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New ERISA Ruling on San Francisco’s Health Access Program

In late September, the federal Ninth Circuit Court of Appeal, reversing a lower court ruling, held that ERISA does not preempt San Francisco’s “pay or play” law requiring large- and medium-sized employers to spend a specified amount on employee health care or help to finance the city’s health care access program.[1]

 A 2007 San Francisco ordinance requires for-profit employers with 20 to 99 employees and non-profit employers with at least 50 employees to spend at least $1.17/hour on employee health care; for-profit employers with 100 or more employees are required to spend at least $1.76/hour. Such spending can include an array of options such as health insurance, reimbursement for employee health spending, funding Health Savings Accounts, or payments to the city. Payments to the city entitles workers to participate in the city’s “Health Access Program,” its public clinic and hospital system, or, for employees living outside the city, finances accounts to help them pay for obtaining health care elsewhere.

The Golden Gate Restaurant Association challenged the ordinance on the grounds that it was preempted by ERISA and at the end of 2007, a federal district court agreed. Recently, the Court of Appeals reversed the lower court’s decision.  In a detailed opinion, the Court of Appeals held that ERISA does not preempt the local ordinance because it does not require employers to establish or alter ERISA plans because employers can pay all or part of the assessment to the city (specifically holding that this public program is not itself an ERISA plan). The court noted that the ordinance does not specify the benefits employers must include in any ERISA plan they choose to establish. The Court also specifically distinguished the Maryland “Fair Share Act” (requiring large employers to spend at least 8 percent of their payroll on employee health care or pay the difference between this amount and its actual spending to the state’s Medicaid program) and the analysis of the fourth Circuit Court of Appeals that held ERISA preempts that state law.[2] The Ninth Circuit held that, because the Maryland law applied only to Wal-Mart, whose employees would not benefit from any payment made to the state, Wal-Mart faced no practical option but to expand its existing ERISA plan to meet the spending requirement, which doomed the law to preemption. Employees in San Francisco, however, would directly benefit from employer payments to the city by eligibility for the city’s health care program or health care reimbursement accounts for services purchased outside the city. Therefore, the Court held, the San Francisco law provides a real alternative for employers to creating or altering an ERISA plan and is not preempted.

While the restaurant association has requested a rehearing before the full Court of Appeals, and the Supreme Court may ultimately review this case, this decision currently is helpful to state health policy makers considering pay or play laws, especially in contrast to the Fourth Circuit Maryland case. To fit within the reasoning of this decision, such laws should apply to a large set of employers, allow employers to satisfy the spending requirement with a broad array of possible health expenditures (with no constraints on the types of benefits reimbursed), and fund a public health care access program with these revenues that directly benefits workers of employers that choose to pay the assessment.