San Francisco hikes 2025 Health Care Expenditure rates 

August 13, 2024

San Francisco has posted a more than 8% increase for the 2025 Health Care Expenditure (HCE) rates under the Health Care Security Ordinance (HCSO) rules. The HCSO applies to all employers that must obtain a San Francisco business registration certificate and have at least 20 employees in any location if at least one works in the city and county of San Francisco.

The HCE is the minimum amount covered employers must spend on healthcare for each hour worked by a covered employee, defined as anyone employed for more than 90 days who regularly works at least eight hours a week in San Francisco. To determine workforce size, employers must count all of their employees, no matter where they live or work. However, the expenditure applies only for hours worked in San Francisco — i.e., in ZIP codes starting with 941xx. However, special considerations apply for the 94128 ZIP code (i.e., the San Francisco International Airport).

Employers subject to the HCSO make HCEs on a quarterly basis. Self-funded plans may be able to make annual HCE payments based on claim data and plan design (see the Self-funded plan expenditures section below). Rules limit the types of group health plan expenses considered HCEs, and employers may need to make up the difference between the required HCE and their contribution toward an employee’s health coverage.

An annual reporting form (ARF) is normally due each April 30 (or the next business day if April 30 is on a weekend). The ARF reflects an employer’s HCSO compliance (and compliance with San Francisco’s Fair Chance Ordinance) for the prior calendar year and is submitted electronically via a website maintained by the Office of Labor Standards Enforcement (OLSE). Once the ARF portal closes, an employer has no electronic means to file the ARF.

A covered employer under HCSO includes one that meets all of these requirements:

• Employs one or more workers within the geographic boundaries of the city and county of San Francisco
• Is required to obtain a valid San Francisco business registration certificate under applicable laws
• Employs at least 20 individuals (for-profit employers) or at least 50 individuals (nonprofit employers), regardless of work location

Covered employees exclude managers, supervisors and confidential employees — as defined under HCSO rules (Q&As 12 and 13), not an employer’s definition — earning at least $121,372 annually (or $58.35 per hour) in 2024. Beginning Jan. 1, 2025, that amount rises to $125,405 per year (or $60.29 per hour). If the employer can document an employee’s eligibility for Medicare or TRICARE, that employee may be excluded. Employers also may exclude employees working in their first 90 days of employment or fewer than eight hours per week in San Francisco. In addition, the ordinance excludes employees covered by the Health Care Accountability Ordinance for city contractors or tenants.

Telecommuters present additional challenges for employers under the HCSO. During the COVID-19 pandemic, many employees telecommuted from a San Francisco address and became subject to the law, and some San Francisco employees worked remotely from home and could not come into the city/county during the public health emergency.

A 2021 HCSO amendment (Ordinance 92-21) clarified that work locations trigger the HCE. An employer must provide the HCE for a covered employee when the employer’s office or worksite is in San Francisco or the employee works from home in San Francisco as a telecommuter. The employer does not have to provide the HCE for employees who usually telecommute from outside the city in neighboring locations, such as Oakland. However, the legislation required HCSO coverage for San Francisco employees working remotely solely due to public health orders, meaning HCEs could be due for an employee working remotely outside of San Francisco.

Since the city’s public health order (last updated on Dec. 21, 2022) eliminated the remote-work recommendation, HCSO expenditure requirements do not currently apply to employees telecommuting outside of San Francisco. That could change if the city reinstates earlier public health restrictions.

This COVID-19 issue may still arise when an employer undertakes a voluntary corrective action, which typically entails a three-year look-back period.

Beginning in 2023, many employers adopted mandatory return-to-work or return-to-office policies. This midyear shift in work locations created additional compliance complexities. Employers may not have adequately adjusted tracking systems to reflect employees coming into work at a San Franciso physical location or telecommuters in San Francisco now working in a physical location outside of a 941xx ZIP code. Many employers looking back to 2023 realized unintentional errors in their calculations and may still be working on corrections. COVID-19-related work and return-to-office issues related to HCSO compliance complexities may continue this year, depending on employer policies adapted or changed.

Employers may ask workers who have other employer-provided coverage to waive the expenditure, using the authorized HCSO voluntary waiver form. However, employees with other employer coverage do not have to waive the expenditure and can revoke the waiver any time. A valid waiver form must disclose these employee rights. If employees with other coverage do not sign the voluntary waiver, an employer must make up the expenditure in some other way. The waiver form must be signed each year and cannot be retroactive. Failure to use the proper waiver form and/or follow the waiver process could result in expenditure payments being owed for all participants who have waived coverage.

Employers can count toward their required HCE any premium payments to an insurance provider for medical, dental, or vision coverage, as well as contributions to health savings accounts or other irrevocable reimbursement accounts. Only amounts irrevocably paid to third parties qualify as HCEs.

