San Francisco HCSO, OB3, And What Employers Need To Know For 2026
When it comes to employee benefits, the insurance plan itself is only the beginning. For employers with employees in San Francisco, and for those trying to understand new federal rules under the One Big Beautiful Bill Act (OB3), the compliance side can feel overwhelming.
In a recent educational session, AEIS, Inc. President Ron Bland and Senior Advisor Dillon Castro sat down with our Compliance and Technology Officer, Elizabeth Kay, to walk through two big topics in plain English:
- The San Francisco Health Care Security Ordinance (HCSO)
- Key health and benefit changes under One Big Beautiful Bill Act (OB3)
Who The San Francisco HCSO Actually Applies To
The San Francisco Health Care Security Ordinance has been in place since 2008, but many employers still misunderstand when it applies.
The HCSO applies if:
- You are a for-profit employer with 20 or more employees, or
- You are a nonprofit with 50 or more employees, and
- You have at least one employee working within the geographic boundaries of the City and County of San Francisco.
A few important nuances Elizabeth highlighted:
- Employee count is global. If you have 20+ employees worldwide and even one person working in San Francisco, HCSO applies to that covered employee.
- Remote and home-based workers count. If a San Francisco based employee works from home, that still counts as work within the city.
- Control groups are combined. Companies with shared ownership, husband and wife owned businesses, and certain affiliated groups may have to aggregate their headcounts to determine if they cross the 20 / 50 / 100 employee thresholds.
Required Health Care Expenditures Under HCSO
For covered employers, HCSO requires a minimum hourly health care expenditure for covered employees working in San Francisco:
- Employers with 20-99 employees (for-profit) or 50-99 (nonprofit) must contribute at least:
- $2.74 per hour in 2026
- Employers with 100+ employees must contribute at least:
- $4.11 per hour in 2026
This applies only to hours worked within San Francisco, but the employer size test looks at the entire group, including affiliated or commonly owned companies.
Who Counts As A Covered Employee
Under HCSO, an employee is generally “covered” if they:
- Are entitled to minimum wage,
- Have worked at least 90 calendar days for the employer, and
- Regularly work at least 8 hours per week within San Francisco in a given quarter.
Job title or classification does not change eligibility. Seasonal, part-time, full-time, commissioned, union, non-union, exempt or non-exempt, salaried or hourly – if they meet the basic criteria and are working in San Francisco enough hours, they are typically covered.
There are some exemptions, including:
- Employees who voluntarily waive HCSO rights each year using the city’s waiver form and have other qualifying coverage (through a spouse, Medi-Cal, Medicare, another employer, etc.).
- Certain managers, supervisors, and confidential employees who meet both a salary threshold and a duties test for 2026.
What Counts As An Acceptable Contribution
Employers can meet their HCSO obligation in a few ways:
- Premium Contributions
- Contributions toward medical, dental, or vision premiums, whether fully insured or self-funded.
- Employer dependent premium contributions can count as well.
- For age-rated plans with percentage contributions, employers may calculate an average employer contribution per employee to test against the HCSO hourly minimums.
2. Medical Reimbursement Accounts (MRAs)
- For employees who are not on the group health plan but are still HCSO-eligible, employers can fund a city approved medical reimbursement account.
- Contributions are made quarterly via file upload and ACH, and employees can use those funds for qualified medical expenses like copays, prescriptions, dental work, and eyeglasses.
Practical Scenarios Elizabeth Clarified
Elizabeth walked through real-world examples that often cause confusion:
- Delivery drivers who spend more than eight hours per week delivering within San Francisco can become covered employees under HCSO, even if the company has no physical office in the city.
- Transit through the city (for example an airport shuttle driving through San Francisco without picking up or dropping off) generally does not trigger HCSO, as long as the driver is not stopping to perform work there.
- Seasonal workers can qualify in their second season very quickly, since prior calendar days count toward the 90-day threshold if they return within 12 months.
Annual Reporting And Notices
Employers subject to HCSO must also:
- File an annual HCSO expenditure report with the City of San Francisco (reporting prior year premiums and MRA contributions), and
- Comply with notice requirements, including posting the official HCSO poster and providing notice to remote employees who work in San Francisco.
