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Making the Required Expenditure

How should a Covered Employer using revocable expenditures handle a Health Care Expenditure that the separating employee has earned, but the employer has not yet contributed as of the separation date?

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A Covered Employee may be entitled to Health Care Expenditures for the quarter in which the employee separates from employment based upon the hours payable prior to the separation.

The Covered Employer may satisfy this obligation in two ways. First, the Covered Employer may make the unmade contribution at the time of separation, in which case an accounting of this contribution must be included in the Separation Notice.

Second, the Covered Employer may make a post-separation contribution on its usual schedule, which must be no later than 30 days after the end of the calendar quarter. If the Covered Employer elects to make the final Health Care Expenditure after the separation, the following three criteria must be met:

  1. The Separation Notice must indicate that the Covered Employee is entitled to a final Health Care Expenditure and when it will be made;
  2. The separated employee must be provided a Revocable Expenditure Summary within 15 days of the post-separation contribution; and
  3. The post-separation contribution must remain available to the separated employee for at least 90 days from the date of the contribution.

What are some examples of Health Care Expenditures that meet the requirements of the HCSO?

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  1. Payments to a third party to provide health care services for the Covered Employee, such as payments for medical, dental, or vision insurance, or payments to a health care provider;
  2. Payments on behalf of the Covered Employee to the City Option;
  3. Contributions on behalf of the Covered Employee to a reimbursement program (subject to certain limitations regarding irrevocable expenditures);
  4. Payments to the Covered Employee to reimburse the employee for costs incurred in the purchase of Health Care Services (subject to certain ACA limitations);
  5. Costs incurred by the employer in the direct delivery of health care services for the Covered Employee.
  6. Any of the above made on behalf of a Covered Employee’s spouse, domestic partners, children, or other dependents.

Payments made directly or indirectly for workers’ compensation or Medicare benefits do not qualify as Health Care Expenditures. Increasing hourly wages, or otherwise giving employees extra money in their paychecks, also do not qualify as a Health Care Expenditure.

An employer may choose more than one option to satisfy its obligations. An employer may, for example, pay for health insurance for its full-time employees while making contributions to the City Option for its part-time employees.

When do Health Care Expenditures have to be made?

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Health Care Expenditures must be made within 30 days of the end of the preceding calendar quarter.

Does the HCSO require employers that already provide health insurance to their employees to spend more money on their employees?

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It depends. The premiums that a Covered Employer pays for medical insurance for its Covered Employees count toward its required Health Care Expenditures, so if that amount meets the minimum required expenditure under the HCSO, the Covered Employer will have no further obligations.

However, if the monthly premium paid by the employer does not meet the minimum expenditure amount, it must make up the shortfall. The employer could choose a health insurance plan that provides more comprehensive benefits; increase its contribution towards the health care premiums while decreasing the portion paid by the employee; or add dental and vision benefits. The employer could also complement the existing plan with a health spending or medical reimbursement account; make payments to the City Option; or make other expenditures that qualify as Health Care Expenditures according to the HCSO.

How does an employer that provides uniform coverage to its Covered Employees determine if its expenditures meet or exceed the minimum Health Care Expenditure rate?

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A Covered Employer that provides uniform health care coverage (i.e., an HMO or PPO) to some or all of its Covered Employees will be deemed to comply with the spending requirement of the HCSO as to those employees if the average hourly expenditure rate per employee meets or exceeds the expenditure rate required under the HCSO. If the Covered Employer’s expenditure rate fails to meet or exceed the minimum expenditure rate, the employer must spend the difference (or shortfall) within 30 days of the end of the calendar quarter.

Employers shall calculate the average hourly expenditure rate by (a) dividing the total monthly premium paid for all employees covered by the uniform plan by the total number of employees covered by that plan, then (b) dividing that number by 172 hours paid (hours paid per employee is capped at 172 hours in a single month).

The option of averaging expenditures is limited to plans with a uniform design, i.e., the plans must have a uniform benefit design offered to all employees (same co-pay requirements, out-of-pocket maximums, deductibles, coverage tiers, eligibility criteria). An employer that offers an HMO and a PPO may average hourly expenditures for all of the employees covered by the HMO, and calculate a separate average hourly expenditure for those covered by the PPO. Similarly, an employer that offers two HMO options may not average the expenditures between the two HMOs unless the benefit design for both HMOs is exactly the same.

The employer has the option of including only Covered Employees in this calculation, or including all employees participating in the uniform plan, provided that all such employees receive the same health coverage or product.

