An Introduction to San Francisco’s Health Care Security Ordinance

Long before the Affordable Care Act reshaped the national conversation about who pays for employee health coverage, San Francisco answered the question locally. The Health Care Security Ordinance, enacted in 2006 and codified at Chapter 14 of the San Francisco Administrative Code, requires most employers operating within the city to spend a set amount on health care for the people who work for them. It survived a determined federal preemption challenge, settled into routine compliance, and has quietly become one of the more durable experiments in municipal health policy. For employers with even a single worker in San Francisco, the ordinance is less a curiosity than an ongoing obligation, and understanding its structure remains worthwhile.

What the ordinance actually requires

The Health Care Security Ordinance, commonly shortened to the HCSO, rests on two distinct pieces. The first is the Health Access Program, known publicly as Healthy San Francisco, a city-administered means of connecting uninsured residents to subsidized care. The second, and the one that draws the most attention from businesses, is the Employer Spending Requirement.

That requirement obliges covered employers to make a minimum health care expenditure on behalf of each covered employee, calculated per hour worked and satisfied on a quarterly basis. The dollar rate is set annually by the city’s Office of Labor Standards Enforcement and rises with medical cost inflation, with a higher rate applying to larger employers. The ordinance does not dictate how the money buys care. An employer may pay insurance premiums, fund a reimbursement arrangement, or route contributions to a city-run option. What the law fixes is the floor on spending, not the form of the benefit.

Who is covered, and who is not

Coverage turns on size and location rather than industry. For-profit businesses with twenty or more employees, and nonprofits with fifty or more, fall within the ordinance once they have at least one worker inside the city and a San Francisco business registration certificate. The headcount is measured across the entire enterprise, so an out-of-state company with a small San Francisco footprint can still be a covered employer.

On the employee side, the obligation attaches to workers who have been employed for more than ninety days and who regularly perform at least eight hours of work per week within San Francisco. Managerial, supervisory, and confidential employees earning above a salary threshold are excluded, as are workers who voluntarily waive coverage because they receive health benefits through another source. The hourly structure means part-time and seasonal staff are frequently covered, which often surprises employers accustomed to thinking of health obligations as tied to full-time status alone.

The preemption fight that defined it

The HCSO’s legal foundation was tested almost immediately. The Golden Gate Restaurant Association argued that the federal Employee Retirement Income Security Act, or ERISA, preempted the Employer Spending Requirement. ERISA broadly displaces state and local laws that “relate to” employee benefit plans, and the association contended that a municipal spending mandate did exactly that.

The Ninth Circuit disagreed. In Golden Gate Restaurant Ass’n v. City & County of San Francisco, 546 F.3d 639 (9th Cir. 2008), the court upheld the ordinance, reasoning that it neither required employers to establish or modify an ERISA plan nor dictated the substance of any benefit. Because the law concerned only the dollar amount an employer spent, and left untouched the design of any plan the employer chose to maintain, it lacked the impermissible “connection with” an ERISA plan that triggers preemption. An employer could satisfy the ordinance entirely outside ERISA, by contributing to the city’s option, so the mandate did not force any plan into existence.

The Supreme Court declined to take up the dispute, denying certiorari on June 28, 2010, after inviting and receiving the views of the Solicitor General. That denial left the Ninth Circuit’s reasoning standing as the governing word on whether a local pay-or-spend rule of this kind survives ERISA. The ruling has since been read as marking out room for municipalities to require health care spending without crossing into the territory ERISA reserves for federal regulation, though the precise boundary remains contested in commentary. Readers tracking how local governments structure mandates around federal labor and benefits law will find an instructive parallel in the analysis collected under the publication’s commentary section.

How employers comply in practice

Compliance generally takes one of three forms. An employer may purchase health insurance and count the premiums, fund a health reimbursement arrangement, or make irrevocable contributions to the SF City Option, the city-administered alternative. The first route is straightforward for businesses that already offer group coverage; the spending requirement is usually satisfied by premiums alone. The reimbursement-arrangement route grew more complicated after the Affordable Care Act constrained stand-alone arrangements, prompting the city to revise its guidance so that compliance methods would not collide with federal rules.

The City Option route deserves particular attention, because it changed in a way that reshaped the entire program. Through contributions to the SF City Option, an employer’s payments fund a medical reimbursement account that the employee can draw on for eligible expenses. Beginning in the first quarter of 2017, the city required that contributions counted toward the spending obligation be fully irrevocable. Earlier “revocable” arrangements, under which unused funds could revert to the employer at year’s end, no longer satisfied the ordinance. The practical effect was to ensure that money set aside for an employee’s health care stayed available to that employee rather than flowing back to the business.

The problem of money no one claims

Irrevocability solved one problem and surfaced another. Because contributions to the City Option cannot return to the employer, and because many workers never learn an account was opened in their name, substantial sums accumulate unspent. Reporting has placed the pool of unclaimed reimbursement funds in the hundreds of millions of dollars, with a large share belonging to workers who have moved on from the jobs that generated the contributions. The city has built tools to help people locate accounts and has periodically weighed what to do with long-dormant balances, including whether the city itself may eventually absorb them.

This is the quiet tension at the center of a law that otherwise functions smoothly. A mandate measured in dollars spent, rather than coverage delivered, guarantees that employers pay but does not guarantee that employees receive care. The gap between contribution and consumption is not a defect in drafting so much as a feature of any system that decouples the obligation to fund from the choice to use. It is also a reminder that worker-protective rules can leave value stranded when the intended beneficiaries are never told it exists, a theme that recurs across employment regulation, including the questions raised in commentary on employee rights as the workplace itself dissolves into the home.

Where things stand and where they may go

Nearly two decades on, the HCSO is settled law administered as routine. Employers file an annual reporting form, expenditure rates climb each year, and the preemption question that once threatened the ordinance has receded into precedent. The open issues are now administrative rather than existential: how to reunite workers with unclaimed funds, how to keep municipal compliance methods aligned with shifting federal benefits rules, and whether the spending-floor model the Ninth Circuit blessed will inspire imitation in other cities. The ordinance’s endurance suggests that a carefully drafted local mandate, framed as a dollar obligation rather than a benefit design, can coexist with federal law. Whether that framing continues to hold as health-coverage rules evolve is the question the next round of litigation, if any comes, will answer.

This publication offers commentary and analysis for general information, not legal advice; employers and workers with specific questions about their obligations under the ordinance should consult counsel.