1. Q: What is a Health Care Surcharge?
A: If a Covered Employer imposes a surcharge on its customers to cover, in whole or in part, the costs of the health care expenditure requirement, the Covered Employer will be required to report two pieces of data to the OLSE during the annual reporting process: 1) the amount of money collected from the surcharge for employee health care and 2) the amount of money spent on employee health care.
If the amount collected from the surcharge is greater than the amount spent on employee health care, the Covered Employer must irrevocably pay or designate an amount equal to that difference for health care expenditures for its Covered Employees. OLSE may refer any potential cases of consumer fraud to appropriate authorities.
2. Q: Does the City of San Francisco require employers to impose surcharges? Or prohibit employers from doing so?
A: Neither. Employers impose such surcharges at their discretion. The City neither requires nor prohibits them.
3. Q. If an employer elects to impose such a surcharge, does the HCSO establish any standards or requirements?
A. Yes. A surcharge provision – along with several other changes – was added to the HCSO by the Board of Supervisors and the Mayor in late 2011 and took effect on January 1, 2012.
4. Q. Who does this provision apply to?
A. The provision applies to any “covered employer” (i.e. any employer subject to the HCSO) who “imposes a surcharge on its customers to cover in whole or in part the costs of the health care expenditure requirement” of the HCSO. The “health care expenditure requirement” provides that covered employers must make health care expenditures to or on behalf of their “covered employees” each quarter.
5. Q. What does the provision do?
A. The provision has two parts.
First, any covered employer who “imposes a surcharge on its customers to cover in whole or in part the costs of the health care expenditure requirement” must report two pieces of information to the OLSE on an annual basis:
• the amount collected from the surcharge for covered employee health care, and
• the amount spent on covered employee health care.
(Commencing with the 2012 reporting year, the OLSE integrated this information into the Annual Reporting Form, which all businesses are required to submit to the OLSE by April 30th of each year.)
Second, if the amount collected from the surcharge is greater than the amount spent on covered employee health care, the employer must irrevocably spend or irrevocably designate the excess surcharges on health care for these covered employees.
6. Q. How does an employer “irrevocably” spend or irrevocably designate these funds for its covered employees?
A. Among the common ways to irrevocably spend money on health care are: providing health insurance (including dental and vision insurance), making contributions to the City Option, and reimbursing employees for out-of-pocket medical expenses (including reimbursements paid from a reimbursement account).
Although funds allocated to reimbursement accounts may constitute valid health care expenditures for the purpose of meeting the HCSO’s general spending requirement, such allocations do not count as irrevocable expenditures within the meaning of this surcharge provision unless they meet the following conditions:
• the funds are made available to the employee in perpetuity (including after the employee separates from employment and after the employer ceases doing business), and
• any agreement governing the terms of the allocations shall not permit the employer to revoke the funds.
7. Q. Is there a deadline by which employers must irrevocably spend these funds for its covered employees?
A. Yes. The OLSE is providing employers with a full calendar year to irrevocably spend excess surcharges collected. Be aware that an employer must spend the excess surcharge funds in the following year in addition to spending any health care surcharge funds collected in that year.
For example, if an employer collected $50,000 in health care surcharges in 2012, but spent just $40,000 on covered employee health care during the year, the employer is required to spend the $10,000 difference on health care for covered employees (in addition to spending any health care surcharges collected in 2013) by December 31, 2013.
8. Q. Should my business stop collecting a health care surcharge?
A. It remains at the discretion of any business to decide whether to impose a health care surcharge or not. However, if your business collected excess health care surcharges in a particular year, you may want to consider reducing or eliminating your health care surcharge in the following year to help ensure that you can irrevocably spend the excess surcharges collected in the prior year.
9. Q. How will the OLSE determine whether my business satisfied the obligation to irrevocably spend excess surcharges for my covered employees in the following year?
A. The OLSE will make this determination based on the information your business provides on the Annual Reporting Form you submit to our office by April 30th of each year plus any supplemental information we may request.
10. Q. Are businesses supposed to charge sales tax on any such health surcharge?
A: The OLSE does not enforce tax laws nor provide tax advice. However, on May 1, 2009, the State Board of Equalization issued a Special Notice (PDF) entitled “Sales Tax Applies to the San Francisco Health Care Security Ordinance (SFHCSO) Surcharge.”
If you have further questions about the taxability of surcharges, please call the State Board of Equalization’s Taxpayer Information Section at (800) 400-7115.
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