Amounts paid for dependent coverage may be counted towards the minimum Health Care Expenditure required under the HCSO. Accordingly, contributions for employees with dependents can be averaged with contributions for employees without dependents. However, if differences in the employer’s contribution levels are based on other criteria, i.e., number of hours worked, status as union/nonunion, salary, waiting periods, or work site/location, the expenditures cannot be averaged.

What if my employees have other insurance? Am I still required to make Health Care Expenditures for those employees?

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Covered Employees who already have health care benefits through another employer may voluntarily waive their right to Health Care Expenditures under the HCSO by signing the OLSE’s Employee Voluntary Waiver Form. An employer will not be required to make Health Care Expenditures for employees that choose to sign this form. If an employee who is receiving health care benefits from another employer chooses not to sign the waiver, the employer must make the minimum Health Care Expenditures for that employee.

Keep in mind that the waiver will not be valid unless the health care benefits are provided either by another employer of the Covered Employee or by the employer of that Covered Employee’s spouse, domestic partner, parent, or guardian. If a Covered Employee has health care benefits that are not provided by another employer (i. e., the employee is purchasing it themselves or receiving Medi-Cal), the employee may not sign a waiver and the employer is still required to make the minimum Health Care Expenditures for that employee.

What if employees choose not to participate in the health plan offered?

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A Covered Employer that establishes or maintains a health insurance program that requires contributions by a Covered Employee must do more than offer the Covered Employee an opportunity to participate in such a program. If the employee declines to participate in such a program, the employer must satisfy its Employer Spending Requirement in some other manner.

What do my employees receive if I contribute to the City Option on their behalf?

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The City Option allows employers to contribute to the City’s public benefit program on behalf of their employees. Based on the information the employer provides, employees will be provided one of two health benefits:

  1. Healthy San Francisco (HSF) – If an employee is eligible for Healthy San Francisco (HSF), the employer’s payment may be applied towards the Employee’s HSF enrollment, and the employee may receive a discount on HSF program participation fees. HSF is not health insurance. HSF provides limited services and providers for medical care.

    To be eligible for HSF, the employee must:
    a. Live in San Francisco,
    b. Be uninsured for at least 90 days,
    c. Be age 18 or over, and
    d. Not qualify for public health insurance programs (such as Medi-Cal).

  2. Medical Reimbursement Accounts (MRAs) – If the employee is not eligible for HSF, the employer’s contribution is deposited in an irrevocable medical reimbursement account – MRA. Employees can obtain reimbursements from their MRAs for a full range of medical, dental, and vision expenses, including reimbursements for the cost of insurance premiums. The contributed funds remain available to the employee, and the employee may seek reimbursements for health care expenses from their remaining MRA balance at any time.

Can an employer allocate Health Care Expenditures for employees then recover any unused funds?

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For hours payable on and after January 1, 2017, only irrevocable Health Care Expenditures shall be counted toward the Employer Spending Requirement.  In other words, only money actually spent on employee health care can be counted toward compliance with the HCSO.  This means that the employer cannot retain or recover any portion of the funds at any time, even if the employee leaves the job or if the business ceases to operate.


Health Reimbursement Arrangements (HRAs), as defined in IRS Publication 969, including excepted benefit HRAs and integrated HRAs, are considered revocable expenditures because the employer has the option to recover any unused funds at some point.


For an allocation of funds to a reimbursement arrangement to be counted toward the spending requirement, the funds must be actually paid over to a third-party trustee who has control over these funds in perpetuity or until the employee exhausts the funds through submitting claims.  The employer must have no access to, or control over, these funds and no possibility of ever recovering them.


Examples of Irrevocable Expenditures:


Note:  Employers will have until January 30, 2017 to make the required health care expenditures for the fourth quarter of 2016; 20% of expenditures for that quarter will still be permitted to be made revocably.

What is the minimum length of time a revocable expenditure needs to be available before the employer can reclaim unused funds?

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Revocable expenditures count toward the Employer Spending Requirement provided the employer does not reclaim any part of the expenditure before the earliest of –

  1. 24 months from the date of the expenditure*; or
  2. 90 days after the employee separates from employment, provided they receive a separation notice; or
  3. For revocable expenditures made for hours payable prior to January 1, 2014, the date that the Covered Employee knowingly, voluntarily, and permanently waives in writing the unused portion of such expenditure.

*Funds contributed to a Flexible Spending Account do not count as a Health Care Expenditure, because these funds only remain available to the employee for one calendar year. In order to qualify as a Health Care Expenditure, a revocable expenditure cannot be revoked for a minimum of twenty-four months (if the Covered Employee remains employed).