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We believe that a prudent short term approach will focus on paying the City (a “Pay In” strategy) for any spending shortfall that occurs during the first quarter of 2008. This Pay In approach takes advantage of the provision of the HCSO that allows for payment to the City of any spending shortfall within 30 days following the close of the calendar quarter. As such, this provision will provide the employer with additional time to assess the results of legal challenges to the HCSO. 

In the event that compliance is no longer required or postponed during Q1 2008, the Pay In approach will have avoided any actual cash outlay and it will also have avoided making a longer term commitment to benefit spend for impacted employees (i.e., expanding benefit eligibility or creating new FSA or HRA benefits plans). Should compliance with the regulations be upheld during Q1 2008, employers will be able to choose to either continue their Pay In approach or to adopt a new HCSO compliance plan. 

For employers adopting the Pay In approach, following are the minimum reasonable steps to take:

Prior to January 1, 2008

1. Confirm you are a covered employer. Any for-profit company with more the 20 employees (or non-profit with more than 50 employees) that is required to have a Business Registration Certificate from the City is a covered employer.
   
   
2. Obtain Voluntary Waiver Forms signatures from covered employees who are waiving coverage due to coverage through another employer.

1. The form requires certain information that is typically not collected by employers from employees opting out.
   
   
2. Employers may be able to request the information in another format (existing “universal” or other forms) if the required information is included.
   
   
3. It is important to note that the regulations only permit exclusion of employees who opt out AND who have coverage under another employer. As such, it appears that employees who opt out and do not have health insurance or who have individual health insurance policies are not eligible to be excluded from the employer’s required expenditures.

Prior to and During Q1 2008

1. Identify all Eligible employees working at least 10 hours/week in San Francisco.

1. Excluded employees
   
   
   1. Employees who have not reached the first of the month following 90 days of service
   2. Independent contractors not classified as employees
   3. Leased employees (if the leasing company has specifically assumed responsibility for HCSO compliance)
   4. Employees who have waived coverage under the group benefits and meet the waiver requirement described above
   5. Managerial, supervisory, or confidential employees, unless such employees earn under $76,851 annually (or $36.95 hourly) in 2008
      
      
2. Included employees

1. Telecommuting employees
2. Leased employees (unless the leasing company has specifically assumed responsibility for HCSO compliance)

2. Ensure tracking systems can capture the number of hours employees are paid while working in San Francisco each week.
   
   
   1. Identify the number of hours worked by eligible employees. 
   2. Hours paid per month can be capped at 172. 
   3. Exempt employees can be assumed to work 40 hours per week.
   4. Vacation, sick and other time off counts as “paid” and must be pro-rated for employees working intermittently within city boundaries.
      
      
3. Identify the total amount of employer funding for medical, dental, vision, EAP or other health benefits and determine the average spend per hour for employees covered under each plan.
   
   
   1. On a quarterly basis, divide the total employer healthcare spend (total premiums less employee contributions) by the total hours worked for employees enrolled in each plan (HMO will be calculated separately from PPO). Because this calculation allows for the blending of employee and dependent premiums, most employers will be spending more than the required amount for employees enrolled in group health plans. The table below is a simple example of the calculation for two hypothetical health plans.
      
      
      

   	Covered Employees (A)	Total Quarterly Premium (B)	Employee Contribution (C)	Employer Contribution (D)	Number of Hours Paid for Quarter (E)	Expenditure per Hour for Covered Employees (F)
   				(B - C)		(D / E)
   HMO Plan	100	$200,000	$50,000	$150,000	50,000	$3.00
   Dental Plan	80	$50,000	$0	$50,000	40,000	$1.25

    

4. Develop a census indicating the SF hours paid and the spend per hour for employees covered by the SF HCSO during the calendar quarter. Calculate the difference between the actual spend for those employees and the $1.72/hour minimum set by the ordinance ("the shortfall"). A sample calculation for a group of only three employees is included below and it assumes the employer profile outlined in Step 3.
   
   
   

   	Number of Hours Paid for Quarter (A)	Actual Spend per Hour for Medical (B)	Actual Spend per Hour for Dental (C)	Actual Total Spend per Hour (D)	Required Spend per Hour (E)	Shortfall per Hour (F)	Shortfall in $ (G)
   				(B + C)		(D - E)	(A x F)
   EE #1	480	$3.00	$1.25	$4.25	$1.72	$0.00	$0.00
   EE #2	480	$0.00	$1.25	$1.25	$1.72	$0.47	$225.60
   EE #3	80	$0.00	$0.00	$0.00	$1.72	$1.72	$137.60
   Total (payable to the City or as other qualified expenditure)							$363.20

   
   

5. Any shortfall will require further payments to or on behalf of employees for whom the employer is not meeting the minimum spending requirements. This payment can be made to the City by April 30, 2008. More details are expected from the City as to how these payments are to be made.
   

Next Steps

Contact your ArlenGroup consultant to discuss how this proposed compliance strategy aligns with your company’s fact pattern.

This document is not intended to provide any legal advice or analysis. Please consult your own legal counsel for further information on the topics discussed in this issue of Insight.