San Francisco has posted the 2020 health care expenditure (HCE) rates required by the city’s Health Care Security Ordinance (HCSO) rules. The HCSO applies to all employers with a valid San Francisco business registration certificate and at least 20 employees in any location if at least one works in San Francisco.

HCE Mandate

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 what types of expenses can be considered an HCE. Annual reports are due each April 30.

Excluded Employees
Covered employees exclude managers, supervisors and confidential employees earning at least $104,761 (or $50.37 an hour) in 2020. Employees covered by Medicare or TRICARE may also be excluded if the employer can document employee enrollment. In addition, the ordinance excludes employees covered by the Health Care Accountability Ordinance for city contractors or lessees.

Waivers. 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. Waiver forms must disclose these employee rights for the waiver to be valid. 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.

HCE Creditable Expenses
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 employee covered by the law. Special annual reconciliation rules apply for self-insured group health plans as described below.

Uniform health plan. A covered employer may comply with the HCSO by providing a uniform health plan to some or all of its covered employees that applies the same benefit design for all covered employees, including cost sharing, coverage tiers and eligibility criteria. The average hourly HCE for employees in a uniform health plan is calculated by dividing the total required HCEs for employees in the plan by the total hours payable to each of the employees in the plan during that quarter.

Updated Rates

For 2020, the updated HCE hourly rates are as follows:

• Large employers with 100 or more employees will pay a 2020 HCE rate of $3.08, up from $2.93 in 2019.
• Medium employers with 20–99 workers and nonprofits with 50–99 employees will pay a 2020 HCE rate of $2.05, up from $1.95.
• Employers with fewer than 20 employees (and nonprofits with fewer than 50 employees) are exempt from the mandate.

Self-Insured Plan Expenditures

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. 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.
• Paid healthcare claims. 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.

Practical Considerations
Most self-funded plans have both fixed expenditures and paid healthcare claim components. The rules don't explicitly recognize situations in which the combination of the two is used 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 expenditures but doesn't include specifics. For example, the required frequency of compliance determination (quarterly vs. annual) differs for the two types of expenditures.

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 toward returned fixed expenditures or offset to paid claims is unclear. The rules don't currently require including these transactions in the HCSO compliance determination.

Employer Next Steps

Employers with workers in San Francisco will need to adjust their expenditures for 2020 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.

Related Resources

• Voluntary Waiver Form (San Francisco OLSE, Nov. 1, 2017)
• Amended HCSO Rules (San Francisco OLSE, Oct. 10, 2017)
• Health Care Security Ordinance Resources (San Francisco OLSE)
• Health Care Accountability Ordinance Resources (San Francisco OLSE)
• San Francisco City Option
• San Francisco Business Registration (San Francisco Office of the Treasurer & Tax Collector)