While the Court’s decision to hear the case is undoubtedly significant, it must be emphasized that the ACA will remain in place during this process. 

On March 2, 2020, the Supreme Court of the United States agreed to consider whether a legislative change to the individual mandate under the Affordable Care Act (ACA) rendered the entirety of the law unconstitutional. In addition to having significant political implications with the upcoming presidential election this fall, the Court’s decision to hear the case may create uncertainty for employers regarding their continuing obligations under the ACA. This Alert will detail the legal battle that awaits and the potential implications that it may have on employers.

Background

In California v. Texas, the key issue is whether the individual mandate became unconstitutional when the associated tax penalty was eliminated with the passage of the Tax Cuts and Jobs Act of 2017 (Tax Act).

When originally passed on March 23, 2010, the ACA required that individuals obtain medical coverage or face a tax penalty. The Supreme Court addressed the constitutionality of the individual mandate in 2012 in National Federation of Independent Businesses v. Sebelius. The Court held that the individual mandate was within Congress’ tax power: “The Federal Government does have the power to impose a tax on those without health insurance. [The individual mandate] is therefore constitutional, because it can reasonably be read as tax.”

The Tax Act became law on December 22, 2017, and reduced the ACA’s individual mandate penalty to zero, effective January 1, 2019. Following passage of the Tax Act, a group of 20 states sued the federal government in February 2018, seeking to have the entire ACA struck down. Two self-employed residents of Texas then joined the lawsuit to challenge the ACA, claiming that the individual mandate requires them to purchase health insurance that they otherwise would not buy, although there is no penalty if they fail to buy coverage.

At the trial court level, the federal government did not defend the constitutionality of the individual mandate and agreed with the state and individual plaintiffs that the individual mandate is no longer constitutional under Congress’ taxing power as a result of the Tax Act provision that set the financial penalty at zero. The district court found the individual mandate is no longer fairly readable as an exercise of Congress’ tax power. Therefore, the individual mandate was found to be unconstitutional. The district court then turned to the question of whether the individual mandate is severable from the rest of the ACA―or whether the entire ACA is unconstitutional due to the removal of the individual mandate.

The district court believed that Congress made the issue clear in 2010 when it stated: “The [individual mandate] requirement is an essential part of this larger regulation of economic activity, and the absence of the requirement would undercut Federal regulation of the health insurance market.” In other words, “The requirement is essential to creating effective health insurance markets in which improved health insurance products that are guaranteed issue and do not exclude coverage of pre-existing conditions can be sold.” Finding these statements of Congress to be unambiguous, the district court ruled the individual mandate to be inseverable from the act to which it is essential.

The case was then heard on appeal by the Court of Appeals for the Fifth Circuit, which issued a 2-1 decision finding the individual mandate unconstitutional and sending the case back to the district court for additional analysis about whether the rest of the ACA can survive. The Fifth Circuit agreed with the plaintiffs and the federal government’s assertion that the requirement to produce some revenue is essential to the Court’s earlier finding that the individual mandate could be saved as a valid exercise of Congress’ power to tax. Without that feature, the individual mandate is a command to purchase health insurance, which the Court found to be an unconstitutional exercise of Congress’ power to regulate interstate commerce.

Regarding the severability of the individual mandate from the rest of the ACA, the Fifth Circuit instructed the district court to employ a “finer-toothed comb” to conduct a more searching inquiry into which provisions of the ACA Congress intended to be inseverable from the individual mandate.

Next Steps

With the Supreme Court’s decision to hear the case, it will need to determine whether the individual mandate is constitutional in light of the change in the Tax Act and, if so, whether the individual mandate is severable from the rest of the ACA. It should be noted that the Court denied requests to expedite its decision about whether to take the case. Therefore, a decision will not be issued until the 2020-2021 term, which means that a ruling will not be issued until May 2021 at the earliest.

There are a number of potential outcomes from the Court’s review:

• The Court could affirm its prior ruling that the individual mandate is constitutional, even in light of the fact that the Tax Act reduced its penalty to zero. In such a scenario, the Court would not need to consider whether the individual mandate is severable from the rest of the ACA and the law would continue to exist in the same form as it exists today.
• The Court could find that the individual mandate (as amended by the Tax Act) is unconstitutional. If so, then the Court will need to decide whether the individual mandate is severable from the rest of the ACA (meaning that all or some of the nonindividual mandate provisions of the ACA would remain in place, despite the fact that the individual mandate itself was found to be unconstitutional) or whether the unconstitutionality of the individual mandate dictates that the entirety of the ACA must be overturned.

A finding that the individual mandate’s unconstitutionality renders the entirety of the ACA unconstitutional would have far-reaching consequences on nearly every American in some way. For example, the ACA’s protections for people with preexisting conditions would be eliminated, as well as the insurance marketplaces where millions have obtained health insurance since the passage of the ACA. Employers would also be significantly impacted by elimination of the mandate that employers with 50 or more full-time equivalent employees offer affordable health coverage to their full-time employees or face penalties. This would require employers to significantly rethink their existing benefit offerings and plan design.

While the Court’s decision to hear the case is undoubtedly significant, it must be emphasized that the ACA will remain in place during this process. Therefore, employers should not act as if the ACA has been eliminated at this time. The outcome of the ultimate decision by the Court is unknown and may or may not uphold the Fifth Circuit’s decision. Employers should continue to act in accordance with all of the ACA’s requirements―including, but not limited to, issues such as the offering of coverage to full-time employees and the annual reporting obligations.

Duane Morris attorneys in the Employee Benefits and Executive Compensation Group will continue to monitor these issues and provide updates on any process or changes.

For Further Information

If you have any questions about this Alert, please contact any of the attorneys in our Employee Benefits and Executive Compensation Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.