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February 19, 2008

SAN FRANCISCO’S EMPLOYER HEALTH MANDATE GOES INTO EFFECT

San Francisco’s pay-or-play health care mandate — the Employer Spending Requirement (ESR) of the Health Care Security Ordinance (HCSO)¹ — was enacted in 2006 as part of an effort to provide health care services to the uninsured. Still the subject of a legal challenge that initially delayed implementation (see the text box below), the ESR has now been allowed to take effect. The HCSO requires employers that engage in business in San Francisco to spend a certain amount for health care for most employees, measured on a sliding scale based on the size of the employer. Employers may purchase health insurance coverage, make payments to the City or make the required health care expenditures in a variety of other ways. If an employer does not spend the requisite amount, it must increase its expenditures or pay a fee to the City.²

The law’s ESR requires immediate attention from employers with employees who work in San Francisco. Those employers must file their first annual report with the San Francisco government, covering their health care expenditures for 2007, by April 30, 2008.³

This Capital Checkup summarizes details of the ESR and its impact on employers.

Employers Affected by the ESR Mandate

Employers affected by the ESR mandate include any large or medium business that engages in business within the City and is required to obtain a valid San Francisco business registration certificate. Employers with fewer than 20 employees and non-profit organizations with fewer than 50 employees are exempt from the ESR, as are public employers.

In determining whether they are covered by the ESR, employers must include all employees, regardless of status or classification (e.g., full-time and part-time; seasonal, permanent and temporary; and directly employed or leased) or job site (i.e., they must count employees both within and outside of San Francisco).

Covered Employees

A covered employee is generally one who (1) has been employed for 90 calendar days, and (2) works at least 10 hours per week⁴ within the City and County of San Francisco.

There are a number of exemptions, including the following:

• Owners and managerial, supervisory or confidential employees who earn more than $76,851 in 2008,
• Employees who have other employment-based insurance coverage and voluntarily complete an Employee Voluntary Waiver form attesting to such coverage,
• Employees covered by Medicare or TRICARE, and
• Employees in certain training programs or those who are receiving benefits under other San Francisco health care programs.

Calculating the ESR

The employer’s spending obligation is calculated by multiplying the number of hours paid for work in San Francisco by the employer’s minimum health care expenditure rate. The health care expenditure rates for 2008 and 2009 are noted in the following table:

For 2008, the obligation applies with respect to every employee who works at least 10 hours per week in San Francisco, and is capped at the amount of 172 hours per month (or 516 hours per quarter). On an annual basis, this would amount to an expenditure of up to $3,632.64 for each employee of a large business.

An employer can meet its spending requirement in a variety of ways, including paying insured or self-insured health care costs, contributing to an individual account such as a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA), directly reimbursing employees for health care expenses, and paying an employee’s membership in Healthy San Francisco. Health care expenditures are measured differently for insured and self-insured health plans, based on a formula in the regulations implementing the law.⁵

Employers must report regarding employee numbers and the amount of health care expenditures by calendar quarter. As noted, the first report, covering expenditures for 2007, is due on April 30, 2008.

Special Concerns for Employers Who Decline Coverage

An employer must still make the required health care expenditure on behalf of an employee who declines to participate in the employer’s group health plan.

However, contributions are not required for employees who decline coverage because they have other employment-based coverage (e.g., through a spouse’s employer) and voluntarily sign the Employee Voluntary Waiver Form. Employers must obtain the City’s Employee Voluntary Waiver Form and obtain a new signature in order to exclude these employees. In addition, a new form must be obtained every year.

Key Deadlines and Next Steps for Affected Employers

Employers should talk to legal counsel about their obligations under the HCSO. The following deadlines should be noted:

• File Report by April 30, 2008. Employers should download as soon as possible the sample annual reporting form devised by the Office of Labor Standards Enforcement because the deadline for employers to submit the form is April 30, 2008.⁶
• Make Payments by April 30, 2008. Employers that determine their expenditures are not sufficient, at least for some groups of employees (e.g., certain part-time employees or leased employees), must make the required payments no later than 30 days after the end of the first quarter (i.e., for employers with 50 or more employees, by April 30, 2008). Companies with 20 to 49 employees have until July 30, 2008 (30 days after the end of the second quarter) to make their required contributions.

As with all issues involving the interpretation or application of laws and regulations, employers should rely on their attorneys for authoritative advice on the HCSO and ESR. Sibson Consulting can be retained to work with employers and their attorneys to comply.

1	The text of the ordinance is available at: CHAPTER 14. SAN FRANCISCO HEALTH CARE SECURITY ORDINANCE. For links to various materials about the HCSO, see Office of Labor Standards Enforcement: Health Care Security Ordinance (HCSO). (To return to the Capital Checkup text, click here.)
2	Implementing regulations issued by the Office of Labor Standards Enforcement are available at: http://www.sfgov.org/site/uploadedfiles/olse/hcso/HCSO_Final_Regulations.pdf. To see, click here. To see the FAQs, click here. (To return to the Capital Checkup text, click here.)
3	The reporting deadline was initially set for February 29, 2008, but was postponed due to delays by the City in mailing the required forms to employers. To see the notice that announced the delay, click here. (To return to the Capital Checkup text, click here.)
4	The hour threshold drops to 8 hours per week beginning January 1, 2009. (To return to the Capital Checkup text, click here.)
5	See Regulation 6.2(B) and FAQ #s 38 to 42. To see the FAQs, click here. (To return to the Capital Checkup text, click here.)
6	To see a sample reporting form, click here. Note that the deadline of February 29, 2008 printed on the form was extended to April 30, 2008.(To return to the Capital Checkup text, click here.)

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