Supreme Court Strikes Contraceptive Mandate for Certain Closely Held Corporations

On June 30, 2014, the United States Supreme Court issued a decision in Burwell v. Hobby Lobby Stores, Inc. (“Hobby Lobby”), striking down a minor, but highly publicized and politically charged, agency regulation under the preventive services provisions of the Patient Protection and Affordable Care Act (the “ACA”) commonly known as the “contraceptive mandate.” The Court’s decision will impact “closely held” for-profit employers with “sincerely held” religious objections to certain contraceptives, and the insurers and third-party administrators (“TPAs”) that work with such employers. We expect that the government will release guidance regarding Hobby Lobby and the contraceptive mandate for these entities in the near future. However, note that the Court’s Hobby Lobby decision does not strike the ACA in its entirety, or mean that all for-profit employers can now ignore the contraceptive mandate (or any other ACA requirement). Employers should continue to comply with ACA mandates currently in effect and prepare for those mandates effective in the coming years, such as the employer shared responsibility mandate (or “Pay or Play Rule”).

The Contraceptive Mandate. The ACA requires that non-grandfathered health plans cover certain preventive services without cost-sharing. The Department of Health and Human Services (“HHS”) issued final regulations under the ACA stating that “preventive services” include all FDA-approved forms of contraceptive coverage. The three federal agencies that enforce the contraceptive mandate previously issued an exemption for religious employers, such as churches. However, that exemption did not apply to other employers with religious beliefs, such as nonprofit hospitals or for-profit corporations. To accommodate certain nonprofit religious employers, the agencies issued additional final regulations on July 2, 2013, under which contraceptive coverage is to be provided for employees of nonprofit religious employers with no involvement required by the employer and at no cost to the employer or the employee (called an “accommodation” under the final regulations). The agencies declined to provide a similar accommodation for for-profit corporations.

For more information regarding the final regulations applicable to nonprofit religious employers, please see our alert from July 2013 found here).

Brief Summary of Burwell v. Hobby Lobby Stores, Inc. Hobby Lobby Stores, Inc. (“Hobby Lobby”) and Conestoga Wood Specialties (“Conestoga Wood”) sued the government under both Religious Freedom Restoration Act of 1993 (“RFRA”) and the Free Exercise Clause of the First Amendment, seeking to enjoin enforcement of the contraceptive mandate to the extent it requires them to provide health insurance coverage for four specific contraceptives (two forms of intrauterine devices and two forms of emergency contraception) that they believe are “abortifacients” that operate after fertilization of an egg. In Hobby Lobby , the Court ruled in a 5-4 decision that, as applied to certain closely held corporations, the HHS regulations imposing the contraceptive mandate violate RFRA because the government failed to meet the “least-restrictive-means” standard under RFRA. The Court did not reach the constitutional question.

Additional HHS Guidance Necessary for Employers, Insurers and TPAs. The Court expressed two alternatives that HHS could implement to provide contraceptives at no cost to women who are unable to obtain coverage for contraceptives under employer-provided health coverage due to an employer’s religious objections. The government could assume the cost of providing the contraceptives at issue for affected women. Alternatively, the government could extend the nonprofit religious employer accommodation to for-profit corporations with religious objections, in which case insurers or TPAs would be required to arrange and pay for the contraceptive services.

Q&B Key: In Hobby Lobby, the Court makes several references to HHS’s position that the accommodation for nonprofit religious employers imposes no net economic burden on the insurers that are required to provide or secure the coverage for employees of nonprofit religious employers, and assumes that the same will be true of any accommodation provided to for-profit employers. Although Hobby Lobby may affect a fairly limited scope of corporations, insurers, and TPAs may find any expansion of the accommodation burdensome and potentially costly.

We anticipate that HHS will release guidance providing for-profit corporations with an accommodation that is similar to that provided for nonprofit religious organizations. An accommodation would likely be limited to only those contraceptives that the owners oppose for religious reasons, such as the four contraceptives challenged in Hobby Lobby, and will likely require that a corporation’s owner(s) certify religious objections to those contraceptives. It is not clear at this time whether affected corporations will accept any accommodation offered by HHS following Hobby Lobby, or if they will challenge the constitutionality of any proposed accommodation in lawsuits similar to those brought by nonprofit religious organizations.

