San Francisco's Health Care Security Ordinance – Five Traps For The Unwary

Do you have any San Francisco-based employees? If so, you may be subject to the San Francisco Health Care Security Ordinance ("SFHCSO"), a complex set of rules requiring certain minimum employer contributions toward San Francisco employee health coverage. Read on for a summary of the SFHCSO requirements, as well as five compliance traps to avoid.

What Is Required Under the SFHCSO?

The SFHCSO requires "Covered Employers" to make certain minimum "Health Care Expenditures" on a quarterly basis for their "Covered Employees." The relevant definitions are:

Covered Employer:

• Employs one or more Covered Employees working in the city or county of San Francisco;
• Is required to maintain a valid San Francisco business registration certificate under Article 12 of the Business and Tax Regulations Code; and
• Is a for-profit entity with 20 or more workers or a nonprofit entity with 50 or more workers. The number of "workers" includes all persons working for the entity, regardless of their classification (e.g., part-time, seasonal, etc.). Employer size is determined by counting all employees nationwide, including those in the employer's controlled group.

Covered Employee:

• Works for a Covered Employer within the city or county of San Francisco for at least eight hours per week on average during the calendar quarter;
• Is entitled to be paid the minimum wage;
• Has worked for the Covered Employer for at least 90 calendar days; and
• Does not fall into any of the following categories of exempt employees:
  
  
  • Employees who waive their right to have their Covered Employer make the Health Care Expenditures on their behalf;
  • Employees who qualify as managers, supervisors, or confidential employees AND earn more than the salary exemption amount (2024: $121,372 annual salary/$58.35 hourly salary);
  • Employees who are eligible for Medicare or TRICARE;
  • Employees who are employed by a nonprofit corporation for up to 1 year as trainees in a bona fide training program; and/or
  • Employees who receive healthcare under the San Francisco Health Care Accountability Ordinance.

Health Care Expenditure:

• Annual Health Care Expenditure Rate multiplied by
• Hours in calendar quarter Covered Employee was paid wages for work performed or for which is otherwise entitled to pay (vacation, PTO, sick leave, paid parental leave, etc.) (capped at 172 hours per month).
• Must be separately calculated for each Covered Employee.

Unless the Covered Employee has signed a voluntary waiver form or is otherwise exempt, the Covered Employer must contribute the required Health Care Expenditure dollar amount as calculated for each Covered Employee by paying such amounts:

• To a third party to provide healthcare services for the Covered Employee and/or the Covered Employee's spouse, domestic partner, or dependent(s) (e.g., employer share of medical, dental, and/or vision insurance premiums);
• As employer HSA contributions for the Covered Employee;
• To a healthcare reimbursement program for the Employee, including the SF City Option;
• Directly to the Covered Employee to reimburse for costs incurred in the purchase of healthcare services (which may be taxable depending on whether medical care expenses are classified as tax deductible); and/or
• Toward other costs incurred by the Covered Employer for direct delivery of healthcare services to the Covered Employee (not including administrative costs).

What Happens If a Covered Employer Does Not Comply?

Failure to comply with the SFHCSO can result in hefty penalties if discovered on an audit by the Office of Labor Standards Enforcement ("OLSE"). Penalties may include:

Tip: The OLSE has informally commented that penalties are generally only assessed in an audit, which is typically only triggered if it receives an employee complaint that the required Health Care Expenditures are not being made.

Tracking quarterly Health Care Expenditures for each Covered Employee, posting the annual SFHCSO Notice, filing the Annual Report, and meeting recordkeeping requirements should be part of a Covered Employer's SFHCSO compliance routine. Whether these tasks are handled in-house or by a third party, the Covered Employer is ultimately responsible for meeting SFHCSO requirements.

Five Compliance Traps Covered Employers Should Understand

1. Covered Employee Works Remotely: If an employee used to work at a Covered Employer's headquarters in Oakland but now works remotely from the employee's home in San Francisco, is such employee a Covered Employee? YES! Assuming the employee meets the other criteria for being a Covered Employee, the hours the employee works from their San Francisco home count toward the at least eight hours per week requirement. Work performed in San Francisco (either at a worksite or at home) is taken into account.
   
   
2. 90-Day Waiting Period: If an employee of a Covered Employer terminates and is re-hired at a later date, does such employee have to re-satisfy the 90-day waiting period in order to be a Covered Employee? IT DEPENDS! If there is more than one year between when the employee terminated and when the employee is rehired, the Covered Employer may require the employee to complete a new 90-day waiting period. If it is one year or less between the employee's termination and re-hire date, the employee is not required to complete a new 90-day waiting period. If there is one year or less between the employee's termination date and re-hire date and such employee did not previously satisfy the full 90-day waiting period, the employee's prior days count toward the 90-day waiting period because the days in the waiting period do not have to be continuous.
   
   
3. Covered Employee Is Ineligible for Health Coverage: Covered Employee is a part-time employee and as such is ineligible for health coverage under the terms of the Covered Employer's plan. Must the Covered Employer still spend the requisite amount of Health Care Expenditures for this part-time Covered Employee? YES! An employee need only work eight hours per week to be a Covered Employee entitled to Health Care Expenditures. If the employee does not satisfy the eligibility requirements for the Covered Employer's health plan, the Covered Employer must make the requisite Health Care Expenditures in another way for a Covered Employee, such as paying into the city's SF City Option.
   
   
4. Covered Employee Declines Health Coverage: If a Covered Employee is offered health coverage by the Covered Employer and the coverage is declined because the Covered Employee has health coverage under another employer's plan, is the Covered Employer still required to spend the requisite amount on the Covered Employee? YES! Unless the employee is an exempt employee or waives their right to Health Care Expenditures, the Covered Employer must still make the requisite amount of Health Care Expenditures. Just because the Covered Employee waived coverage under the Covered Employer's plan does not relieve the Covered Employer of making another type of Health Care Expenditure for the Covered Employee. "Free Plan Rule" Although not formally codified, OLSE has informally indicated that Covered Employers may be exempt from making Health Care Expenditures for Covered Employees who decline employer-sponsored health coverage where:
   • The Covered Employer pays 100% of the employee-only premium under its employer-sponsored health plan;
   • The employee-only premium meets or exceeds the required Health Care Expenditure amount for the Covered Employee; and
   • The Covered Employer has requested and received permission from OLSE to operate under the Free Plan Rule.
     
     
5. Covered Employer Contributions to Covered Employee's Health Coverage Are Insufficient to Satisfy Health Care Expenditure Requirements. If a Covered Employer makes contributions to a Covered Employee's health coverage that are less than the required Health Care Expenditures, must the Covered Employer make additional Health Care Expenditures? IT DEPENDS! All contributions that a Covered Employer makes toward a Covered Employee's medical, dental, and vision coverage are counted toward meeting required Health Care Expenditures. This means that employer contributions toward medical, dental, and vision premiums, and HRA, HSA, and FSA contributions for a Covered Employee should be added together to determine if the Covered Employer has spent the required Health Care Expenditures. If not, then the Covered Employer may need pay the difference to the SF City Option or directly to the Covered Employee to reimburse for the cost of healthcare.

Compliance with the SFHCSO can be complicated! Please contact a DWT employee benefits attorney to determine whether you must comply with the SFHCSO, how to comply with it, or how to correct any instances of noncompliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.