San Francisco has posted the 2021 health care expenditure (HCE) rates required by the city’s 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 San Francisco.
The HCE is the minimum amount employers must spend on healthcare for each hour worked by a HCSO- covered employee. Covered employees include 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 employees, no matter where they live or work. However, the expenditure applies only for hours worked in San Francisco.
Regulations limit the types of expenses can be considered an HCE. Annual reports are normally due each April 30. While the public health emergency cancelled the report due in 2020, employers must continue to make the required HCE. Reporting will resume in 2021.
Covered employees exclude managers, supervisors and confidential employees earning at least $104,761 (or $50.37 an hour) in 2020; the 2021 pay levels for exclusion haven’t been announced yet. Employees covered by Medicare or TRICARE may also be excluded if the employer can document employee eligibility. In addition, the ordinance excludes employees covered by the Health Care Accountability Ordinance for city contractors or lessees.
Employers may ask workers who have other employer-provided coverage to waive the expenditure, using the authorized voluntary waiver form. However, employees with other employer coverage don’t have to waive the expenditure and can revoke the waiver any time. To be valid, waiver forms must disclose these employee rights. If the employee has other coverage but doesn’t sign the voluntary waiver, the employer must make up the expenditure in some other way. Failure to use the proper waiver form could result in noncompliance penalties.
Employers can count toward their required HCE any payments to an insurance provider for medical, dental or vision insurance premiums, as well as contributions to health savings accounts, Archer medical savings accounts or other irrevocable reimbursement accounts. Only amounts irrevocably paid to third parties qualify as HCEs.
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 City Option program. These payments are either allocated to a medical reimbursement account (MRA) in the employee’s name or used to offset the cost of the Healthy San Francisco program for each covered employee. To be eligible, the employee must live in San Francisco, lack insurance and not qualify for other public health insurance programs (such as Medi-Cal). Employer payments for eligible Healthy San Francisco employees may apply toward their enrollment fees. Special annual reconciliation rules apply for self-insured group health plans, as described below.
A covered employer may comply with the HCSO by providing a uniform health plan to some or all of its covered employees. The plan must have the same benefit design, including cost sharing, coverage tiers and eligibility criteria, for all covered employees. The average hourly HCE is calculated by dividing the total required HCEs for employees in the uniform plan by the total hours payable to each of those employees during that quarter.
For 2021, the updated HCE hourly rates are as follows:
HCEs must reflect amounts irrevocably paid to third parties. Rules that took effect in 2017 clarify that employers cannot use a COBRA-equivalent rate to determine their 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.
Under this option, the employer pays premiums and/or fees to a third party to administer the self-insured 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.
Under this option, the employer pays claims as they are 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 above. The employer can choose to include only covered employees (the eligible San Francisco population) or all employees participating in the uniform plan. Employers using this option don’t need to reconcile expenditures every quarter for employees covered under the plan. Instead, if actual paid claims during the calendar year don’t meet the required HCE, employers can make additional contributions through the end of February of the following year.
Most self-funded plans have both fixed expenditures and paid healthcare claim components. The rules don’t explicitly recognize situations in which an employer uses the combination of the two to meet the minimum expenditure. The San Francisco Office of Labor Standards Enforcement (OLSE) has provided informal guidance that recognizes the combined use of both types of expenses but doesn’t include specifics. For example, the required frequency of compliance determination (quarterly vs. annual) differs for the two types.
The rules also don’t explicitly address stop-loss reimbursements, prescription drug rebates, paid claim adjustments (e.g. subrogation), returned administrative fees (i.e., performance guarantee penalties) and certain other variables. Whether these types of transactions should count as returned fixed expenditures or offset paid claims is unclear. The rules don’t currently require including these transactions in the HCSO compliance determination.
Employers with workers in San Francisco will need to adjust 2021 expenditures to meet the new HCE standards. Once premiums are set for insured plans, plan sponsors can review any deficits and determine the best approach to make up any shortfall. Self-insured plans may want to work with their third-party administrators and actuaries to evaluate spending options.