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October 15, 2008
(updated March 19, 2009)
Impact on Multiemployer Plans of Decision that San Francisco's Employer Health Mandate Is Not Preempted by ERISA
San Francisco’s pay-or-play health care mandate — the Employer Spending Requirement (ESR) of the Health Care Security Ordinance (HCSO)1 — was enacted in 2006 as part of an effort to provide health care services to the uninsured. In effect since January 9, 2008, the ESR just cleared an important legal hurdle with the September 30, 2008, decision from the U.S. Court of Appeals for the Ninth Circuit ruling that the law is not preempted by the Employee Retirement Income Security Act (ERISA). (See the text box below for the history of the litigation.)
This Capital Checkup summarizes the ESR, its impact on employers, and what trustees of multiemployer health funds need to know about the mandate.
Background
The HCSO requires employers that engage in business in San Francisco to spend a certain amount for health care for most employees, measured on a sliding scale based on the size of the employer. Employers may purchase health insurance coverage, make payments to the City or make the required health care expenditures in a variety of other ways. If an employer does not spend the requisite amount, it must increase its expenditures or pay a fee to the City.2
The HCSO does not directly apply to multiemployer plans, but would apply to contributing employers engaged in business in San Francisco. Consequently, it is important for multiemployer trustees to be aware of the impact of the law on contributing employers.
Employers Affected by the ESR Mandate
Employers affected by the ESR mandate include any large or medium business that engages in business within the City and is required to obtain a valid San Francisco business registration certificate. Employers with fewer than 20 employees and non-profit organizations with fewer than 50 employees are exempt from the ESR, as are public employers.
In determining whether they are covered by the ESR, employers must include all employees, regardless of status or classification (e.g., full-time and part-time; seasonal, permanent and temporary; and directly employed or leased) or job site (i.e., they must count employees both within and outside of San Francisco). These counts would be made by the individual employer, not a multiemployer plan.
Covered Employees
A covered employee is generally one who (1) has been employed for 90 calendar days, and (2) works at least 10 hours per week3 within the City and County of San Francisco.
There are a number of exemptions, including the following:
- Owners and managerial, supervisory or confidential employees who earn more than $76,851 in 2008 ($80,397 in 2009),4
- Employees who have other employment-based insurance coverage and voluntarily complete an Employee Voluntary Waiver form attesting to such coverage,
- Employees covered by Medicare or TRICARE, and
- Employees in certain training programs or those who are receiving benefits under other San Francisco health care programs.
Calculating the ESR
An employer’s spending obligation is calculated by multiplying the number of hours paid for work in San Francisco by the employer’s minimum health care expenditure rate. The health care expenditure rates for 2008 and 2009 are noted in the following table:
| Size | 1/9/08 – 3/31/08 | 4/1/08 – 12/31/08 | 1/1/09-12/31/09 |
|---|---|---|---|
| Large | $1.76/hour | $1.76/hour | $1.85/hour |
| Medium For-Profit and Non-Profit (50 to 99 employees) | $1.17/hour | $1.17/hour | $1.23/hour |
| Medium For-Profit (20 to 49 employees) | 0* | $1.17/hour | $1.23/hour |
| * The ESR did not apply to medium employers with 20 to 49 employees until April 1, 2008. | |||
For 2008, the obligation applies with respect to every employee who works at least 10 hours per week in San Francisco, and is capped at the amount of 172 hours per month (or 516 hours per quarter). On an annual basis, this would amount to an expenditure of up to $3,632.64 for each employee of a large business.
An employer can meet its spending requirement in a variety of ways, including paying insured or self-insured health care costs, contributing to an individual account such as a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA), directly reimbursing employees for health care expenses, and paying an employee’s membership in Healthy San Francisco. Health care expenditures are measured differently for insured and self-insured health plans, based on a formula in the regulations implementing the law.5
Collectively Bargained Plans
In a recently revised FAQ, the City’s Office of Labor Standards Enforcement clarified that an employer making payments for health coverage under a collective bargaining agreement at a rate that is at or above the required expenditure rate has met its spending requirement. Any portion of the payment to a health and welfare fund that is for life insurance, disability coverage, or any other non-health benefits does not count towards the employer’s minimum spending requirement.6 Employers would still need to file an annual reporting form for 2008, which will be sent to each employer by the City sometime late this year. Employers that do not contribute at or above the required expenditure rate would have to make up the shortfall in one of the ways listed above, including an insured or self-insured plan, HRA, HSA, direct reimbursement or paying into Healthy San Francisco.
