On December 14, 2018, a federal district court in Texas held in Texas v. United States that the Affordable Care Act’s (ACA) individual mandate is unconstitutional.  The court also concluded that because the individual mandate cannot be severed from ACA, the entire law is invalid.


As you may recall, the ACA has both an individual and employer mandate. In 2012, the Supreme Court held, in National Federation of Independent Businesses v. Sibelius (“Sibelius”), that the individual mandate was a constitutional exercise of Congress’ power to tax. Although the individual mandate was upheld as a valid tax, the Supreme Court noted that the individual mandate would otherwise have been unconstitutional under the Constitution’s Commerce Clause.

Individual Mandate Held Unconstitutional Because the Penalty is Zero Beginning in 2019

In 2017, Congress passed the Tax Cuts and Jobs Act of 2017, which will reduce the individual mandate tax penalty to zero effective January 1, 2019.  As a result, Texas and numerous other states commenced litigation arguing that the individual mandate was no longer a proper exercise of Congress’ taxing authority. The Texas court agreed, holding that, without a tax penalty, the mandate was now rendered unconstitutional under the Commerce Clause as the Supreme Court previously noted in the Sibelius case.

Entire ACA Held Unconstitutional Because the Individual Mandate Cannot Be Severed

The Texas federal court did not simply declare the individual mandate unconstitutional. It went on to consider what impact this had on the rest of the ACA—specifically, whether the individual mandate could be severed from the rest of the ACA. The Texas court noted that the Sibelius decision found two other provisions (guaranteed issue and community rating) of the ACA were inseparable from the individual mandate.  Further, the court noted that the Supreme Court’s 2015 decision, King v. Burwell, determined that the same two provisions could not work without the individual mandate. Therefore, the Texas court concluded that it could not sever the individual mandate from ACA because the other provisions of the ACA were so intertwined.  As such, the Court held that the entire law was unconstitutional.

What Should Employers Do?

An appeal of the Texas court’s decision is very likely. Therefore, employers should stay the course for now.  For example, large employers subject to the employer mandate provisions of ACA should still file Forms 1095-C for 2018 and continue to offer coverage for 2019.  Even if the decision is upheld, it is unlikely to be given retroactive effect, because the mandate was still a valid tax for 2018. If the court’s decision is upheld, then employers and insurers will have to decide what to do about many of the popular ACA requirements, such as dependent coverage to age 26, no cost for preventive care, etc.  It remains to be seen how insurers will respond to the case.  Keep in mind that Connecticut (and potentially other state’s laws) require many provisions in health insurance policies that are also contained in the ACA.  We will continue to monitor the developments.

Notwithstanding all the news about repeal and changes to the Affordable Care Act, we are aware that the Internal Revenue Service is enforcing current provisions and assessing penalties.

Enforcement of the 2015 Employer Mandate Penalty

The IRS has announced that it will assess employer mandate penalties for the 2015 tax year.  Employers who had 100 or more full time employees (including full time equivalents) in 2014 and did not offer coverage to 70% of their full time employees in 2015 are subject to a penalty. The penalty applies if even one full time employee received a premium tax credit through the Exchange and employer coverage was not offered.  The 2015 penalty is $2080 times the total number of full time employees (minus 80).

Current Rule

Currently, the penalty applies to employers with 50 or more full time employees, including full time equivalents. If coverage is not offered to 95% of full time employees and at least one employee receives a premium tax credit through the Exchange, the penalty applies. The penalty for 2017 is $2260.

Other Penalties

Employers also can be subject to a penalty even when coverage is offered. The IRS penalizes employers for not offering affordable, minimum value coverage, if the employee received a premium tax credit through the Exchange. There are safe harbors for determining affordability.  The most commonly used one is the W-2 safe harbor, where the cost to the employee for self-only coverage is no more than 9.56% of W-2 income.  (This number is indexed for 2017.)  The penalty for this violation for 2015 is $3120 for each employee ($3390 for 2017).

How Are These Penalties Assessed?

These assessments result from IRS review of Forms 1095-C filed by employers for each full time employee against the records of employees who claimed a premium tax credit. Employers who receive what the IRS has labeled as Letter 226J must respond, typically within a 30 day period.

We can assist you in responding to the IRS.  Ignoring the letter will lead to the assessment of the tax.