On January 9, 2008, the Ninth Circuit Court of Appeals ruled that the City and County of San Francisco (the “City”) could implement the San Francisco Health Care Security Ordinance (the “Ordinance”) pending the outcome of the City’s appeal of a lower court’s ruling that the Ordinance was preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”). Passed in July 2006 for the primary purpose of providing health care services to the City’s uninsured residents, the Ordinance contains a “pay-or-play” provision that requires covered employers to make a minimum expenditure for health care on behalf of each of their covered employees who perform work in San Francisco. Employers with 50 or more employees must now comply with the Ordinance as of January 9, 2008. For-profit employers with 20 – 49 employees must comply effective April 1, 2008. Nonprofit employers with fewer than 50 employees and employers with fewer than 20 employees are exempt from the Ordinance. The Ordinance is enforced by the San Francisco Office of Labor Standards Enforcement, which has recently issued new guidance on expenditures and reporting deadlines for employers as described below.
An entity is a covered employer if it is a for-profit employer with 20 or more employees or a nonprofit employer with 50 or more employees that engages in business within the City and is required to have a valid San Francisco business registration certificate. When determining the size of the employer, all members of a controlled group of corporations are counted (as defined in Internal Revenue Code section 1563(a) without regard to sections 1563(a)(3)(C) and 1563(a)(4)). To determine the number of employees, all persons (including owners) who perform work for the employer for compensation during a given week must be counted, regardless of whether the person works in the City, and regardless of their job classification. This may include seasonal, permanent or temporary, full-time or part-time, contracted (directly by the employer or indirectly through a staffing agency, leasing company or professional employer organization, etc.) or commissioned employees. If the number of employees fluctuates from week-to-week, the employer’s size is based on the weekly average number of persons that work for the employer during the applicable calendar quarter (13 weeks).
Note that the employer does not have to be physically located within the City to be subject to the Ordinance. However, the minimum health care expenditure will only be required for employees who work within the geographic boundaries of the City.
The Ordinance requires covered employers to make a minimum health care expenditure for each covered employee who works an average of at least 10 hours per week in San Francisco and who has worked for the employer for a minimum of 90 calendar days, regardless of immigration status. This includes employees who telecommute from San Francisco or who travel to San Francisco on business. Days counted for this 90 day period need not be consecutive workdays, or even occur in the same year. If an employee terminates before working 90 days and is rehired within one year, the days worked by that employee both before termination and after rehire are counted for purposes of satisfying the 90- day eligibility period. Furthermore, if an employee who has become eligible for the minimum health care expenditure terminates and is rehired within one year he or she will not be required to complete a new eligibility period. Effective January 1, 2009, the minimum hours requirement will be reduced to eight hours per week.
An employer will not be required to make contributions on behalf of any of the following employees:
- employees who receive health benefits through another employer as an employee or dependent and who have completed the annual “Employee Voluntary Waiver Form” provided by the City;
- managers, supervisors, and confidential employees¹ who earn more than a minimum amount in wages ($76,851 annually or $36.95 per hour for 2008);
- employees who are covered by Medicare or TRICARE/CHAMPUS;
- employees who are employed by a non-profit corporation for up to one year as trainees in a bona fide training program; and
- employees of City contractors who receive health benefits pursuant to the San Francisco Health Care Accountability Ordinance.
Minimum Health Care Expenditure Requirements
Under the Ordinance, employers must make a minimum “health care expenditure” on behalf of each covered employee for each calendar quarter, irrespective of whether the covered employee was employed for the entire quarter. A “health care expenditure” must be for health care services that qualify as tax deductible medical care expenses under Internal Revenue Code Section 213, or for medical care, services or goods that have substantially the same purpose or effect as a deductible Section 213 medical expense. This includes expenditures for medical, dental, vision and employee assistance program coverage.
The Ordinance provides the following non-exclusive means of satisfying the expenditure requirement:
- Payments to a third party (e.g., premiums paid to an HMO or insurance company) to provide health care services to covered employees;
- Expenditures made by a self-funded or selfinsured health plan;
- Contributions to a covered employee’s health flexible spending account, health savings account, health reimbursement arrangement, or medical spending account;
- Cash reimbursements to the covered employee for expenses incurred for the purchase of health care services;
- Payments for the direct costs of health care services provided to the covered employee (e.g., direct payments to the health care provider); or
- Payments to the City to fund membership in the Healthy San Francisco program (previously called the “Health Access Program”) or to set up a medical reimbursement account with the City for each covered employee’s health care expenses.
