The San Francisco Office of Labor Standards Enforcement issued final revised rules on September 26 addressing the Health Care Security Ordinance (HCSO) Employer Spending Requirement. The rules are effective October 29.

The HCSO requires employers to spend a minimum amount on health coverage ($2.83 per hour in 2018 for large employers) for their San Francisco employees who regularly work eight or more hours per week.

The spending requirement rules, initially issued in 2007, were revised to address interim amendments to the HCSO and, in particular, the irrevocability requirement added to the HCSO in 2014. The irrevocability requirement was added to clarify that dollar-denominated accounts (such as HRAs) that were then being used to satisfy the employer spending requirement of the HCSO could not be forfeited.

Although the final rules are a slight improvement to the proposed version (in part due to September testimony presented by Morgan Lewis and others), they still contain worrisome concepts based on the 2014 “irrevocability” amendments that will create particular problems for self-insured health plans.

While employers who offer uniform plans can still use a self-insured health plan to satisfy the employer spending requirement, they are now faced with large practical problems satisfying the rules.

In particular, self-insured plans must either irrevocably pay premiums to a third party provider (no portion of which may return to the employer) or pay claims as they are incurred and determine that the average hourly expenditure for the preceding year meets or exceeds the current year expenditure rate. Unfortunately, when determining the average hourly expenditure, employers are now prohibited from using a COBRA rate, and amounts must be “irrevocably spent” and “reflect amounts irrevocably paid to third parties.”

We understand that the “irrevocability” changes in the final rules are based on a concern that self-insured health plans are not actually “spending” the required amount on San Francisco employees that do not incur significant health expenses in a year. Further, the Office of Labor Standards Enforcement expects to require self-insured employers to demonstrate that amounts are irrevocably paid to third parties—practically transforming the promised benefits in a self-insured health plan into a defined dollar-denominated spending requirement.

Ironically, this “irrevocability” concept is satisfied merely by writing a check for an insurance premium (regardless of what claims are incurred or how the premium is spent) or irrevocably paying premiums to a third party administrator.

Since the final rules apply now, self-insured employers will have to take them into account when determining that 2017 average hourly expenditures meet or exceed the 2018 expenditure rate.

Given the practical difficulties and San Francisco-specific administrative burdens created for self-insured plans under the final rules, it remains to be seen whether the US Department of Labor or employers will challenge the final rules on the grounds of ERISA preemption.