April 22, 2014

Significant Changes to San Francisco Health Care Security Ordinance Require Immediate Employer Action; ERISA Preemption Controversy Reopened

Last week, San Francisco Mayor Ed Lee signed legislation that significantly revises parts of the city's Health Care Security Ordinance (Ordinance). In particular, the revised Ordinance imposes detailed design and administrative requirements on accounts established to satisfy the employer healthcare expenditure requirement. Because these new requirements directly relate to the operation of such accounts, there is a strong likelihood that the requirements will reopen the long-simmering debate about whether the Employee Retirement Income Security Act of 1974, as amended (ERISA), preempts some or all of the revised Ordinance.


The Ordinance, first applicable in 2008, requires most employers with employees in the City of San Francisco to spend a minimum amount on health benefits. This spending requirement applies to employees who work at least eight hours per week. As one method of complying with the Ordinance, employers can contribute $2.06 per hour ($2.20 in 2012) to a reimbursement account. In response to perceived abuses associated with forfeitures and eligible expenses under these accounts, the revised Ordinance imposes new design and administration requirements.

New Requirements

Beginning in 2012, the revised Ordinance requires employers that use such an account to do the following:

  • Keep employer contributions available for at least 24 months after the date of the contribution.
  • Provide a detailed written account summary to the employee (including the account balance and any applicable forfeiture rules) 15 days after each quarterly contribution.
  • Allow reimbursements from the account for at least 90 days after termination of employment.
  • Provide a written notice (including the balance in the account and any applicable forfeiture rules) within three days after termination of employment.
  • Annually report account terms to the city (including which expenses are eligible for reimbursement under the account).
  • Annually post a new city-provided notice addressing employee rights and employer obligations under the Ordinance.

Further, the Ordinance requires employers to "roll over" any December 31, 2011 account balance to January 1, 2012 in order to ensure that participants start 2012 with an account balance.

Administrative Implications

Any employer that uses an account to meet the requirements of the Ordinance will have to quickly review and significantly change the operation of its account to meet the revised requirements. As many current accounts forfeit balances more frequently than now permitted (and few have a rolling 24-month contribution tracking structure) employers should ensure that their account administrators can handle the revised Ordinance requirements by December 31. Employers should also review (and will likely have to significantly enhance) the notices associated with their accounts.

ERISA Preemption

Prior litigation determined that the original Ordinance was not preempted by ERISA. However, the revised Ordinance now both narrows the types of accounts that can be used to satisfy the Ordinance and dictates detailed rules about the design and administration of reimbursement accounts. These new requirements squarely relate to an employee benefit plan that is subject to ERISA and, as such, are likely preempted by ERISA.

The revised Ordinance anticipates and attempts to discourage such an ERISA challenge. The Ordinance imposes even more rigid requirements (tantamount to fully vested, nonforfeitable, and funded account contributions to a third party) if the Ordinance is struck down through a lawsuit brought by or on behalf of a covered employer.

It remains to be seen whether a covered employer will challenge the revised Ordinance or possibly even refuse to comply with its revised terms in order to prompt enforcement action to test the validity of the revised Ordinance under federal law.

Copyright © 2014 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

About the Author


Andy R. Anderson is a partner in Morgan Lewis's Employee Benefits and Executive Compensation Practice.

Mr. Anderson has handled a variety of employee benefits matters, including government self-correction programs, cafeteria plans, health and welfare plans, VEBAs, and benefit plans for tax-exempt organizations and churches. He has worked with numerous Fortune 500 companies regarding the administration of employee benefits programs, with an emphasis on the administration of health and welfare plans. Mr. Anderson frequently counsels clients on regulatory...


Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.