1. Q: What is an Irrevocable Expenditure?
A. An Irrevocable Health Care Expenditure is a Health Care Expenditure that has not been retained by and cannot at any time be recovered by or returned to the employer. This means that the employer cannot recover any portion of the funds, even if the employee leaves the job or if the business ceases to operate.
A few examples of Irrevocable Expenditures include:
- Payments to an insurance provider for medical, dental, or vision insurance premiums
- Contributions to the City Option; and
- Contributions to Health Savings Accounts, Medical Savings Accounts, or other irrevocable reimbursement accounts.
2. Q: What is a Revocable Health Care Expenditure?
A: A Revocable Health Care Expenditure is a Health Care Expenditure that the employer has “allocated for use by a Covered Employee but not actually paid to the employee, or any amount actually paid to a third party administrator that could revert to the employer at any point.” None of money actually has to revert to the employer for the Health Care Expenditure to be revocable. Rather, the entire expenditure is considered revocable if there is the possibility that any or all of it could be returned to the employer.
Employer contributions to a revocable Health Reimbursement Account (also referred to as a Health Reimbursement Arrangement or HRA) are the most common type of Revocable Health Care Expenditures. An expenditure made to an HRA is considered revocable if the employer allocates the funds as a debit on its books, but does not actually pay the allocated funds into a separate account on the employee’s behalf within 30 days of the end of each quarter. An HRA is also considered revocable if any amount of the employer’s Health Care Expenditure could be returned to the employer at any point, such as when the employee leaves the job or an employer contribution “expires.” HRAs can also be structured to be irrevocable, provided they do not have either of these features.
Please note that the federal Affordable Care Act placed significant restrictions on the use of stand-alone HRAs effective January 1, 2014. Please see Section O, Question 1(a).
3. Q: Can an employer choose whether to make Revocable or Irrevocable Expenditures?
A. Yes, but only in part, and only for Hour Payable through January 1, 2017. The San Francisco Board of Supervisors amended the HCSO in July 2014 to phase out Revocable Health Care Expenditures. by 2017.
a) For 2015, at least sixty percent (60%) of the required amount of Health Care Expenditures for each Covered Employee must be made as Irrevocable Expenditure
b) For 2016, at least eighty percent (80%) of the required amount of Health Care Expenditures for each Covered Employee must be made as Irrevocable Expenditures
c) For Hours Payable on and after January 1, 2017, only Irrevocable Health Care Expenditures shall be counted toward the Employer Spending Requirement.
As an example, if a Covered Employee of a Large Employer was paid for 516 Hours Payable in the first quarter of 2015, the Required Health Care Expenditure would be 516 x $2.48 (the applicable rate for Large Employers), or $1,279.68.
The employer could choose to spend 60% of the Required Expenditures, or $767.81, on health insurance premiums paid to an insurance company (an Irrevocable Expenditure). The employer could then make revocable allocations to an HRA with the remaining 40%, or $511.87 (subject to the limitations of the federal Affordable Care Act and in accordance with the description below in Question 4).
4. Q: Are there any other limitations on counting Revocable Health Care Expenditures toward the Employer Spending Requirement in 2015 and 2016?
A: Yes. A Revocable Health Care Expenditure only counts towards the Required Expenditures if all of the following four requirements are also met:
- The expenditure is reasonably calculated to benefit the employee (see Section F, Question 5, Section O, Question 3(f); and Section P, Question 2); and
- No portion of the expenditure can be returned to the employer before a specified amount of time has elapsed (typically 24 months, see Section F, Question 6); and
- The Covered Employee receives an expenditure summary notice within 15 days of the employer’s expenditure, including all of the information described in Section F, Question 8; and
- The Covered Employee that separates from employment receives a separation notice within 3 days that includes all of the information described in Section F, Question 10.
Note that even if all of the above conditions are met, Revocable Expenditures can only comprise 40% of Required Expenditures for a given employee for Hours Payable in 2015, and 20% for Hours Payable in 2016.
5. Q: How does the OLSE determine whether a Revocable Health Care Expenditure is “reasonably calculated to benefit the employee”?
A: If an employer chooses to make Revocable Expenditures to an “excepted benefits Health Reimbursement Account," described in Section O, the expenditure must satisfy the criteria outlined in that section to be “reasonably calculated to benefit the employee.”
For other types of Revocable Health Care Expenditures, the OLSE will conduct a fact-specific assessment of the expenditure to determine whether it is reasonably calculated to benefit the employee. Among other factors, OLSE may consider whether the benefit meaningfully improves access to Health Care Services and the extent to which employees actually used the benefit.
6. Q: What is the minimum length of time a Revocable Expenditure needs to be available before the employer can reclaim unused funds?
A: Revocable Expenditures count toward the Employer Spending Requirement provided the employer does not reclaim any part of the expenditure before the earliest of:
a) 24 months from the date of the expenditure; or
b) 90 days after the employee separates from employment; or
c) For Revocable Expenditures made for Hours Payable prior to January 1, 2014, the date that the Covered Employee knowingly, voluntarily, and permanently waives in writing the unused portion of such expenditure. (See Question 7 in this section for more information about employee waivers).
