CITY AND COUNTY OF SAN FRANCISCO LONDON N. BREED, MAYOR
GENERAL SERVICES AGENCY
OFFICE OF LABOR STANDARDS ENFORCEMENT
PATRICK MULLIGAN, DIRECTOR
Self-funded Insurance Plans:
Calculations and 2023 Top-Off Payment Instructions
Dated: February 1, 2024
Page 1 of 7
The Health Care Security Ordinance (HCSO) has Rules
regarding employers who offer self-funded medical/dental/vision plans to their San
Francisco employees. The Rules require that:
(1) Employers may not use the COBRA premium rate to calculate their required Health Care Expenditures.
(2) For self-funded plans in which the employer pays claims as they are incurred, the employer must calculate the health care
expenditures of the self-funded plan according to the instructions below, and may calculate the annual spend, rather than the
quarterly spend normally required by the HCSO;
(3) For employees enrolled in these self-funded plans, when the employer’s annual spend falls short of the HCSO expenditure rate, the
employer must make a “top-off” payment by Feb 28
th
/29
th
of the following year.
**The quarterly expenditure requirements still apply for employees who are in fully-funded health plans, or not enrolled in insurance**
More information on the rules regarding self-funded health plans can be found on our website
.
Overview of Coverage Calculations
HCSO Rule 5.8 explains how to calculate the expenditure rate for employees enrolled in uniform health plans. This rule applies to both
traditional health plans and self-funded health plans.
A “uniform health plan” means a plan with the same benefit design for each enrolled Covered Employee, including but not limited to the same
co-pays, coverage tiers, and eligibility criteria. A Kaiser HMO plan and an Aetna PPO plan are two separate plans. A Kaiser Bronze plan and a
Kaiser Silver plan are two separate plans.
Where there is a uniform health plan, the average value is calculated by dividing the total amount of health care expenditures for employees in
the plan by the total number of hours payable to all of the employees in the plan. The employer can choose whether to include the
expenditures and hours for all employees enrolled in the plan (ie, nationwide), or only the Covered Employees (ie, SF e’ees) enrolled in the plan.
Examples:
Self-funded plan. Employer Acme Co. has 350 employees enrolled in the self-funded plan nationwide, 300 are full-time and 50 are part-time
working 20 hours/week. Acme has 25 Covered Employees in San Francisco.
Option A: Nationwide Average
Total Claims Paid
by Employer
Total Payable Hours
Average Hourly Expenditure
Compliance
$2,100,000
300 FT employees (x2064 hrs)
and 50 PT employees (x1032
hrs) = 670,800 hrs
$2,100,000 / 670,800 Hrs. = $3.13
per Hr.
$3.13 per hour falls short of the 2023
Large Employer rate of $3.40.
Do NOT count
employee’s share
of premium
(subtract it out).
Include paid vacation hours,
sick time, etc. (172 Hr. /mo.
maximum)
Calculation:
Total Claims Paid / Total Payable
Hours
Employer must make additional
expenditures of $.27 per Hours Payable to
each employee covered by the HCSO.
Option B: Covered Employee Only Average: 25 SF Employees enrolled in plan all covered by HCSO
Total Claims Paid
by Employer
Total Payable Hours
Average Hourly Expenditure
Compliance
$165,000
25 Employees x 2064 Hrs. =
51,600 Hrs.
$165,000 / 51,600 Hrs. = $3.19 per
h
r.
$3.19 does not meet the 2023 Large
Employer rate of $3.40.
Do NOT count
employee’s share
of premium
(subtract it out).
Include paid vacation hours,
sick time, etc. (172 Hr. /mo.
maximum)
Calculation:
Total Claims Paid / Total Payable
Hours
Employer must make additional
expenditures of $.21 per Hours Payable to
each employee covered by the HCSO.
Self-funded Insurance Plans:
Calculation and 2023 Top-Off Payment Instructions
Page 3 of 7
Option C: Employer can’t isolate SF claims, and can’t match up nationwide hours with nationwide enrollment info. Employer may look at
total value of claims paid, then divide it by total # employees enrolled, multiplied by 2064 hours, to get average. Here, let’s use 950
employees enrolled nationwide.
