The ACA's Employer Mandate is Valid under Commerce Clause: Fourth Circuit

Practical Law Legal Update 1-534-3945 (Approx. 5 pages)

The ACA's Employer Mandate is Valid under Commerce Clause: Fourth Circuit

by Practical Law Employee Benefits & Executive Compensation

Background

Liberty University and other plaintiffs initially filed suit to challenge the ACA's:

Individual mandate, which requires individuals to purchase a minimum level of health insurance coverage.
Employer mandate, which requires certain employers to offer minimum coverage to their employees and their dependents (see Practice Notes, Employer Mandate under the ACA: Overview and Employer Mandate under the ACA: Determining Full-time Employees for Employer Penalties).

The district court upheld the constitutionality of both mandates. On appeal, however, the Fourth Circuit held that it lacked jurisdiction to hear the dispute, and remanded to the district court to dismiss the action (see Legal Update, Fourth Circuit Rejects Challenges to Individual Mandate on Jurisdictional Grounds).

In its June 2012 ACA decision (NFIB), the Supreme Court concluded that it had jurisdiction to hear a challenge to the individual mandate, and ruled that the individual mandate was a lawful exercise of Congress' taxing power (see Legal Update, Supreme Court Upholds the ACA's Individual Mandate). The Court did not review the constitutionality of the employer mandate. The Supreme Court subsequently granted the plaintiffs' petition for review of Lew, vacated the Fourth Circuit's judgment, and remanded for consideration in light of the decision in NFIB.

Outcome

The Fourth Circuit affirmed the district court's judgment, holding that:

The plaintiffs have standing to challenge the employer mandate, and the court has jurisdiction to hear the challenge.
In light of the Supreme Court's decision in NFIB, the employer mandate is a valid exercise of Congress' authority under the Commerce Clause.
The employer mandate's payment is a constitutional tax under Congress' taxing power.
The employer and individual mandates do not violate the First Amendment or the RFRA.

Jurisdictional Issues

On remand from the Supreme Court, the Fourth Circuit reconsidered its prior holding that it lacked jurisdiction because of the Anti-Injunction Act (AIA), an Internal Revenue Code rule that prohibits pre-enforcement actions to enjoin the collection of federal taxes. Following the reasoning in NFIB, the Fourth Circuit concluded that the AIA did not bar the action, because the employer mandate payment, like the individual mandate's "shared responsibility payment," was not a tax for AIA purposes.

The Fourth Circuit also held that the plaintiffs had standing to pursue their claim on the basis of potential and imminent harms stemming from the employer mandate and the compliance obligations it imposes. The court rejected the government's argument that the allegations of injury were merely speculative.

Constitutionality of the Employer Mandate under the Commerce Power

The Fourth Circuit held that the employer mandate is a valid exercise of Congress' authority under the Commerce Clause because the mandate regulates:

A term of employment (compensation) that substantially affects interstate commerce.
An activity (employee compensation) that substantially affects workers' interstate mobility, given that the availability of health insurance options through employers can affect individuals' employment choices.

Although five justices in NFIB stated that the individual mandate could not be sustained under the commerce power because it required individuals to engage in commerce (by purchasing health insurance coverage), the Fourth Circuit distinguished the employer mandate from the individual mandate on the grounds that it does not:

Seek to create commerce in order to regulate it, because employers by their nature are engaged in economic activity.
Require employers to purchase an unwanted product, because employers are free to self-insure.

Requiring employers to offer their employees a certain level of compensation through health insurance coverage, the Fourth Circuit noted, is similar to requiring employers to pay their workers a minimum wage or a certain rate for overtime hours, activities that the Supreme Court has previously upheld.

Constitutionality of Employer Mandate under Congress' Taxing Power

The Fourth Circuit also rejected the plaintiffs' argument that the employer mandate exceeded Congress' taxing power. The court concluded that, as with the Supreme Court's ruling on the individual mandate's payment in its ACA decision, the employer mandate's payment was properly characterized as a tax notwithstanding its labeling as a "penalty."

Applying the functional approach used by the Supreme Court in NFIB in analyzing the individual mandate, the Fourth Circuit noted that:

The employer mandate payment will generate revenue and is enforced by the IRS, rather than by another agency such as the DOL, and is paid to the Treasury.
The mandate lacks a scienter requirement and does not punish unlawful conduct.
The amount of the payment is proportionate rather than punitive, and leaves employers with a choice (that is, providing insurance or making the payment).

Given these characteristics, and the Supreme Court's conclusion in NFIB that the individual mandate's payment was a constitutional tax, the Fourth Circuit held that the employer mandate payment fell within Congress' taxing power. The court also concluded that the employer mandate payment is not a direct tax requiring apportionment among the states.

Religion-based Challenges to Employer and Individual Mandates

The plaintiffs also challenged the individual and employer mandates on religion-based grounds under the First Amendment and RFRA, alleging that the mandates forced them to violate their religious belief that they should play no part in funding or supporting abortions. The Fourth Circuit rejected both challenges, holding that the ACA does not violate the First Amendment's free exercise rights because it is a neutral law of general applicability. Regarding the RFRA, the Fourth Circuit concluded that the ACA does not substantially burden the plaintiffs' free exercise of religion by forcing them to facilitate or support abortion. The court observed that the ACA allows an individual to obtain, and an employer to offer, a plan that covers no abortion services at all.

The court rejected the plaintiffs' argument that the mandates themselves imposed a substantial burden, reasoning that the ACA contains strict safeguards at multiple levels to prevent federal funds from being used to pay for non-excepted abortion services.

In post-remand briefs, the plaintiffs also attempted to challenge regulations requiring group health plans to cover all FDA-approved contraceptive methods. However, the Fourth Circuit declined to consider these claims, noting that they:

Were not presented to the district court.
Raised issues and concerned provisions different from those at issue with the mandates.
Were already under consideration by several other circuit courts.

Practical Impact

Although the employer in this case was unsuccessful in challenging the employer mandate on constitutionality grounds, employers generally can take some solace in the fact that, as recognized by the Fourth Circuit in its decision, the employer mandate will not become effective until 2015, a year later than originally planned.

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