OB3: The One Big Beautiful Bill Act
The second half of Elizabeth’s presentation focused on OB3, signed into law on July 4, 2025. Not all changes take effect immediately, and many roll out in 2026, 2027, and beyond, so it is important for CFOs and HR teams to understand the timeline.
Some of the key changes she highlighted:
1. Telehealth And HSA Eligibility
- The temporary pandemic relief rules for telehealth on HSA-qualified plans are now made permanent, retroactive to December 31, 2024.
- Employees enrolled in an HSA-qualified high deductible health plan (HDHP) can access telehealth with low or no copays without losing HSA eligibility.
2. Direct Primary Care And HSAs
- Direct primary care (concierge) fees can now be paid without impacting your HSA eligibility:
- $150 per month for an individual, or
- $300 per month for more than one person.
- Having a direct primary care arrangement will no longer disqualify an otherwise HSA-eligible individual, starting for plan years beginning after December 31, 2025.
3. Dependent Care FSA Limit Increases
- The long-standing $5,000 annual limit for dependent care FSAs is finally increasing.
- New limits:
- $7,500 per year for joint filers,
- $3,750 for a single parent or per parent when filing separately.
- Applies to plan years beginning after December 31, 2025.
4. ACA Premium Tax Credits Reverting
- The enhanced ACA premium tax credit formula that capped costs at around 8 percent of household income is set to sunset at the end of 2025.
- Beginning in January 2026, the original ACA credit formula returns, which may:
- Reduce subsidies for many enrollees, especially older individuals.
- Encourage dependents who had migrated to the individual marketplace to return to employer sponsored plans for more affordable coverage.
- States may choose to offer their own state-funded tax credits for some income ranges, but these will not be federally funded.
5. Stricter Exchange Verification And Clawbacks
Starting in 2026, with full implementation by 2028:
- Pre-enrollment verification of income and immigration status will become stricter and faster.
- Individuals will be fully liable for any excess advance premium tax credits after January 1, 2026, meaning 100 percent of overpaid subsidies can be clawed back if income is misstated or not updated.
6. HSA Eligibility For Certain Exchange Plans
- Bronze and catastrophic individual marketplace plans become HSA-eligible, even if they have first dollar benefits like office visit copays.
- This applies only to individual exchange plans, not employer sponsored plans.
7. Other Notable Changes
Elizabeth also covered additional provisions, including:
- Student loan repayment: Employers may continue to make up to $5,250 per year in tax free student loan payments.
- Transportation benefits: Salary reduction benefits for bicycle commuting will no longer be tax free for plan years beginning after December 31, 2025.
- Premium tax credits and special enrollment events: Premium tax credits will no longer be available for people who enroll midyear solely due to a change in household income. In many cases, they will need to wait until open enrollment.
- Medicaid / Medi-Cal work requirements: Some individuals may be required to work at least 80 hours per month to maintain eligibility, phased in through 2028, with more guidance to come.
- Paid family and medical leave tax credit: Permanently extended.
- Employer provided childcare credit: Increased from $150,000 to $500,000, starting after December 31, 2025.
Open Enrollment: A Quick Compliance Checklist
Because these changes are arriving during a busy open enrollment season, Elizabeth closed with a reminder list of items employers should review annually:
- Plan documents and SPDs (including Section 125 / Premium Only Plan documents)
- Annual required notices, including Marketplace Exchange Notices to new hires
- COBRA initial notice and ongoing administration
- Summary of Benefits and Coverage (SBC) for medical plans, and in California, dental SBCs
- Medicare Creditable Coverage reporting to CMS within 60 days of the plan year start
- Pharmacy reporting (confirm whether the carrier or TPA is handling this)
- Broker compensation disclosure from your benefits advisor, as part of your fiduciary duty and DOL audit readiness
Need Help Applying This To Your Organization?
Every employer’s situation is a bit different. Factors like multi-state operations, fractional or part-time staff, control groups, and remote employees layered on top of local mandates and OB3 can make compliance feel like a puzzle.
That is where we come in.
AEIS, Inc. helps employers:
- Understand when laws like HCSO and OB3 apply to them,
- Design cost effective, compliant benefit strategies, and
- Stay audit-ready, not scrambling.
If you would like to talk through your specific scenario, or schedule a deeper dive for your leadership team, you can reach us anytime.
Disclaimer: Any information related to compliance, laws and regulations, or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.
