Supreme Court Ruling Impacts Closely-Held Companies
July 3, 2014

By Scott E. Fiducci

On June 30, 2014, the U.S. Supreme Court issued a controversial decision affecting certain closely-held corporations. The Court’s 5-4 decision in Burwell et al. v. Hobby Lobby Stores, Inc. et al. resolved a split among the federal appellate courts to hold that the federal government may not tax closely-held corporate employers who, for religious reasons, decline to provide contraception coverage mandated under the Affordable Care Act (ACA).

Background

The Hobby Lobby decision involved three family-owned businesses (the Corporations) owned by two families whose owners claimed a religious exemption from a portion of the ACA coverage mandates. Under regulations promulgated by the Department of Health and Human Services (HHS), the ACA requires that non-exempt group health plans provide coverage for in-network “recommended preventative services” without participant cost sharing. The recommended preventative services specifically include coverage for the 20 contraceptive methods approved by the Food and Drug Administration (FDA).

Hobby Lobby, Inc., which operates 514 hobby stores in forty-one states, and has over 13,000 employees, is a closely-held S-corporation controlled by a family with strong Christian beliefs. The company has long sponsored a group health insurance plan for its employees, but does not qualify for an existing religious employer or religious nonprofit exemption. As a result of the ACA, the contraceptive mandate first applied to the Hobby Lobby plan beginning on July 1, 2013. Hobby Lobby’s statement of purpose includes references to “Biblical principles” and its owners believe that four of the 20 FDA-approved contraceptive methods would violate these principles.

The Ruling

The consolidated cases on which the Court ruled in the Hobby Lobby decision arose from actions in which the Corporations sued HHS and other federal agencies under the Religious Freedom Restoration Act of 1993 (RFRA) and the First Amendments’ Free Exercise Clause, seeking to enjoin application of the contraception mandate as related to the Corporations. Under RFRA, the federal government cannot take action that would substantially burden a person’s exercise of religion unless the action is the least restrictive means of serving a compelling governmental interest.

In holding that the contraception-specific HHS regulations violate RFRA, the Supreme Court noted that Congress designed RFRA to provide broad protection for religious liberty and did not intend to put business owners in the position of choosing between religious beliefs and engagement in commerce.

The majority also noted that--even if it were assumed that the contraceptive coverage requirement could be upheld on grounds that it served a compelling governmental interest--the ACA’s $100 per person, per day, penalty for failure to cover the mandated benefits was not the least restrictive means available to serve that interest. Instead of imposing the penalty, the Court observed, the government could offer to pay for the objected-to contraceptives or could allow other corporations to take advantage of the accommodation currently offered to religious employers and religious nonprofits.

Impact – and Limitations – of the Hobby Lobby Decision

Although the Hobby Lobby owners objected specifically to only four of the 20 FDA-approved contraceptive methods, the Supreme Court’s ruling applies to all contraception coverage. Of potentially broader implication is the Court’s explanation that the term “person” generally includes corporations, that being organized as a private corporation does not prevent the exercise of religion, and that RFRA did not provide any basis for distinguishing between non-profit and for-profit corporations. (Note that RFRA does not protect against state mandates).

The Court was careful to limit its ruling by noting that a large, publicly-traded corporation cannot be said to hold a unified religious belief in the same way that a closely-held business can. The Court also explicitly restricted its decision to the ACA contraceptive mandate and stated that other mandates (such as those requiring immunizations) should not necessarily fail merely because they conflict with an employer’s religious views. Finally, the Court articulated that its opinion does not permit discrimination to be “cloaked as a religious practice” to avoid legal penalty. The dissent, on the other hand, voiced the concern that the ruling will allow companies to “opt out of any law . . . they judge incompatible with their sincerely held religious beliefs”.

On its face, the Court’s decision applies to a very small category of businesses; namely those that are closely held and can demonstrate formation around, and operations consistent with, faith-based principles. While it is conceivable that some business owners may view the Hobby Lobby decision as an opportunity to avoid obligation under one or more objectionable ACA mandates, legal uncertainties and the practical need to provide compensation and benefits needed to attract and retain a talented workforce suggest that closely-held companies carefully consider any decision to do so.

For those existing closely-held companies controlled by owners with sincere religious objections to providing contraceptive coverage, the recent ruling would likely support a decision to eliminate employer-sponsored coverage for contraception. It remains to be seen, however, whether HHS will propose any new guidelines or rules in order to implement the decision. For example, although a federal form (EBSA Form 700) for self-certifying a religious objection to the contraceptive mandate already exists (for religious employers and nonprofits), it is not yet known whether for-profit companies who claim an exemption will be asked to provide any corroborating documentation, or whether a revised form will be provided. Because even an inadvertent violation of the ACA mandates would expose companies to significant tax penalties (of up to $36,500 per employee per year), business owners with religious objections to the ACA regulations should consult with legal counsel prior to taking any action to revise an existing group health plan coverage offerings.

Davis & Kuelthau provides a full-range of corporate, business, and employee benefits planning and compliance services to closely-held companies. If your business would benefit from a review of current group health plan, retirement, or executive compensation strategy or compliance, please contact your Davis & Kuelthau attorney or the author, Scott E. Fiducci, at 414.225.1428 / sfiducci@dkattorneys.com.

 

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