Benefit News

San Francisco Health Care Security Ordinance Compliance Update

November 09, 2016

San Francisco's Office of Labor Standards Enforcement (OLSE) recently released the 2017 contribution rates applicable to the San Francisco Health Care Security Ordinance (HCSO).

In addition, as a reminder, beginning with the 2017 year, in order to comply with the HCSO, health care expenditures made by employers subject to the ordinance (Covered Employers) must all be irrevocable expenditures. This means that the use of revocable expenditures such as stand-alone health reimbursement accounts (HRA) after January 1, 2017 will no longer be permitted. (HRAs are considered revocable health care expenditures because they are designed so that unexpended balances can revert to the employer upon an employee's termination.) Note that In 2016, up to 20 percent of a Covered Employer's health care expenditure made to comply with the HCSO was potentially permitted to be a revocable expenditure.

Overview of the HCSO

The HCSO first became effective January 9, 2008, and generally requires Covered Employers to make a minimum health care contribution on behalf of its "Covered Employees."

The HCSO defines Covered Employers as employers with 20 or more employees (50 or more for nonprofit organizations), considering all members of the employer's controlled group, regardless of physical location, as long as they employ workers within the boundaries of the City and County of San Francisco (the City) during a quarter. For-profit entities are also required to obtain a valid San Francisco business registration certificate.

Covered Employees are generally those employees subject to the City's minimum wage ordinance, who have worked for the employer for a minimum of 90 days and who perform at least eight (8) hours of work per week within the geographic boundaries of the City. There is an exemption for management, supervisorial, and confidential employees earning at least $95,101 annually.

2017 Contribution Rates

The OLSE recently announced the 2017 HCSO employer health care expenditure rates as reflected in the following table:

Number of Employees 2017 Expenditure Rate 2016 Expenditure Rate
All entities with 100 or more employees $2.64 per hour payable $2.53 per hour payable
For-profit entities with between 20-99 employees $1.76 per hour payable $1.68 per hour payable
Nonprofit organizations with between 50-99 employees $1.76 per hour payable $1.68 per hour payable
For-profits with less than 20 employees Exempt Exempt
Nonprofits with less than 50 employees Exempt Exempt

The Irrevocable Contributions Requirement

To comply with the requirements of the Affordable Care Act, the HCSO had been previously amended to include a requirement that all contributions made by a Covered Employer to satisfy its heath care spending requirement cannot be retained by, nor recovered by, or returned to a Covered Employer, effective with contributions payable, beginning January 2015 (representing hours worked during quarters beginning on or after October 1, 2014). This requirement was phased-in over a three-year period:

  • Required health care expenditures for hours payable in 2015 had to consist of at least 60 percent irrevocable expenditures. In other words, any contribution amount consisting of more than 40 percent revocable health care expenditures, did not count toward fulfilling a Covered Employer's 2015 health care spending requirement;
  • For 2016, 80 percent of a Covered Employer's contributions toward fulfilling its health care spending requirement had to consist of irrevocable expenditures; and
  • For 2017 and beyond, 100% of contributions must be irrevocable to count toward fulfilling a Covered Employer's health care spending requirement.

This new requirement impacted Covered Employers who use HRAs to comply with the HCSO health care spending requirement.

Other Permitted Alternatives for Complying with the HCSO

Some examples of health care expenditures that are available to employers include the following:

  1. Contributions to the employer's group health plan in which the employee is eligible to participate, including a limited benefit or other excepted benefit plan;
  2. Payments on behalf of the employee to the City Payment Option;
  3. Contributions on behalf of the employee to a health savings account;
  4. Contributions on behalf of the employee to an HRA that is linked to an employer group health plan meeting the ACA's integration requirements;
  5. Payments directly to the employee as reimbursement for costs incurred by the employee in the purchase of health care services;
  6. Payments to a third party to provide health care services for the employee (e.g., health insurance premiums); and
  7. Costs incurred by the employer in the direct delivery of health care services for the employee.

Information regarding the HCSO is available at http://sfgov.org/olse/health-care-security-ordinance-hcso%20.

For additional information, please contact your Burnham Benefits Consultant or Burnham Benefits at 949-833-2983 or inquiries@burnhambenefits.com.


Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

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