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San Francisco legislators near deal with mayor to curb health reimbursement arrangements

Posted On: Nov. 4, 2011 12:00 AM CST

San Francisco legislators near deal with mayor to curb health reimbursement arrangements

SAN FRANCISCO—San Francisco Mayor Edwin Lee and the city's legislators are nearing an agreement on a compromise plan to impose new restrictions on health reimbursement arrangements, potentially setting the stage for a new legal battle involving the city's controversial health care spending law.

The new proposal being put together by Malia Cohen, a member of the city's Board of Supervisors, that is likely to be considered Nov. 15 would require funds employers contribute to HRAs to satisfy the health care spending law to be available for 24 months after the contribution. For terminating employees, the account balance would have to be available for 90 days after the employee leaves.

Under the city's 2006 spending law, employers with 100 or more employees are required to spend $2.06 per hour per covered employee on health care, while employers with between 20 and 99 employees must spend $1.37 per hour.

The overwhelming majority of employers satisfy the requirement by paying group health insurance premiums. However, the law also offers an alternative in which employers contribute the required amounts to HRAs, which reimburse employees for health care expenses. Employers can design their HRAs so that unused funds revert to them at the end of the year.

Supervisor Cohen's proposal does not go as far as one vetoed last month by Mayor Lee, who has described the HRA approach in which funds are forfeited at the end of the year as a “loophole.” That measure, proposed by Supervisor David Campos, would require the indefinite annual rollover of HRA account balances. In addition, terminating employees would have access to funds for 18 months.

In vetoing the Campos proposal, Mayor Lee said it was “overly broad,” adding, though, that he was confident that another acceptable approach to restrict HRAs could be found.

Last week, Mayor Lee issued a statement signaling support for the Cohen proposal. “By closing the loophole through these proposed amendments, we can increase access to health care, protect jobs in our small businesses and protect consumers while growing our economy at the same time. These are goals I have embraced from the beginning of this discussion,” he said.

Benefit experts, though, question the legality of the Cohen HRA proposal.

By mandating that HRAs meet certain requirements, the proposal runs directly afoul of a provision in the federal Employee Retirement Income Security Act, which pre-empts state and local rules that relate to employee benefit plans, experts say.

The measure is saying “if you choose this health care spending option, this is how you have to design your plan. That on its face would seem to violate ERISA,” said Amy Bergner, a partner with Mercer L.L.C. in Washington.

“Based on court rulings and a reading of the law, this proposal is unambiguously pre-empted by ERISA,” said Scott Macey, of counsel with Covington & Burling L.L.P. in Washington.

Supervisor Cohen's aide said, though: “We believe that this proposal is legally defendable and does not violate ERISA.”

Whether a lawsuit—assuming the measure is passed—is filed isn't clear. For example, Steve Falk, the president and CEO of the San Francisco Chamber of Commerce, described the proposal as “a compromise we can live with. It is a reasonable compromise.”

And the Golden Gate Restaurant Assn., which unsuccessfully challenged the 2006 law, said in a statement that while it has concerns about the Cohen proposal, “We also believe that if the amendment achieves consensus, it is the best way forward.”

The 9th U.S. Circuit Court of Appeals in a 2008 ruling rejected the argument that the spending law was pre-empted by ERISA, noting that the law does not require employers to provide specific benefits through an existing ERISA plan or other health plan.

Some experts say the court would rule differently if the Cohen proposal were to be passed and challenged. “This goes to the heart of how employers design and administer their benefit programs. That significantly diminishes the likelihood the 9th Circuit would rule the same way,” said Andy Anderson, a partner with Morgan Lewis & Bockius L.L.P. in Chicago.

“There was a good case before and there would be an even better case now,” said J.D. Piro, a principal with Aon Hewitt Inc. in Norwalk, Conn.

The drive to amend the spending law was generated by a June report by the city's Office of Labor Standards Enforcement, which found that just 20% of the $62 million allocated to HRAs last year actually was reimbursed to employees.

In all, about 13% of employers last year used the HRA approach to satisfy the spending requirement, according to the report.

Among those using the HRA approach to satisfy the health care spending law requirements are smaller local employers that may not offer a group plan, as well as large employers based elsewhere that may have a small number of part-time employees in San Francisco who do not qualify for its group health care plan, said Laura Paszkiewicz, a director with Buck Consultants L.L.C. in Santa Ana, Calif.