NEWSROOM

Employers with employees working in San Francisco – even just one – are subject to a local health care spending law that’s easy to overlook: the San Francisco Health Care Security Ordinance (HCSO). Unlike federal or state health insurance laws, HCSO is not a coverage mandate – it is a spending requirement. It requires certain employers to spend a minimum amount per hour paid on health care for their covered employees.
 
Meeting this spending requirement is fairly straightforward for fully insured employers since employer-funded portions of premiums often exceed the minimum. However, it can be tricky for employers with self-funded, level-funded, or other alternative funding arrangements, where actual spending depends on how much employees use the plan.
 
Many employers – and even some benefits professionals – aren’t aware of HCSO, or they assume that simply offering a health plan satisfies the requirement. But compliance isn’t just about providing benefits; it’s about ensuring that the minimum required spending threshold is met for each covered employee.
 
On top of that, HCSO has strict reporting and recordkeeping rules. The type of reporting required – and when it’s due – depends on whether an employer has a fully insured or self-funded plan (or no plan at all). Employers with fully insured plans generally report and make required expenditures (as applicable) quarterly, while self-funded employers calculate expenditures annually and must make up any shortfalls the following year. Employers who miss deadlines or underpay can face penalties, making compliance a critical issue.
 
This is especially important today, as remote work blurs the lines of traditional workplace locations. HCSO applies not only to employers with employees working in an office within San Francisco but also to remote workers who live in the county and work from home. Employers with distributed teams – even those outside California – may be subject to HCSO without realizing it, highlighting the need to carefully track work locations and ensure compliance.
 
Who’s Covered?
HCSO applies to for-profit employers with at least 20 employees worldwide and non-profits with at least 50 employees worldwide, as long as they have at least one employee working in San Francisco city or county.
 
It covers most employees working in San Francisco, including part-time workers. Employers must make health care expenditures for any employee who:

• Works at least 8 hours per week in San Francisco.
• Has been employed for at least 90 days.
• Is entitled to minimum wage.

Unlike traditional benefits eligibility rules, part-time workers must be accounted for under HCSO – even if they aren’t eligible for the company’s health plan.
 
Required Health Care Expenditures
Employers must spend a minimum amount per hour of service paid (including sick time, vacation, and PTO) up to 172 hours per month:
 
2024 Rates (for Self-Funded plans’ expenditures due in 2025)

• $2.34 per hour for employers with 20-99 employees
• $3.51 per hour for employers with 100+ employees

2025 Rates

• $2.56 per hour for employers with 20-99 employees
• $3.85 per hour for employers with 100+ employees

Employers who don’t meet these spending levels by funding health benefits must make up the difference through additional contributions. Many facilitate these adjustments by contributing to employees’ Health Savings Accounts (HSAs), but this is only an option if the employees are enrolled in a High Deductible Health Plan (HDHP) and have an active HSA. Otherwise, employers must make payments directly to the San Francisco City Option program to satisfy their HCSO obligations  – unless the employee has formally waived HCSO expenditures by signing an approved waiver.
 
How Employers Can Meet the Requirement
To comply, employers must spend at least the required amount per hour worked using one or a combination of:

• Providing health insurance (medical, dental, vision)
• Contributing to Health Savings Accounts (HSAs) (for eligible employees with HDHPs)
• Making payments to the SF City Option program (which funds employee Medical Reimbursement Accounts for those in San Francisco)

Employers who do not meet the required spending levels through insurance must make additional contributions – either directly to affected employees’ HSAs or through top-off payments to SF City Option.
 
Quarterly and Annual Reporting Requirements
For fully insured plans and employers without a group health plan, HCSO expenditures must be calculated and paid quarterly, with deadlines at the end of the following month:

• Q1: Due April 30
• Q2: Due July 30
• Q3: Due October 30
• Q4: Due January 30

Employers with self-funded plans report annually. If they don’t meet the required spending levels, they must make top-off payments to SF City Option by February 28 of the following year.
 
Self-Funded Plans and the Challenge of Meeting Spending Minimums
Employers with self-funded health plans face an added challenge: because claims are paid as incurred, not every employee will hit the spending requirement.
 
For example, if an employee is healthy and rarely uses the plan, the employer may end up spending less than the HCSO-required minimum on their health care. The law does not care whether employees actually use their benefits; it only looks at how much the employer spends per hour worked.
 
This means self-funded employers must track expenditures annually to determine whether they’ve met their obligations. If total spending for any employee falls short, the employer must make a top-off payment to SF City Option to cover the difference.
 
For 2024 expenditures, the top-off payment deadline is February 28, 2025.
 
Using HSAs to Meet the Requirement
Some employers try to close the gap by contributing to employee HSAs, which can count toward HCSO spending. However, this is only an option if:

• The employee is enrolled in a High Deductible Health Plan (HDHP).
• The employee has an open and active HSA.

 
If these conditions are not met, HSA contributions cannot be used to meet HCSO obligations, and the employer must make SF City Option payments instead. Direct cash payments to employees do not satisfy the HSCO requirements.
 
Employees Who Waive Coverage Still Require Expenditures
HCSO does not allow employers to avoid making health care expenditures just because an employee declines the company’s health insurance.
 
If an employee waives coverage, the employer must still spend the required amount unless they obtain a signed HCSO Voluntary Waiver Form. This waiver:

• Must be signed voluntarily, without coercion.
• Only lasts one year and must be renewed annually.
• Is not valid for employees on Medi-Cal, individual insurance, or who are uninsured.

Since waivers are rare, most employers must still make HCSO-required expenditures for employees who waive coverage.
 
HCSO Annual Reporting and Recordkeeping
All covered employers must file an Annual Reporting Form (ARF) by April 30 each year, documenting their total health care expenditures for SF employees. At the time of this article’s publication, the form due in 2025 is not yet available. It is usually published in April annually.
 
Failure to file the ARF results in a $500 per quarter penalty – just for missing paperwork.
 
Employers must also:

• Provide written notice of HCSO rights at hire, annually, and within seven days of any benefit changes
• Display the official 2025 HCSO poster in workplaces with covered employees.
• Keep records for at least four years, including hours worked, health care expenditures, and waiver forms.

The Bottom Line
HCSO compliance isn’t just about offering a health plan; it’s about meeting spending requirements for every covered employee. Employers must carefully track part-time workers, self-funded plan spending, and waived employees to ensure compliance and avoid penalties.
 
For official forms and additional information, visit the San Francisco HSCO website.