An employer may use one or any combination of the above to satisfy its expenditure obligation. For example, an employer could pay premiums to an HMO or insurance company to provide health care services for its fulltime employees but make payments to the City with respect to its part-time employees.
Minimum Health Care Expenditure Amounts
The amount that an employer must contribute on behalf of each of its covered employees depends on the size of the employer and the number of hours that it pays to such covered employees. The contribution need only take into account hours for which the employee is entitled to wages (subject to a maximum of 172 hours per month or 516 hours per quarter) including:
- hours paid for work performed within the geographic boundaries of the City; and
- hours paid for vacation, sick leave or paid time off.
If an employee performs work both within and outside of the City, contributions for hours paid for vacation, sick leave or paid time off may be paid on a pro-rata basis.
If the employer is large (i.e., the employer has 100 or more employees), the “applicable health care expenditure rate” for 2008 is $1.76 per hour. The 2008 rate for medium-sized employers (i.e., those with 20 to 99 employees) is $1.17 per hour. The applicable health care expenditure rates for 2009 are $1.85 per hour for large employers and $1.23 per hour for medium-sized employers.²
If an employer provides uniform coverage to all covered employees (e.g., it offers all covered employees the same HMO plan), the employer can satisfy its minimum expenditure requirement if its average hourly expenditure rate per employee meets or exceeds the applicable health care expenditure rate. If an employer sponsors a self-funded plan, the employer will be deemed to comply with the expenditure requirement if the preceding year’s average expenditure rate per employee meets or exceeds the current year’s applicable health care expenditure rate.
To determine the average hourly expenditure rate, an employer must divide the total amount the employer paid for health care expenses for covered employees (i.e., premium payments for insured health plans and HMOs, and claims and related third party expenses for self-funded plans) by the total number of hours paid to those covered employees. Employers that offer covered employees several different plan options (e.g., PPO and HMO coverage) must separately calculate the average hourly expenditure rate per covered employee for each plan option. Alternatively, the City has indicated that an employer may use the monthly premium for an insured health plan or the COBRA rate for a selffunded plan as the “average hourly expenditure rate” to determine if it meets or exceeds the minimum employer spending requirement for an employee.
If an employer does not sponsor a health plan for its covered employees or provides different coverage or different contributions for its covered employees (other than for employee-only or family coverage), an employer may satisfy its minimum expenditure requirement by multiplying the total number of hours paid to that employee by the applicable health care expenditure rate. If this method is selected, the calculation must be made for each of the employer’s covered employees.
If an employer’s expenditure is less than the minimum amount, the employer must make up for the shortfall in any way it chooses, including one or more of the following:
- Reducing the employee share of the cost of coverage;
- Choosing a more generous plan that has a higher premium;
- Making payments to “medical reimbursement accounts” maintained by the City which enable individuals to be reimbursed for health care expenses; or
- Contributing to the employee’s health care flexible spending account, health savings account, health reimbursement arrangement or medical spending account.
Except with respect to self-funded or self-insured plans, expenditures must be made by the 30th day of the month that follows the end of each calendaryear quarter:
- April 30 for the quarter ending March 31;
- July 30 for the quarter ending June 30;
- October 30 for the quarter ending September 30; and
- January 30 for the quarter ending December 31.
This means that an employer with 50 or more employees must make its first minimum expenditure no later than April 30, 2008.
Employer Disclosure and Reporting Obligations
An employer that satisfies its contribution obligation by making payments to the City must provide each covered employee with a “Notice to Employee of Payment to the City.” The City has provided a notice that must be used to satisfy this requirement. Employers must also file an annual report with the City using the “Mandatory Annual Reporting Form.” This annual report confirms that the employer has made the required health care expenditures. The first Mandatory Annual Reporting Form for voluntary expenditures made by covered employers for 2007 was originally required to be filed by February 29, 2008. According to the Office of Labor Standards Enforcement website, as a result of a delay by the City in mailing of the Annual Reporting Form and Notice to Employees of Payment to the City to employers, the deadline for filing the Annual Reporting Form has been extended to April 30, 2008. The form states that because the spending mandate did not become effective until January 2008, reporting for the 2007 calendar year “should be based only on [an employer’s] voluntary business practices in 2007”.
