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San Francisco HCSO Responds to the Affordable Care Act's Effect on HRAs

Health Care Security Ordinance Responds to Uncertainty Regarding the Affordable Care Act's Effect on HRAs

The San Francisco Health Care Security Ordinance (HCSO) provides those individuals who work in San Francisco and qualify as an employee entitled to minimum wage with access to affordable health care through a Health Access Program that provides services to the uninsured. Specifically, the HCSO requires employers to spend a minimum amount of money each quarter on their employees' healthcare. (See our Compliance Alert "2014 Health Care Expenditure Rates Just Released Under the San Francisco HCSO" dated August, 2013.)

On September 13, 2013, the Internal Revenue Service, Treasury and Department of Labor issued Notice 2013-54 providing additional guidance on the application of certain provisions of the Affordable Care Act (ACA) that affect Health Reimbursement Arrangements (HRAs) effective January 1, 2014. The Notice appeared to allow the San Francisco HCSO HRAs and other state, local and tribal government HRAs to continue until the later of January 1, 2014 or the first day of the plan year following the close of a regular legislative session after September 13, 2013. 

In the meantime, the HCSO team, working closely with other city departments and public agencies to determine how the HCSO will be impacted by the various provisions of the ACA, recently published their FAQs on the HCSO and the ACA available at

Among other issues, the FAQs:

Confirm the future of the HCSO Employer Spending Requirement. Since the ACA does not preempt or regulate the HCSO, covered employers will be required to continue meeting the HCSO Employer Spending Requirement into 2014.

Acknowledge the ACA requirements regarding the prohibition of stand-alone HRAs, yet confirms the HRA as an appropriate vehicle for health care expenditures under HCSO. Although the ACA has made significant changes to federal regulation and guidance regarding HRAs, the HCSO has not changed and contributions to reimbursement programs, including HRAs, will continue to be valid health care expenditures for the purpose of meeting the HCSO's Employer Spending Requirement.

Remind employers of additional methods of complying with the San Francisco HCSO such as making payments on behalf of the Covered Employee to the "City Option." Information about the City Option can be found at

Warn employees that seeking reimbursements from their employer's HRA in 2014 may have federal tax implications.

The IRS anticipates issuing additional guidance on the tax consequences of utilizing HRA funds. We will keep you apprised of further developments.

This is important clarification for employers utilizing the HRA to comply with San Francisco's HCSO. More information regarding the HCSO is available at

Prior to receiving clarification from the IRS, it would be wise to seek legal counsel on "next steps" for providing funds to comply with the San Francisco HCSO.

Click here for a printable download of this update.