This morning, as the last opinion of its 2012 term, the U.S. Supreme Court issued a 5-4 decision upholding the individual mandate of the Affordable Care Act (ACA) on very narrow grounds. As a consequence, all of the provisions of the Act remain in effect, except for a provision relating to enforcement of expanded Medicaid eligibility. Employers, human resource professionals, health care insurers and other service providers should continue to meet the Act's requirements as they unfold over time.

Individual Mandate Upheld Under Taxing Power

What is the Mandate?

The ACA individual mandate (also called a "shared responsibility" provision) requires Americans who are not exempt for religious or other reasons, and who can afford health care coverage but do not obtain it beginning in 2014, to pay a penalty assessed (starting in 2016) by the Internal Revenue Service ("IRS"). ACA permits those who believe that they cannot afford health care coverage to seek a waiver and avoid the penalty.

What Did the Court Do?

In the cases before the Court, the federal government (represented by the Solicitor General) justified the individual mandate as a valid exercise of Congress' powers under the Constitution. The government relied upon Congress' enumerated powers under the Commerce Clause, the Necessary and Proper Clause, and the clause permitting the levying of taxes.

Explaining that the Court does not address the wisdom or soundness of the policies animating the ACA, Chief Justice Roberts (who wrote and read the narrow decision this morning) focused on the Court's single responsibility: to determine whether Congress acted within its powers under the Constitution.

The Court first rejected the Government's justification for the mandate under the Commerce Clause and found that the Commerce Clause only permitted Congress to "regulate" activities in commerce. The Chief Justice noted that the Framers of the Constitution "understood the difference between doing something and doing nothing." For these reasons, the Court also rejected the government's justification under the Necessary and Proper Clause, finding the mandate, though necessary to the ACA's goals, an improper exercise of power.

The Court did accept the government's justification for the mandate under Congress' authority to levy taxes. The ACA authorizes a penalty beginning in 2016 to be assessed "in the same manner as a tax" by the IRS against non-exempted individuals who can afford but who fail to obtain health care coverage. The Court concluded that Congress was authorized under the Taxing Clause to impose this penalty. In essence, individuals can choose not to purchase health care coverage and pay the penalty.

Implications for Employers, HR and Service Providers

Patterned after the individual mandate signed into Massachusetts law by then Governor Romney in 2006, the ACA individual mandate does not affect the vast majority of American workers and their families, who are offered health care coverage through their employment.

The likely result of the decision for employed workers with health care coverage will be simple paperwork at tax time. Many, if not most, third-party administrators ("TPAs') and insurers for national employers and/or national health care plans have experience with such documentation. When the Massachusetts penalty provision took effect, for example, TPAs and insurers provided HC 1099s to covered employers with self-insured or insured plans for distribution to their Massachusetts employees. The HC 1099s described the employees' health care plans and group numbers, and the employees then completed a single half page of their state income tax forms with that information, thereby avoiding any penalty.

For those employers that do not offer health care to their employees, and for uninsured individuals, the state health care exchanges will offer a variety of options of coverage, with levels of benefits and coverages keyed to premium costs. At least 36 states have provided preliminary designs for their health care exchanges, which must be in place to offer health care coverage in 2014. In previous Alerts, we have described employer responsibilities for modification of existing health plans and penalties for failing to offer health care coverage:

• What Employers Need to Know Now
• HHS Issues Guidance on the Early Retiree Reinsurance Program
• Guidance Issued Regarding Adult Child Coverage Mandate
  and Related Tax Treatment
• Guidance Issued Regarding Grandfathered Health Plan Status
• Update Regarding the Affordable Care Act
• Complying With Health Care Reform: Immediate Action Required

Employers will need further guidance as they work towards implementing ACA's provisions, especially those relating to the 2014 employer "shared responsibility" provisions and the implementation of the state health care exchanges.

Medicaid Expansion

On a less followed issue, the Court upheld Congress' expansion of Medicaid eligibility, but struck down the provision that permitted the federal government to withhold existing Medicaid funds if a state declined to accept the expansion. Under ACA, more individuals can receive Medicaid benefits under a higher income threshold than several states now permit.