SAN FRANCISCO—San Francisco legislators have approved a compromise plan to impose new restrictions on health reimbursement arrangements used to satisfy the city's controversial health care spending law.

The proposal, unveiled by Malia Cohen, a member of the San Francisco board of supervisors, would require that funds employers contribute to HRAs to satisfy the health care spending law 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.

Majority satisfy requirement

The overwhelming majority of employers satisfy the requirement by paying group health insurance premiums. However, the law offers an alternative in which employers contribute 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, approved on a 6-5 vote Tuesday, does not go as far as one vetoed last month by Mayor Edwin 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, who said the Cohen proposal does not close the “loophole,” would have required 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,” but the mayor is supporting 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, and I thank the board for putting forward amendments that align with these goals,” Mayor Lee said in a statement.

Business groups also say they can live with the Cohen proposal. For example, Steve Falk, the president and CEO of the San Francisco Chamber of Commerce, earlier described the plan as “a reasonable compromise.”

Supervisor Cohen described her proposal as a “compromise that preserves rights for workers, recognizes the economic challenges that our small businesses face and balances legal risk.”

Experts question legality

However, benefit experts have questioned the legality of the Cohen HRA proposal.

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

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

Once the provision takes effect, which would be Jan. 1, 2012, employers choosing the HRA approach will face more work.

“The revised ordinance will require quick changes to almost all San Francisco HRAs,” said Andy Anderson, a partner with Morgan, Lewis & Bockius L.L.P. in Chicago.

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.

Previous challenge

In 2006, a city restaurant trade group challenged the broader spending law, saying it was pre-empted by ERISA. But in a 2008 ruling, the 9th U.S. Circuit Court of Appeals disagreed, noting that the law does not require employers to provide specific benefits through an existing ERISA plan or other health plan.

The Cohen proposal requires one more vote—expected next week—before it can be sent to Mayor Lee.