Q&B Key: Several nonprofit religious employers have challenged the current accommodation offered to them under the contraceptive mandate, stating that the accommodation violates their religious beliefs and rights because it causes them to facilitate access to contraceptives. Although the Court relied on the accommodation to show that the contraceptive mandate does not satisfy the “least-restrictive-means” standard, the Court expressly stated that Hobby Lobby does not decide whether an approach like the accommodation for nonprofit employers complies with RFRA for purposes of all religious claims. In addition, the Court provided another alternative and less restrictive option for the government — that the government could assume the cost of providing the four contraceptives at issue for affected women. We anticipate that both the government and the nonprofit religious employers in the accommodation challenges will rely on the Court’s statements in Hobby Lobby to support their arguments.

Limited Scope of Hobby Lobby Questionable. The majority opinion in Hobby Lobby emphasizes the limited scope of the Court’s holding, calling it a “very specific” holding. However, the reasoning in Hobby Lobby raises several questions regarding this expressed limited scope, such as the following:

• Could any for-profit corporations with religious owners object to the contraceptive mandate under Hobby Lobby’s reasoning? It’s possible, but this will likely be settled in future lawsuits. The Court’s holding in Hobby Lobby expressly applies to “closely held corporations.” However, the Court’s reasoning could arguably extend to other types of corporations, including publicly traded corporations. The majority opinion appears to admit that its ruling could extend to non-closely held corporations, but states that “it seems unlikely” that publicly held “corporate giants” will “often assert” RFRA claims.

Q&B Key: It is likely that any accommodation resulting from Hobby Lobby will be narrowly defined as applying to only “closely held corporations.” However, the Court does not define its term “closely held corporation” or state whether an accommodation can be limited to corporations that meet certain other factors (e.g., have a limited number of employees, be family-run, etc.). Although the IRS has a general definition of “closely held corporation” (i.e., a corporation that “has more than 50% of the value of its outstanding stock owned (directly or indirectly) by 5 or fewer individuals at any time during the last half of the tax year; and is not a personal service corporation”), it is not clear if the IRS definition will apply in any accommodation offered following Hobby Lobby. Additional guidance would be helpful.

• What will a corporation need to show to assert a “sincere” religious belief affording it an accommodation under Hobby Lobby? It is not clear. To have a claim under RFRA following Hobby Lobby, a corporation will need to assert a belief that is “sincere,” meaning that a corporation cannot make a “pretextual assertion” of a belief for purely financial reasons. In Hobby Lobby, the Court noted that the owners of Hobby Lobby and Conestoga Wood are devout members of their faith, have significant involvement in their businesses, and that both businesses have adopted corporate missions or statements that the owners will operate the businesses in accordance with their religious beliefs. The owners of Hobby Lobby also close their stores on Sundays and engage in financial transactions that further their religious beliefs. We anticipate that HHS will attempt to limit any proposed accommodation to only those for-profit corporations that can show some level of significant religious business involvement similar to that shown in Hobby Lobby.
• Will Hobby Lobby lead religious employers to make religious objections to other mandated medical procedures or drugs? It is possible that we will see future religious objections to certain mandated procedures or drugs, such as vaccinations, even though the Court anticipated that there will not be a “flood” of such objections. However, the Court noted that any future objections will not automatically prevail under Hobby Lobby because the mandates at issue would be based on different government interests and may satisfy the least-restrictive-means standard under RFRA.
• Will Hobby Lobby allow employers to discriminate against employees based on religious beliefs? It is not clear. For example, could an employer rely on Hobby Lobby to deny qualified retirement plan protections to an employee's same-sex spouse based on religious objections to that marriage? The majority opinion in Hobby Lobby warns that the decision does not protect employers who illegally discriminate against employees. However, the dissenting opinion disagreed, stating that antidiscrimination laws may be at risk after Hobby Lobby.

As noted above, employers, insurers, and TPAs will need to wait for guidance to know exactly what type of accommodation will be available following Hobby Lobby. In addition, it is possible that such accommodation will prompt additional legal challenges.

Link to Guidance: The decision can be found here.

For more information on the Court's opinion and related employee benefit issues, contact Marla Anderson at (312) 715-5079 / marla.anderson@quarles.com, Alyssa Dowse at (414) 277-5607 / alyssa.dowse@quarles.com, Robert Rothacker at (414) 277-5643 / robert.rothacker@quarles.com, or your Quarles & Brady attorney.