Special Concerns for Multiemployer Plan Sponsors
Multiemployer plan trustees and administrators may need to help contributing employers complete the 2008 reporting forms, which will likely be due sometime in 2009. Employers contributing to funds with insured arrangements may also need the fund office’s help in obtaining the correct premium amounts paid on behalf of its employees. Finally, if the employer contribution is less than the required amount, plans may be asked to look at new benefit options that would meet the San Francisco spending targets.
* * *
As with all issues involving the interpretation or application of laws and regulations, sponsors of multiemployer plans should rely on fund counsel for authoritative advice on the HCSO and ESR. The Segal Company can be retained to work with plan sponsors and fund counsel to comply.
| The Litigation in Brief |
|---|
| The ESR’s initial implementation date (January 1, 2008, for employers with 50 or more employees*) was put on hold by a federal district court, which found that the requirement was preempted under ERISA.** However, the U.S. Court of Appeals for the Ninth Circuit ruled that the ESR could go into effect while the ERISA preemption litigation continued.*** The Ninth Circuit released its decision on the merits of the case on September 30, 2008, concluding that the ESR is not preempted by ERISA.**** On March 9, 2009, the Ninth Circuit denied the request that the full court review that decision.***** The litigants may still seek review by the U.S. Supreme Court. However, the law is currently in effect. |
| * The effective date for businesses with 20 or more employees is April 1, 2008. ** The district court opinion on the San Francisco government Web site. *** The appellate court opinion is available on the San Francisco government Web site. **** The decision is available on the Ninth Circuit Court of Appeals’ Web site. ***** See http://www.ca9.uscourts.gov/datastore/opinions/2009/03/09/0717370o.pdf |
- The text of the ordinance is available at CHAPTER 14. SAN FRANCISCO HEALTH CARE SECURITY ORDINANCE. For links to various materials about the HCSO, see Office of Labor Standards Enforcement: Health Care Security Ordinance (HCSO). (Click on the following text to return to Capital Checkup.)
- Implementing regulations issued by the Office of Labor Standards Enforcement (OLSE) are available on the following page of the San Francisco government’s Web site: http://www.sfgov.org/site/uploadedfiles/olse/hcso/HCSO_Final_Regulations.pdf. The FAQs, which were recently updated, are available on the following page of the San Francisco government’s Web site: http://www.sfgov.org/site/uploadedfiles/olse/hcso/HCSO FAQs, released 8-28-2008.pdf. (Click on the following text to return to Capital Checkup.)
- The hour threshold drops to 8 hours per week beginning January 1, 2009. (Click on the following text to return to Capital Checkup.)
- According to a recently revised FAQ from the City’s OLSE, this figure represents annual base salary (before bonuses, etc.). See FAQ #23, which is available on the following page of the San Francisco government’s Web site: http://www.sfgov.org/site/uploadedfiles/olse/hcso/HCSO FAQs, released 8-28-2008.pdf. (Click on the following text to return to Capital Checkup.)
- See Regulation 6.2(B) and FAQ #s 38 to 42. The FAQs are available on the following page of the San Francisco government’s Web site: http://www.sfgov.org/site/uploadedfiles/olse/hcso/HCSO FAQs, released 8-28-2008.pdf. (Click on the following text to return to Capital Checkup.)
- See FAQ # 43. The FAQs are available on the following page of the San Francisco government’s Web site: http://www.sfgov.org/site/uploadedfiles/olse/hcso/HCSO FAQs, released 8-28-2008.pdf. (Click on the following text to return to Capital Checkup.)
Capital Checkup is The Segal Company's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.