On November 15, 2011, the San Francisco Health Care Security Ordinance (the “Ordinance”) was significantly amended by the City of San Francisco (the “City”) to:
- Mandate that health reimbursement account contributions be available to employees for a minimum of two (2) years measured from the date of contribution, thereby eliminating Section 125 health flexible spending accounts from the types of accounts that can be used to satisfy the Ordinance and changing how health reimbursement arrangements must be administered to comply with the Ordinance
- Require the carryover of any balance in any health reimbursement account remaining at the end of 2011 to the applicable employee’s account in 2012
- Require employers to notify employees of the amounts contributed on their behalf to such accounts and the deadline(s) by which such amounts must be used prior to forfeiture
- Require employers to post a notice describing employee rights under the Ordinance
- Modify the penalties for non-compliance
- Impose new rules on employers that impose surcharges on customers to pay for the costs of complying with the Ordinance
Effective January 1, 2008, the Ordinance requires large and medium sized employers to:
- provide eligible employees with health plan coverage that satisfies the minimum average expenditure rate prescribed by the City; or
- contribute a minimum dollar amount to a health reimbursement account or to the City of San Francisco’s “Healthy San Francisco” program.
For 2012, the minimum health care expenditure rate is $2.20 per hour for large employers (i.e., employers with 100 or more employees) and $1.46 per hour for medium-sized employers (i.e., employers with 20 to 99 employees or 50 to 99 employees for non-profit employers) 1. Eligible employees are those employees who have worked for their respective employer for at least 90 days and who work a minimum of eight (8) hours per week within the City and County of San Francisco.
Closing the Health Reimbursement Account “Loophole”
Prior to the amendment, employers could satisfy the minimum health care expenditure requirement by contributing to “a health benefit flexible spending account, a health savings account, a health reimbursement account, a medical spending account (as defined under sections 125, 223 of the federal Internal Revenue Code and Publication 969 of the Internal Revenue Service), or to any other account having substantially the same purpose or effect without regard to whether such contributions qualify for a tax deduction or are excludable from employee income.”
The amendment modifies this language by limiting the types of health reimbursement accounts that can be used to meet the minimum expenditure requirement. The amendment permits employers to contribute to a health savings account as defined in Section 223 of the Internal Revenue Code or to an account which has substantially the same purpose or effect without regard to whether contributions qualify for a tax deduction or are excludable from an employee’s income and which meets each of the following requirements:
- The contribution is reasonably calculated to benefitthe employee.
- The contribution is available to a current employee for a minimum of twenty-four (24) months measured from the date of contribution.
- For employees who have separated from service with a positive account balance, the balance of contributions made on their behalf must be available to such employees (and any other persons eligible for reimbursement for health care expenses through the employees) for a minimum of 90 days following the date of separation.
- Any balance remaining in an employee’s account as of December 31, 2011 is carried over to the account and is available to the employee as of January 1, 2012.
- Within 15 days of each contribution, the employee must be provided a written summary of the contribution which sets forth:
- the contact information of any third party to whom the contribution was made;
- the date and amount of the contribution;
- the date and amount of any debits or credits to the account since the most recent written summary provided to the employee;
- the account balance; and
- any applicable expiration dates for the funds in the account.
- For those employees who separate from service with a positive account balance, the employee must be provided, within three (3) days of employee’s separation from service:
- a written summary of the account balance; and
- the expiration date for the account’s funds.
- The employer reports the terms of the accounts, including what costs are eligible for reimbursement, to the Office of Labor Standards Enforcement (“OLSE”).
The amendment effectively excludes Section 125 health flexible spending accounts from the types of accounts that can be used to satisfy the Ordinance, as funds in such accounts are subject to the “use-it-or-lose-it” rule under Section 125 of the Internal Revenue Code. Moreover, for those employers that wish to comply with the minimum expenditure requirement by contributing to a health reimbursement arrangement, the amendment will likely require employers to change how such accounts are designed and administered. For example, forfeiture provisions will likely need to be amended to provide for:
- the carryover of account balances; and
- the minimum 90-day claim run-out periods for terminated employees.
Such employers will also likely be required to expend additional programming and administrative expenses to facilitate the tracking of the expiration dates of contributions made throughout the year and the new notice requirements. To simplify the tracking process, employers may be forced to consider applying the two-year expiration period at the end of the year rather than tracking the two-year period that follows each contribution that is made during the course of the year.
New Notice Requirement
To apprise employees of their rights under the Ordinance, the amendment requires employers to post the annual notice published by the OLSE in a conspicuous place at any workplace or job site where any covered employee works. Each employer must post the notices in English, Spanish, Chinese and any other language spoken by at least 5% of the employees at the workplace or job site. The required notice, which the OLSE must publish by December 1 of each year, is available at: http://sfgsa.org/modules/show document.aspx?documentid=8221.
New Rules if Employer Imposes a Surcharge
If an employer imposes a surcharge on customers to cover all or part of the costs of complying with the Ordinance, the amendment requires that employer to report the amount collected from the surcharge and the amount spent on employee health care, during the 12-month reporting period prescribed by the OLSE. If the amount collected from the surcharge is greater than the amount spent on employee health care, the employer must irrevocably pay or designate the difference for health care expenditures for its employees.
The amendment makes the following changes to how the Ordinance is enforced:
- The City is now required to impose administrative penalties on employers that fail to make required health care expenditures within five (5) business days of the applicable quarterly due date.
- Restitution to employees may be imposed.
- A failure to make a required health care expenditure now includes an expenditure which the OLSE determines is not “reasonably calculated to benefit the employee.”
- The maximum penalty for failing to timely make the required expenditure is now $100 for each affected employee per quarter (the $100 penalty is subject to increase each year by an amount corresponding to the prior year’s increase, if any, in the Consumer Price Index for urban wage earners and clerical workers for the San-Francisco-Oakland-San Jose, California metropolitan statistical area).
- A maximum $500 administrative penalty may now be imposed for:
- each quarter in which that the employer fails to maintain adequate and accurate records; and
- failing to file the required annual reports.
In light of the significant modifications made by the amendment, it is critical for employers to revisit how they are complying with the Ordinance and to implement any appropriate administrative changes. If you would like assistance implementing any of these changes, contact the author of this article or the attorney with whom you normally work.
1 The Ordinance exempts small employers from the minimum health care requirement, i.e., employers with 19 or fewer employees and non-profit employers with fewer than 50 employees.