Although the Ordinance does not include record-keeping standards or guidelines, the Ordinance requires employers to maintain the following records for each covered employee:
- itemized pay statements;
- the employee’s address, telephone number and date of first day of work;
- records of health care expenditures made for each quarter of each year and the calculations to substantiate that the expenditure was proper;
- a signed Employee Voluntary Waiver Form for each employee for whom the employer claimed an exemption from the spending requirement; and
- a copy of the Notice to Employee of Payment to the City.
Such records must be kept for a period of four years.
Prohibition against Retaliation and Discrimination
The Ordinance prohibits employers from retaliating against any employee who exercises his or her rights under the Ordinance. This means that an employer may not discipline, discharge, demote, suspend or take any other adverse action against an employee who exercises his or her rights under the Ordinance. For example, an employer may not fire an employee who refuses to sign an Employee Voluntary Waiver Form even if that employee is receiving health insurance coverage from another employer. Moreover, an employer may not discriminate against any person on the basis of whether he or she has health insurance coverage. Thus, an employer may not refuse to hire a person because he or she lacks health insurance.
Penalties for Non-Compliance
The Ordinance provides for a number of penalties and methods for corrective action for non-compliance. For example, if an employer fails to make the required expenditure, an employer will be ordered to make the required expenditure or be subject to a penalty of one-and-one-half times the total expenditures the employer was required to make, plus up to 10% of the due and unpaid health care expenditures in interest. This penalty is capped at $1,000 for each employee for each week that the required expenditures were not made. In addition, in the event an employer fails to maintain the required records, the City may assess a $500 penalty. The regulations which implement the Ordinance provide for a number of other penalties and methods of corrective action.
History in the Courts and the Pending Appeal
As referenced in the introductory paragraph, the validity of the Ordinance is currently the subject of an appeal before the Ninth Circuit Court of Appeals. In November 2006, the Golden Gate Restaurant Association brought a lawsuit against the City in federal District Court, asserting that the Ordinance’s employer spending requirement was preempted by ERISA. On December 26, 2007, the District Court agreed and ruled in favor of the Golden Gate Restaurant Association. The following day, the City filed an appeal and requested an emergency stay of the decision by the District Court pending the Ninth Circuit review of the appeal. After the District Court denied the City’s request for a stay, the City appealed to the Ninth Circuit who granted the stay, thus allowing the Ordinance to take effect on January 9, 2008. The Ninth Circuit granted the stay because it determined that there is a “strong likelihood” the City will succeed on the merits of the appeal, the balance of hardships is in favor of the City, and the public interest supported granting a stay. Contrary to the District Court’s findings, the Ninth Circuit preliminarily found that the Ordinance was likely not preempted by ERISA because it does not require an employer to adopt a health plan, or to amend an existing plan. Hence, it does not have a forbidden “connection with” ERISA plans nor does it contain an impermissible “reference to” ERISA plans. The appeal is currently on a fast-track schedule before the Ninth Circuit with briefs due between now and April 2008. It is unlikely that the Ninth Circuit will hear oral arguments before May or June and it may be several months before there is a final ruling. In the meantime, employers will need to comply with the Ordinance.
For formal guidance regarding the Ordinance, including required forms, please see http://www.sfgov.org/site/olse_index.asp?id=45168. If you have any questions regarding the Ordinance or need assistance in complying with it, please contact Julie Burbank or Tiffany N. Santos at (415) 788-3111.
¹ To determine if an employee qualifies as a “manager,” “supervisor” or “confidential employee”, see Section 3.2(A)(1) of the regulations implemented pursuant to the Ordinance for the applicable definitions. (See http://www.sfgov.org/site/uploadedfiles/olse/hcso/HCSO_Final_Regulations,%20with%20new%20Notice%20to%20Employee.pdf.)
² Rates will increase in 2010 and beyond as described in the Ordinance and applicable regulations.