Employer contributions to health reimbursement arrangements (HRAs) are typically considered revocable. For an HRA contribution to be irrevocable, it must meet both of these conditions:

• Employers must pay contributions into a separate account on the employee’s behalf within 30 days of the end of each quarter.
• Employers may never recover any portion of the HRA contribution, even when employment ends.

Employers whose expenditures fall short of the required amount have 30 days after the end of the calendar quarter to remit the difference to the SF City Option program. These payments fund a medical reimbursement account (MRA) in the employee’s name (see these SF MRA FAQs). Under a policy that went into effect on March 1, 2023, MRA participants must submit at least one claim every 36 months or risk the account being closed. As a result, the earliest date an MRA can be closed due to inactivity will be April 2026. Special annual — rather than quarterly — reconciliation rules apply for some self-funded group health plans, as described in the Self-funded plan expenditures section below.

A covered employer may comply with the HCSO by providing uniform health coverage to some or all covered employees. The plan must have the same benefit design — including cost sharing, coverage tiers and eligibility criteria — for all participating employees. The average hourly HCE is calculated by dividing the total required HCEs for employees in the uniform health plan by the total hours paid to each of those employees during that quarter. (Total hours paid are capped at 172 per employee per month.) This method applies only to employees enrolled in the uniform health plan.

For 2025, OLSE is significantly increasing the HCE relative to prior years. The current and updated HCE hourly rates are as follows:

HCEs must reflect amounts irrevocably paid to third parties. Rules prohibit employers from using continuation coverage rates under the federal Consolidated Omnibus Budget Reconciliation Act of 1985 (better known as COBRA) to determine quarterly expenditures for employees enrolled in self-funded plans. Instead, these plans must use one of two options to determine expenditures: fixed expenditures or paid healthcare claims. These methods apply only to HCEs for employees enrolled in the plan:

• Fixed expenditures. Under this option, the employer pays premiums and/or fees to the third-party administrator of a self-funded plan, and no portion of those premiums or fees are returned to the employer. The premiums and fees paid for a calendar quarter must meet or exceed the required HCE for each covered employee for that quarter.
• Paid healthcare claims. Under this option, the employer pays claims when incurred, and the prior year's average hourly expenditures must meet or exceed that year's HCE rate for the employer. This option is limited to uniform health plans, as described earlier in the Uniform health plan section. The employer can choose to include only covered employees (the eligible San Francisco population) or all employees participating in the uniform health plan. Employers using this option do not need to reconcile expenditures every quarter for employees covered under the plan. Instead, if actual paid claims during the calendar year are less than the required HCE, employers can make additional contributions (known as “top-off payments”) through the end of February of the next year.

Most self-funded plans have both fixed expenditures and paid healthcare claim components. The rules do not explicitly recognize situations in which an employer uses a combination of the two to meet the minimum expenditure. The OLSE has provided informal guidance that recognizes the combined use of both types of expenses but does not include specifics. For example, the required frequency of compliance determination (quarterly vs. annually) differs for the two types.

The rules also do not explicitly address stop-loss reimbursements, prescription drug rebates, paid claim adjustments (like subrogation), returned administrative fees (for example, performance guarantee penalties) and other variables. Whether these types of transactions should count as returned fixed expenditures or offset paid claims is unclear. The rules do not currently require including these transactions in the HCSO compliance determination.

Covered employers with San Francisco workers will need to ensure their health benefits comply with the newly updated 2025 HCE amounts and understand the HCE’s application to San Francisco workers. Once premiums are set for insured plans, plan sponsors can review any deficits and determine the best approach to make up any shortfall and make the quarterly payments. Self-funded plans may want to work with their third-party administrators and actuaries to evaluate spending options. Payments for self-funded plans may be measured quarterly or annually, subject to plan design and the availability of claims data.

An employer that discovers an HCSO failure can consider making a voluntary correction with the OLSE, which would require calculating and paying any missed HCEs for all covered employees over a three-year look-back period.

Finally, employers subject to the HCSO should become familiar with the notice-posting requirements, complaint process and penalties for noncompliance.

• Health Care Security Ordinance resources (San Francisco OLSE)
• Health Care Accountability Ordinance resources (San Francisco OLSE)
• San Francisco City Option
• San Francisco MRA FAQs (San Franciso City Option)
• San Francisco business registration (San Francisco Office of the Treasurer & Tax Collector)
• Voluntary waiver form (San Francisco OLSE, Nov. 1, 2017)
• Amended HCSO rules (San Francisco OLSE, Oct. 29, 2017)

• San Francisco posts 2024 Health Care Expenditure rates (Aug. 25, 2023)
• San Francisco's annual Health Care Expenditure report due May 2 (March 31, 2022)