Claims paid for all
employees enrolled
nationwide
hours (172/mo)
Average Hourly Expenditure
Compliance
$4,850,000 claims
paid for 950
employees enrolled
2064 Hrs. = 1,960,800 Hrs.
$4,850,000 / 1,960,800 Hrs. = $2.47
per Hr.
$2.47 does not meet the 2023 Large
Employer rate of $3.40.
*Total # employees
enrolled during
calendar year,
regardless of length
of enrollment.
since e’er does not know
actual payable hours for
enrollees.
Calculation:
Total Claims Paid / Total Payable
Hours
Employer must make additional
expenditures of $.93 per Hour Payable to
each employee covered by the HCSO.
HCSO Rule 5.9 explains how the above calculations are done when the uniform plan is self-funded. If the employer pays monthly premiums,
follow 5.9(a) and does not need to use the annual calculation above. Most self-funded plans, in which the employer pays claims as they are
incurred, will follow the instructions in 5.9(b).
5.9(b) s
tates that to be compliant, the employer must demonstrate that the preceding year’s average hourly expenditures meet or exceeds that
year’s expenditure rate.”
OLSE interprets Rule 5.9(b) to mean that a self-funded or self-insured uniform health plan may comply when the employer pays claims as
they are incurred, and that calendar year’s average hourly expenditures meet or exceed that calendar year’s expenditure rate for that
employer.
For example, in early 2024, when an employer is assessing the cost of its 2023 health plan, the employer must determine whether the 2023
average hourly expenditures meet or exceed the 2023 expenditure rate. In 2025, when an employer assesses the cost of its 2024 health plan,
the employer must determine whether the 2024 average hourly expenditures meet or exceed the 2024 expenditure rate.
Self-funded Insurance Plans:
Calculation and 2023 Top-Off Payment Instructions
Page 4 of 7
Please note the following regarding expenditures:
• Count only claims paid in 2023 (not claims incurred)
• Some types of reasonable fees, such as stop loss insurance, may be included as expenditures in the calculations.
• If employer received a refund or credit for a “good claims year,” that amount may not be included in the expenditure calculation.
Top-off payments:
Rule 5.10(3) requires that where the calculations show that the employer’s average expenditures for a self-funded plan fall short of the $3.40/hr
expenditure requirement, the employer must make a “top-off” payment by the end of February 2024. Remember that the top-off payment is
NOT part of the claims and is not counted towards the value of the plan.
Example:
Nationwide, Acme Employer has 200 full-time employees and 50 employees who all work 20hrs per week. 10 full-time employees and 5 part-
time employees work in San Francisco and are covered by the HCSO.
After completing the calculation above, Acme determines that its nationwide average hourly expenditure in 2023 was $3.13/Hr. This is $0.27 less
than the $3.40/hr expenditure requirement for Large Employers in 2023.
Payable Hrs in 2023 per
Employee
Shortfall
Employees in SF covered
by the HCSO
Total Due
Part time
86 x 12 = 1032
$0.27/hr x 1032 hrs =
$278.64/person
5
5 x $278.64 = $1,393.20
Full time
172 x 12 = 2064
$0.27/hr x 2064 hrs =
$557.28/person
10
10 x $557.28 = $5,572.80
Total
$6,966.00 in top off payments
Self-funded Insurance Plans:
Calculation and 2023 Top-Off Payment Instructions
Page 5 of 7
Who to make top-off payments for:
• Only employees covered by the HCSO are entitled to a top-off payment. For example, if the employer calculated by utilizing a
nationwide average, and the plan fell 10 cents short of the required expenditure, employer must make a top-off payment of 10 cents per
hour for its San Francisco employees only.
• For employees entitled to a top-off payment, the payment shall be made on a pro-rata basis based on the number of hours worked by
that employee during the year. This ensures that full-time employees and part-time employees get a proportionate percentage of the
top-off and that employees who worked the full year receive more than employees who separated from employment during the year.
How to make top-off payments:
• Payments that can count toward the HCEs for 2023 include:
(1) Deposits to the employee’s Health Savings Account; or
(2) Deposits to the SF City Option program
on behalf of the employee; or
(3) Any other type of irrevocable health care expenditure.
• Employers must ensure that the top-off payments can be distinguished, via recordkeeping, from other HSA/City Option payments made
for the employee to comply with the HCSO in 2024.