Consider the following example: If the employer makes a Revocable Health Care Expenditure to an HRA on April 15, 2014, and the employee on whose behalf the employer made the contribution remains employed, then no portion of the contributed funds can be reclaimed by the employer before April 15, 2016, or else that expenditure will not count toward the Employer Spending Requirement. In other words, the funds must remain available to the employee to seek reimbursement from those funds for eligible expenses incurred anytime between April 15, 2014 and April 15, 2016.
To count toward the Employer Spending Requirement, Revocable Expenditures must be provided to the employee on a “first-in-first-out” basis. For example, if an employee has access to revocable funds in an HRA, any reimbursement must be debited from the oldest contribution first (i.e., the one set to expire soonest).
7. Q: Can an employee waive Revocable Expenditures allocated to an HRA?
A: Generally no, with one limited exception. Beginning July 26, 2014, an employee may permanently waive the unspent balance of any HRA funds that the employer contributed prior to January 1, 2014. The employee must use the OLSE’s Employee Voluntary HRA Opt-Out Form (PDF) to ensure that the employee understands his/her rights under the HCSO and that the waiver is a knowing and voluntary one. Other forms cannot be used in lieu of the City’s Employee Voluntary HRA Opt-Out Form.
The Employee Voluntary HRA Opt-Out Form is only valid if the form is completed by the employee without pressure or coercion from coworkers, the employer, or anyone connected to the employer.
8. Q: Are there any specific requirements for the written summary of the Revocable Expenditure?
A: Yes. Employers are required to provide written summaries of Revocable Health Care Expenditures (“Expenditure Summaries”) to Covered Employees within 15 days of the date the employer makes the expenditure. The Expenditure Summary must include the following information:
- The name, address, email address, and telephone number of any third party to whom the expenditure was made; and
- The date and amount of the expenditure; and
- The account balance if the benefit is a revocable HRA; and
- A summary of how the benefit may be used, including types of health care services available; and
- Restrictions on using the revocable benefit; and
- The date on which any portion of this benefit may be revoked.
OLSE developed a sample Revocable Expenditure Summary, which Covered Employers are permitted, but not required, to use as a model.
9. Are there any rules regarding how the employer must distribute the Revocable Expenditure Summary? For example, can it be sent electronically?
A: The distribution of Revocable Expenditure Summaries is not limited to any particular method, but it is the Covered Employer’s obligation to ensure that the Revocable Expenditure Summaries are provided to employees. Moreover, Covered Employers are obligated to keep all records necessary to establish compliance with the HCSO, including copies of the Revocable Expenditure Summaries.
10. Q: Are there any specific requirements for the written summary of the contribution under the HCSO?
OLSE developed a sample Separation Notice (PDF), which Covered Employers are permitted, but not required, to use as a model.
A: Yes. In order for a Revocable Expenditure to qualify as a Health Care Expenditure, the following two conditions must be met when an employee leaves the job:
First, any unused portion of a Revocable Expenditure must remain available for at least ninety days after the date of separation.
Second, the employee must receive, within three days following the separation, a written notice (“Separation Notice”) that includes:
a) a summary of how the benefit may be used, including types of Health Care Services available; and
b) the account balance if the benefit is a revocable HRA allocation; and
c) restrictions on using the Revocable Expenditure; and
d) the date(s) on which the remaining portion(s) of the benefit will be revoked.
11. How should a Covered Employer using Revocable Expenditures handle a Health Care Expenditure that the separating employee has earned, but the employer has not yet contributed as of the separation date?
A: A Covered Employee may be entitled to Health Care Expenditures for the quarter in which the employee separates from employment based upon the Hours Payable prior to the separation.
The Covered Employer may satisfy this obligation in two ways. First, the Covered Employer may make the unmade contribution at the time of separation, in which case an accounting of this contribution must be included in the Separation Notice.
Second, the Covered Employer may make a post-separation contribution on its usual schedule, which must be no later than 30 days after the end of the quarter. If the Covered Employer elects to make this final Health Care Expenditure after the separation, the following three criteria must be met:
a) The Separation Notice must indicate that the Covered Employee is entitled to a final Health Care Expenditure and when it will be made; and
b) The separated employee must be provided a Revocable Expenditure Summary within fifteen days of the post-separation contribution, and
c) The post-separation contribution must remain available to the separated employee for at least 90 days from the date of the contribution.
12. Q: Will a Covered Employer’s use of Revocable Expenditures to satisfy the Employer Spending Requirement trigger additional reporting requirements?
A: Yes. If a Covered Employer makes Revocable Expenditures to a reimbursement account to satisfy its obligation to make Health Care Expenditures for any of its Covered Employees, the Employer will be required to report to OLSE, on an annual basis, the terms of such accounts, including what medical expenses are eligible for reimbursement.
For 2014, employers who make contributions to revocable excepted benefits HRAs for more than an average of 20 hours per week will also be required to complete an addendum to the Annual Reporting Form, described in Section P, Question 4. OLSE will provide specific guidance and instructions with the Annual Reporting Form, which is typically released in March and is due on April 30th of each year.
13. Q: Do employer contributions to a Flexible Spending Arrangement count as Health Care Expenditures under the HCSO?
A: No. Funds contributed to a Flexible Spending Arrangement (also known as a Flexible Spending Account or FSA) only remain available to the employee for one calendar year. In order to qualify as a Health Care Expenditure under the HCSO, a Revocable Expenditure cannot be revoked for a minimum of twenty-four months (if the Covered Employee remains employed).
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