Court rules in IRS's favor in ACA employer mandate penalty case

A U.S. court of appeals has ruled against an employer that sued the IRS over $1.1 million in penalties for not adequately providing insurance coverage for employees. The court ruled that the penalties, called exactions, fell under tax code under a definition provided by an earlier Supreme Court ruling, and therefore is exempt from lawsuits under federal law.

The case, “Optimal Wireless LLC v. IRS,” was before the U.S. Court of Appeals for the District of Columbia after an initial ruling from the U.S. District Court in D.C. found that the exaction penalty was a form of tax, and therefore exempt from lawsuits under the Anti-Injunction Act. The IRS had sent notice to Optimal Wireless in 2019 proposing penalties for the company’s noncompliance regarding health care coverage for employees—coverage that is mandated by the Affordable Care Act (ACA).

A challenge to ACA enforcement

The chief judge of the appeals court, Sri Srinivasan, noted in the ruling that, “The Affordable Care Act obligates large employers to provide their full-time employees with health insurance coverage meeting certain requirements. If an employer fails to provide coverage or provides noncomplying coverage, it is liable for an exaction…

“In 2019, the Internal Revenue Service sent two letters proposing exactions under Section 4980H to appellant Optimal Wireless, a wireless communications company. Optimal then filed an action against the IRS and the Department of Health and Human Services, claiming that the agencies had failed to satisfy certain procedural requirements before imposing the proposed exactions. Optimal sought a declaratory judgment and an injunction barring the IRS from collecting any money without complying with those procedures.”

The original district court ruling was that the exaction was a tax by legal definitions, and fell under the Anti-Injunction Act, “which strips courts of jurisdiction over suits having the ‘purpose of restraining the assessment or collection of any tax,” the ruling said.

Back to NFIB v. Sebelius

For the definitions applied in the case, the appeals court turned to the landmark NFIB v Sebelius case of 2013, which was viewed as a make-or-break case for the ACA. In that ruling, the Supreme Court ruled that the employer mandate was not valid under the Commerce Clause—as had been accepted prior to the case—because Congress could not force individuals to buy health insurance. However, the Court upheld the legality of the ACA by calling the mandate a tax—which it ruled was a permissible use of Congress’ taxing power.

Using that history, the Appeals Court ruled that the standard definitions in this case were the same as the findings in NFIB v Sebelius. “Congress’s use of the phrase ‘assessable payment’ does not conflict with—or otherwise detract from the import of—its choice to label the Section 4980H exaction a ‘tax’ in multiple provisions. The terms are not mutually exclusive,” the court wrote.

Related: ACA’s Employer Mandate: IRS announces higher penalties for noncompliance

“To the contrary, a tax is one species of assessable payment: it is ‘assessable,’ and its assessment calls for a ‘payment.’ Indeed, the terms of the Anti-Injunction Act refer to the ‘assessment’ of a ‘tax’ as well as its ‘collection’ (i.e., its payment). If Congress had only used the more general term ‘assessable payment’ to describe an exaction under Section 4980H, it might be unclear whether the exaction qualifies as a ‘tax’ for purposes of the Anti-Injunction Act. But because Congress also used the more specific term ‘tax’ to describe the same exaction (and did so repeatedly), it thereby established the applicability of the Anti-Injunction Act.”