to employer health care expenditures using the city’s waiver form or qualify as managers, supervisors, or confidential employees (i.e., workers who handle confidential labor relations matters) and earn more than the 2024 salary exemption amount of $121,372 per year (or $58.35 per hour). Other exemptions include employees eligible for Medicare or TriCare, bona fide trainees of a nonprofit corporation, and employees covered by the San Francisco Health Care Accountability Ordinance (for city contractors and airport workers). 

Required Health Care Expenditures

The San Francisco Health Care Security Ordinance requires covered employers to make irrevocable hourly health care expenditures for covered employees, which can include expenditures made on behalf of a covered employee’s spouse, domestic partner, children, or other dependents.

Expenditures can be in the form of:

• Health care premiums for medical, dental, or vision insurance (or payment of health care claims under a self-insured health plan).
• Contributions to a health reimbursement account (HRA), health savings account (HSA), or medical savings account (MSA).
• Contributions to the San Francisco City Option program, which provides employees with medical reimbursement accounts. 

There are some exceptions:

• Flexible spending account (FSA) contributions do not count (they are not considered irrevocable because unused amounts must be forfeited at the end of the plan year).
• Payments made directly or indirectly for workers’ compensation or Medicare benefits also do not count.

For 2024, covered employers must make health care expenditures of $3.51 per hour for large employers (more than 99 employees) or $2.34 per hour for midsize employers (20-99 employees).

Compliance Strategies

1. Offer qualifying health insurance. Employers can satisfy the spending requirement by offering health insurance that meets or exceeds the required expenditure amount. However: only the employer’s premium contribution counts toward the requirement, not the employee’s contribution; expenditures must meet or exceed the requirement for each employee individually; and only irrevocable expenditures count toward the requirement.
2.  Use the San Francisco City Option. Employers can contribute to the San Francisco City Option program. This is a helpful option for part-time workers who may not qualify for the employer’s insurance plan or for topping up expenditures when insurance contributions fall short.
3. Establish an HRA, HSA, MSA, or similar account. Employers can establish an HRA, HSA, MSA, or similar irrevocable account to reimburse employees for qualifying medical expenses. Accounts must be carefully structured to comply with both the HCSO and federal requirements.

There are additional considerations for self-funded plans, self-insured plans, and level-funded plans.

Employers with self-funded or self-insured plans must ensure that their expenditures are irrevocable and meet the required spending amounts for covered employees. There are alternative ways to calculate the expenditure rate for self-insured plans depending on how the plan pays the claims, and the calculations may be done on an annual basis instead of quarterly. Top-off payments must be made by Feb. 29, 2025, if spending falls short.

Level-funded plans may pose a risk if any amounts are returned to the employer at the end of the plan year.

What if an Employee Waives Coverage Under the Employer’s Plan?

An employer must still make the expenditure for a covered employee unless the employee voluntarily waives coverage (and thus their right to the expenditure) using the official HCSO waiver. Each plan year for which the employee is waiving  coverage requires a new waiver.

The HCSO waiver states: “ATTENTION EMPLOYEES: IF YOU COMPLETE THIS FORM, YOU ARE GIVING UP YOUR RIGHT TO RECEIVE HEALTH CARE SERVICES FROM THIS EMPLOYER • You do not have to sign this form. It is unlawful for your employer to pressure you to sign this form. Signing this form may make you ineligible for health benefits you would otherwise be entitled to.” 

Most employees do not sign the form.

However, if the employer provides an insured health plan that meets the expenditure requirements and does not charge the employee a premium (it is free for the employee—other than deductibles and co-pays), the employer is deemed to have met the expenditure requirements—even if an employee declines coverage and does not sign the HCSO waiver. The employer may charge a premium for dependent coverage and still be deemed as having met the HCSO requirements as long as the employee’s coverage is free.

To be deemed as having satisfied the HCSO requirements, the plan must:

• Be fully insured.
• Provide only medical coverage (dental and vision coverage do not count).
• Be 100% free to the employee (for employee-only coverage).
• Otherwise meet the annual hourly expenditure requirements (for 2024, $3.51 for large employers and $2.34 for midsize employers for 2024).

Record-Keeping and Reporting

Employers are required to:

• Maintain accurate records of itemized employee pay statements, health care expenditures, required health care expenditures, proof of such expenditures, and employee waiver forms for four years.
• Submit annual reports to the San Francisco Office of Labor Standards Enforcement (OLSE) each April 30 through the HCSO website.
• Post the required HCSO notice in the workplace.

Penalties and Enforcement

The OLSE has authority to investigate violations, issue determinations, and impose administrative penalties. Noncompliance can result in significant penalties, including up to $100 per employee per quarter for failing to make required expenditures, plus potential civil penalties and enforcement costs. Employers have appeal rights but must act quickly to preserve them (15 days from receipt of the OLSE’s notice of determination of a violation). 

Employers may voluntarily report noncompliance if they are not under audit or investigation for failure to comply with the HCSO. The employer will be required to provide the owed expenditures to the employees via payroll checks but may avoid penalties and interest.

If the employer is under audit or investigation, the expenditures must be provided to employees and the penalties will not be waived.

Key Takeaways

1. Review your workforce to determine if you have covered employees in the city of San Francisco. South San Francisco is not within the city of San Francisco.
2. Determine if your health plan meets the hourly expenditure requirements (talk to your broker about compliant plan designs).
3. Confirm that covered employees who have voluntarily waived coverage have also voluntarily waived the expenditures using the HCSO waiver.
4. Ensure all health care expenditures are irrevocable.
5. Implement robust record keeping and reporting processes.
6. Stay informed about annual rate changes and HCSO updates.

By taking a proactive approach to HCSO compliance, employers can minimize legal risk while providing valuable health care benefits to their San Francisco workforce.

Anne C. Sanchez is an attorney with Littler in San Jose, Calif. Briana M. Swift is an attorney with Littler in Seattle. © 2024 Littler. All rights reserved. Reposted with permission.