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This guest post was authored by Heather L. DeBlanc

This morning, the United States Supreme Court issued its decision in National Federation of Independent Business v. Sebelius addressing the Patient Protection and Affordable Care Act (“ACA”).1 The Court upheld, in a 5 to 4 ruling, the constitutionality of the individual mandate under the ACA.  Chief Justice John Roberts wrote the majority opinion for the Court addressing the ACA’s individual mandate and the Medicaid provisions.2 This alert focuses on the ruling with regard to the individual mandate.

The Individual Mandate

 The individual mandate requires that all persons obtain minimum essential health insurance coverage or face a penalty (shared responsibility payment) to be collected by the Internal Revenue Service beginning in 2014.  Likewise, large employers that do not offer coverage or provide “adequate” health insurance will face a shared responsibility payment called an assessable payment.

In upholding the individual mandate as constitutional, the Court addressed two issues: (1) whether Congress has the power to enact the individual mandate pursuant to the Commerce Clause, and (2) whether the individual mandate constitutes a valid exercise of Congress’ power to tax.

With regard to the first issue, the Government argued that the individual mandate is within Congress’ power under the Commerce Clause because the failure to purchase insurance has a substantial and deleterious effect on interstate commerce by creating a cost-shifting problem.  The Court rejected this argument finding that although the Commerce Clause authorizes Congress to regulate interstate commerce, that power does not extend to ordering individuals to engage in commerce.  It reasoned that “construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority.”

Although the Court did not uphold the individual mandate under the Commerce Clause, it upheld the law as a valid exercise of Congress’ power to tax.  It explained the distinction it made with the Anti-Injunction Act, where it held the shared responsibility was not a tax.  The fact that the ACA labels the payment as a penalty is fatal to the Anti-Injunction Act, but this was not determinative as to whether the payment could be reasonably construed as an exercise of Congress’ taxing power.

The Court followed a functional approach in finding that the individual mandate was a tax rather than a penalty that seeks to impose punishment for unlawful conduct.  The Court reasoned that the ACA does not attach negative legal consequences to an individual for failing to buy health insurance beyond requiring that the individual make a payment to the IRS – “if someone chooses to pay rather than obtain health insurance, they have fully complied with the law.”

Effect on Employers

In upholding the individual mandate, today’s ruling left provisions of the ACA affecting employers unchanged, including:

  • Large employers who fail to offer minimum essential coverage or who do not offer affordable coverage will owe an assessable payment to the IRS;
  • Health plans may not impose any pre-existing condition exclusions;
  • Employers must report the aggregate cost of employer-provided health care coverage on Form W-2’s;
  • Employers must ensure that participants receive a Summary of Benefits and Coverage; and
  • Employers must report to the IRS regarding the coverage offered.

1  The decision can be found at: http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf

2 The Court found that ACA’s Medicaid expansion violates the Constitution to the extent it threatens States with the loss of their existing Medicaid funding if they decline to comply.