• Regarding the SF City Option program, please note:
o It may be utilized for former employees.
o Employees enrolled in the employer’s health insurance plan will be eligible for the Medical Reimbursement Account (MRA)
program and can use your payment to offset their costs for premiums and other out of pocket medical expenses.
Refunds
• If employer receives a refund or credit for a “good claims year,” the amount refunded may not be included in the expenditure
calculation. How should the employer handle this?
• If employer receives the refund (or confirmation from the carrier of what the refund amount will be) prior to the end of February, the
employer may:
o Choose not to accept the refund/credit;
o If the employer accepts the refund/credit, it must subtract that amount from the “claims” amount.
o If the employer receives the refund (or confirmation from the carrier of what the refund amount will be) after it’s done its February
calculations, it must do a second round of top-off payments to the HCSO-covered employees.
Employer should complete the second round of calculations and top-offs within thirty days of getting confirmation of
the amount from the carrier.
Self-funded Insurance Plans:
Calculation and 2023 Top-Off Payment Instructions
Page 6 of 7
• Example of top-offs with refunds:
o In February 2024, Acme Co. calculated a $.83/hr shortfall for its 2023 plan and made its top-offs accordingly. However, in May
2024, Acme receives a refund from its carrier. Acme recalculates the value of its self-funded plan in 2023 and determines that
the true shortfall was actually $.93/hr.
o Employer must now pay an additional $.10/hr to the same employees it topped off in February.
Records of Compliance
• The HCSO requires employers to keep records of compliance for a four-year period. Self-funded employers should keep records of the
backup data used to perform the calculations of the hourly expenditures (record of claims paid, enrollment records, etc) as well as the
calculation method. These will be requested by OLSE in the event of an audit. The employer should also keep record of the top-off
payments made and the calculations for the individual employees who receive those payments.
Best practices:
• Communicate with employees!
o Notify current and former employees, in writing, about the top-off payment. Tell employees what the employer’s spending was
on the self-funded plan, the dollar amount of the top-off payment, and where the payment will be made.
o If the payment is being made to the SF City Option program, inform employees that they’ll need to set up an account in order to
use the funds (more info here
).
o Employers are encouraged to use the Sample Letter to Employees Regarding HCSO Top-Off Payments developed by OLSE.
o During open enrollment, let employees know which plans are self-funded at what that means regarding the other benefits they
may or may not receive during the year.
o If employees are not aware of your top off, they may believe that the employer did not comply with the HCSO.
• Have a knowledgeable point person who can answer inquiries from employees and OLSE!
o Both employees who receive a top-off payment and employees who do not receive a top-off payment are likely to have
questions regarding why they are/are not getting a payment, and how it was calculated.
o If employees cannot get their questions answered by their employer or benefits administrator, they are likely to contact OLSE. If
OLSE also cannot get questions answered in a timely manner, the employer is likely to be audited.
• Be proactive next year by making top-off payments in advance, if the employer anticipates a shortfall
o For example, if an employer has employees who are enrolled in a self-funded dental plan only, the employer has the full
calendar year to calculate the value of its plan. However, the employer knows it will have a large shortfall resulting in a large
Self-funded Insurance Plans:
Calculation and 2023 Top-Off Payment Instructions
Page 7 of 7
lump sum payment due in February. The employer can choose to distribute that expense throughout the year by making
quarterly City Option payments throughout the year.
Example: annual required spend in 2023 for a FT employee was $7,017.60. The employee is enrolled only in the employer’s self-funded dental
plan, the value of which is TBD during 2023. Employer makes a $1500 City Option payment in Q1, Q2, and Q3 for a total of $4,500 in advance
top-off payments made. At the end of 2023, employer values its dental plan at an average of $.53 cents/hr or $1,102.40 spent on that
employee’s dental plan throughout the year ($.53 cents times 2080 hours). $7,017.60 - $4,500 - $1,102.40 = $1,308.80 top off payment owed by
end of February 2023.
Although the employer is permitted by Rule 5.10 to wait until the end of February 2024 to address the shortfall, if it chose to do so without
making additional contributions throughout the year, the employer would then be required to make a significant top off payment of $5,915.20
($7,017.60 - $1,102.40). Advance payments are not required, but many employers find that they help spread the cost throughout the year and
also benefit employees during the calendar year, particularly if they have a large number of SF employees enrolled in only dental.