San Francisco HCSO Funds May be Used for Non-Healthcare Expenses Use Health Funds for Basic Life Necessities San Francisco’s Mayor has announced a plan to allow employees in San Francisco to use employer-contributed funds under the city’s Health Care Security Ordinance (HCSO for necessary expenses such as food, rent, utilities, and other basic needs, in addition to eligible healthcare expenses, during the pandemic. HCSO is a law requiring covered San Francisco employers to make healthcare expenditures on behalf of their workers. Employers would not be required to make additional contributions under this plan for non-healthcare expense, however, they are not excused from their existing HCSO obligations. The Reason City officials clarified that this move was made to acknowledge that in the COVID-19 era public health extends beyond traditional healthcare expenses to basic life needs. As such, the $138 million in deposits to the SF City Option Medical Reimbursement Accounts will be made available for expanded basic needs purposes to over 100,000 covered employees. Overview FSA plans with a grace period provision may be amended to permit employees to use amounts remaining in their health FSA or Dependent Care FSA for eligible expenses incurred up to December 31, 2020. Similarly, non-calendar year plans may be amended to permit employees to use amounts remaining in their health FSA or Dependent Care FSA for eligible expenses incurred up to December 31, 2020. Impact on COBRA While not specifically addressed in the notice, the COBRA law is structured to apply the “similarly situated employee” rule for most all COBRA administration purposes. Thus, until and unless guidance is expressly provided to the contrary, employers would be wise to take the conservative approach and assume that expanding election options for active employees also cascades to COBRA Qualified Beneficiaries. This is particularly important as it relates to employers considering allowing employees to elect coverage mid-year (if previously declined) or change health plans (switch plans or add dependent coverage). The Question of Taxation An important tax conundrum results from the Mayor's order. How are funds distributed for basic life needs (as opposed to for healthcare purposes) to be taxed? The nature of the HCSO Medical Reimbursement account leverages federal and state tax code that allows for tax-free distribution of funds for healthcare expenses. As critical and foundational as having funds for basic life expenses is during this time, there is no corresponding tax exemption for such distributions. Therefore, in the absence of future legislation otherwise, it should be assumed that such distributions would be taxable to the recipient.
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