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On Wednesday, January 9, 2008 the Ninth U.S. Circuit Court of Appeals (appeals court) granted a stay to the enforcement of the federal trial court’s (trial court) decision that the employer spending requirement is pre-empted by the Employee Retirement Income Security Act (ERISA). By granting the stay, the appeals court has given the City of San Francisco (City) the right to enforce the employer spending requirement mandated by the San Francisco Health Security Act (the Ordinance) during the period preceding the Court’s ruling on the appeal itself.

The Test

To grant the stay, the appeals court applied a four prong test:

1. Whether there is a strong likelihood of success for the City in its appeal to overturn the trial court’s opinion;

2. Whether the City would be irreparably harmed in the absence of the stay;

3. Whether the stay would substantially injure other parties to the proceeding; and,

4. What is in the best public interest.

By granting the stay using these standards, the appeals court has foreshadowed its potential ruling on the appeal itself. The ruling contains the court’s initial outline of what the appeals court perceives as the flaws in the trial court’s decision.

We do not know at this time when the appeals court will issue its ruling on the appeal itself. But in the meantime, San Francisco employers with 50 or more employees must comply with the employer spending requirements contained in the Ordinance. If the decision on the appeal is not issued prior to April 1, 2008, the spending requirement will apply to employers with 20 or more employees (except for certain non-profit organizations).

The Spending Requirement

1.   Employers Spending Rates. Employers with 100 or more employees must spend at least $1.76 per hour for each covered employee toward the cost of health care as of January 1, 2008. Employers with 50 but less than 100 employees must spend at least $1.17 per hour. On April 1, 2008, employers with 20 but less than 50 employees become subject to the Ordinance and must spend at least $1.17 per hour. The rates increase to $1.85 per hour and $1.23 per hour as of January 1, 2009.

2.   Covered Employers. To be subject to the Ordinance, the employer must be subject to the City’s business licensing requirements and must employ an average of 50/20 or more employees per week during a calendar quarter, regardless of whether all employees work in the City or elsewhere. The regulation will aggregate all employers in a control group (as defined under the Internal Revenue Code).

3.   Covered Employees. Effected employees are those covered by the San Francisco minimum wage law, who have been employed for at least 90 days and work at least 10 hours per week. The law exempts managers, supervisors, and confidential employees who earned more than $74,588 in 2007. It also exempts employees of City contractors or subcontractors, Medicare eligible employees, and TRICARE/CHAMPUS participants.

For employees whose hours fluctuate from week to week, the Ordinance permits the use of the average hours per week in the calendar quarter. Employees also include seasonal, past-time, temporaries, and leased employees who work the requisite number of hours.

4.   Additional Requirements. The Ordinance contains numerous additional rules. Some of the more significant rules are:

a. Monthly maximum hours per employee to be used in calculating the employer expenditure is 172. Exempt employees are assumed to work 40 hours per week;

b. Employers must spend the required amount during the calendar quarter or within 30 days following the end of the quarter; and,

c. Employers must maintain and make available complete records of the eligibility calculations and its expenditures.

5.   Health care Benefits. Under the Ordinance, employers can count money spent on the following:

a. Group health premiums;

b. Health Savings Account contributions;

c. Employer contributions to a Healthcare Spending Account (i.e., 125 Plan). Note here that employee pre-tax contributions are actually employer contributions in lieu of salary;

d. Medical Expense Reimbursement Plan (IRC 105(h));

e. Employer contributions to an HRA; and,

f. Arrangements for medical services such as annual physicals, urgent care only benefits, mini-meds, onsite medical clinic, etc.

The Ordinance also permits an employer to meet its spending requirement for City residents only by contributing to the City’s Health Access Program (HAP) administered by the City’s Department of Public Health. Employers who consider this option for its part-timers, for example, must be alert to the potential risk of a surcharge by the HAP plan if it has a user of the HAP plan incurring more than $50,000 in expenses.

Employer Action Plan

1.   Determine if you are a covered employer.

2.   Calculate how much you spend on employee (and family if applicable) health care.

3.   Determine the number of eligible employees who work at least 10 hours (average per week) but less than the number of hours needed to meet your current health plan’s eligibility requirements.

4.   Look at your options:

a. Include them in your current health plan (including dental, vision and prescription drug plans), if carriers permit the expanded eligibility.

b. Establish a mini-med available only to those who do not qualify for the regular employee plan, if administratively feasible.

c. Establish a Healthcare Spending Account using employee pre-tax contributions under IRC Section 125. Note, participation may not be very great, resulting in a shortfall in meeting the City spending requirement.

d. Establish a Medical Expense Reimbursement Plan (MERP) under IRC Section 105(h). This plan is subject to discrimination testing, and may fail the availability test.

e. Contract with a clinic for routine and urgent care (not an ERISA plan under most circumstances).

f. Pay into the City’s HAP program.

According to the Ordinance, employers may choose one ore more of the options available (not all are discussed here) so long as the net result is meeting the employer spending requirement.

Finally, time is of the essence. Employers are now subject to penalties up to $1,000 per week for each employee not covered by the employer’s expenditure, plus interest. We expect the City to be aggressive in its enforcement.

We will keep you informed of developments.

You may view the City’s Ordinance and the related rules by visiting the City’s website: http://www.sfgov.org/site/olse_index.asp?id=45168 . 

 

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IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of ( i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.