San Francisco's Pay or Play

Appeals Court Rules that San Francisco’s “Pay-or-Play” Law Is Permissible under ERISA

Families USA, October 9, 2008

On September 30, 2008, the Court of Appeals issued its final opinion that San Francisco’s Health Access Program ordinance, which requires employers to pay for health care for their employees or to pay the city to provide care, is permissible under the federal law known as ERISA (the Employee Retirement Income Security Act). This is good news for other states and localities that are considering pay-or-play laws.

The ruling follows several steps in a court battle:

On December 26, 2007, the U.S. District Court for the Northern District of California ruled that the San Francisco ordinance was preempted by ERISA. That is, the court said that San Francisco was not allowed to create such a rule because the federal government, not cities or states, has jurisdiction over benefit plans offered by employers. San Francisco City Attorney Dennis Herrera appealed the decision to the Ninth Circuit Court of Appeals.
On January 9, 2008, the Court of Appeals granted an emergency stay, which allowed the ordinance to go into effect pending the outcome of the full appeal.
The September 30, 2008, unanimous decision is the outcome of that full appeal.

What does the San Francisco ordinance require?

The San Francisco ordinance requires employers to make health care expenditures based on their size and for-profit/nonprofit status:

A private employer with between 20 and 99 employees and a nonprofit with 50 or more employees must, for any employee who has been employed for 90 days and who works more than 10 hours per week, make health care expenditures of $1.17 per hour on behalf of that employee.
A private employer with 100 or more employees must make health care expenditures of $1.76 per hour on behalf of each covered employee.

Employers can satisfy this requirement in a number of ways, including the following:

by directly paying for health services;
by paying a third party (such as a health insurer) to provide services;
by funding health savings accounts (HSAs); or
by paying into a new city-funded program, the “Health Access Program,” that provides care.

The Health Access Program is funded partly by employer contributions and partly with general revenues and individual contributions. It is open to all uninsured residents, whether or not their employers contribute, and it provides care through a network of public hospitals and clinics and other participating providers.

What is ERISA?

ERISA is a law designed to safeguard employees from mismanagement of funds that the employer has set aside for pensions and other types of employee benefits. In fact, the law’s stated purpose is to "promote the interests of employees and their beneficiaries in employment benefit plans." To do this, it creates some uniform national standards, and when it was enacted in 1974, it replaced a patchwork of sometimes conflicting state laws. The ERISA statute says that some of its provisions “supersede any and all State laws" so far as "[the State laws] relate to any employee benefit plan." However, ERISA goes on to explain that states can still regulate health insurance that is purchased by employers.

Generally, the division between state and federal responsibilities for health coverage works like this:

States regulate health insurance plans that are purchased by employers or by individuals, and there are a few federal parameters for these plans as well.
Only the federal government can regulate “self-funded” insurance arrangements in which the employer pays workers’ claims instead of passing risk on to an insurance company.
The federal government regulates the reporting, disclosure, and fiduciary responsibilities for “employee welfare benefit plans,” which are defined as programs that are established or maintained by an employee or employee organization to purchase insurance or otherwise provide health care or certain other benefits to employees.

Who challenged the ordinance?

The Golden Gate Restaurant Association challenged the San Francisco ordinance, saying it was preempted by ERISA.

The U.S. Secretary of Labor filed an amicus brief in the case, also arguing against the ordinance.

The Court of Appeals responded to two questions raised by the Golden Gate Restaurant Association and the Secretary of Labor:

Did the option to pay the city for health benefits create a new employee welfare benefit plan? In other words, is San Francisco’s Health Access Program an employee welfare benefit plan that can only be regulated by the federal government rather than the city or state?
Even if the Health Access Program is not an employee welfare benefit plan, did the ordinance have a connection or reference to an employee benefit plan that can only be governed by the federal government under ERISA and not by states?

What kind of “pay-or-play” laws will be allowable under the Appeals Court decision?

In its ruling, the Ninth Circuit said that states are allowed to pass laws related to the amount that employers spend on employees, but not laws related to the benefit plans they provide. Though we do not know how other laws will be reviewed by this or other circuit courts, the opinion notes a number of factors about why the San Francisco ordinance is allowable that will be instructive to other states. The court noted that:

Employers have a true choice of whether to “pay or play.” The San Francisco ordinance requires employers to pay a certain amount for health care, but they will have many choices about how to do this. Employers are not required to alter their ERISA plans, nor are they required to provide an employee benefit plan at all. If they already have an ERISA benefit plan but they are not meeting the level of health expenditures required by the ordinance, they can choose either to pay more in health benefits or to pay to the city the difference between their actual expenditures and the required expenditures. Likewise, if they do not have an ERISA plan and do not want to establish one, they can make required health care expenditures directly to the city.
The law does not require employers to structure their employee benefit plans in any particular way. The ordinance does not say anything about the type of health care benefits that an employer must provide to its employees. The employer’s obligation to the city is to make a particular level of payments, not to offer a particular level of benefits.
Employers will not have to administer their employee benefit plans differently in San Francisco than they do in other jurisdictions. In San Francisco, the accounting that employers will need to do is about the amount of payments they provide, not about the structure of their health plan benefits. Employers will need to maintain records of their health payments whether or not they have ERISA plans. The record-keeping that is required is fairly mechanical, and employers will have to maintain the same kinds of records whether they have an ERISA plan or use the city-payment option.
When employers elect to “pay,” they will help to finance a program that is not solely financed by employers and is not an employee welfare benefit plan. The new Health Access Program created by the city of San Francisco is not an employee welfare benefit plan under ERISA; it is a program for low- and moderate-income people regardless of whether they are employed or not. In fact, employers have no control over the eligibility levels or benefits of the Health Access Program. The program will be funded primarily be taxpayer dollars, and employer payments will be only a small portion of its funding. Employers will make payments to the city, not to the employees, based on the number of hours that employees work. The employer is not holding funds in a plan, so there is no risk that funds set aside by an employer for benefits will be misspent or abused, which is the problem that ERISA was designed to address.

To read the full decision, Golden Gate Restaurant Association v. City and County of San Francisco et al., U.S. District Court for the Northern District of California, Case No. C06-6997 JSW, see http://www.sfgov.org/site/uploadedfiles/cityattorney/GGRA-US9-OPINION.PDF

City Attorney General Herrera’s press release is available online at http://www.sfgov.org/site/uploadedfiles/cityattorney/GGRA-US9-RULING-RELEASE.PDF.

[Return to top]