Hobby Lobby and the Employer-Sponsored Health Plan

by King & Spalding

[author: Laura Westfall]

In Burwell v. Hobby Lobby Stores, Inc. (134 S. Ct. 2751, June 30, 2014), the Supreme Court ruled that closely-held for-profit corporations may refuse for religious reasons to cover contraceptives otherwise required to be covered by the Patient Protection and Affordable Care Act (PPACA). Despite subsequent guidance from the Departments of Labor, the Treasury and Health and Human Services (the "Departments"), questions remain outstanding as to which employers may rely on Hobby Lobby to refuse contraceptive coverage to their employees.

PPACA's Contraceptive Coverage Requirement and Hobby Lobby

PPACA requires employment-based group health plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) to cover certain types of preventive health services without cost sharing, including women's preventive services recommended by the Health Resources and Services Administration (HRSA), which include all FDA-approved contraceptive methods. Failure to provide such contraceptive coverage if required by PPACA can subject an ERISA-covered group health plan to a penalty of $100 per day, per employee not receiving compliant coverage. Recognizing that some religions object to contraceptive coverage, in 2012 the Departments exempted from this requirement any group health plan sponsored by a "religious employer," such as a non-profit organization run by a church or church auxiliary organization. The Departments expanded the exemption in July 2013 to include other non-profit "eligible organizations" (such as religious universities, hospitals, and charities) that objected to providing contraceptive coverage for religious reasons. In order to take advantage of the exemption, organizations were required to self-certify that they were a "religious employer" or "eligible organization," and either provide a copy of the self-certification to their insurer (for fully-insured plans) or their third-party administrator ("TPA") (for self-insured plans). The insurer or TPA, as applicable, rather than the employer's plan, was then responsible for providing such contraceptive coverage to the organization's employees, at no cost to the organization.

The Departments did not exempt for-profit corporations from the contraceptive coverage requirement of PPACA, and as a result several religious for-profit businesses owned by religious families sued, claiming that the Religious Freedom Restoration Act (RFRA) protected them from having to provide such coverage. In Hobby Lobby, the Supreme Court agreed with the businesses, holding that for-profit, closely held corporations holding "sincerely-held religious beliefs" had religious free exercise rights protected by RFRA, that PPACA's contraceptive coverage requirement imposed a substantial burden on such rights, and that less restrictive means were available to further the government's interest in providing contraceptive care at no cost to employees (as shown by the Departments' existing workaround for "religious employers" and other "eligible organizations," as discussed above).

The Hobby Lobby decision raised several related questions regarding the scope of the exemption from PPACA's contraceptive coverage requirement. For example, in holding that "closely held corporations" with sincerely-held religious beliefs were exempt from the requirement, the Court neglected to define the term "closely held corporation," leaving open the possibility that a far larger subset of corporations could be exempt from the requirement. Similarly, after Hobby Lobby, entities that were clearly exempt from the contraceptive coverage requirement (such as religious non-profits) questioned whether the Departments could require them to file a self-certification with their insurer or TPA. (Several days after the Supreme Court issued its decision in Hobby Lobby, the Court also enjoined the Departments from requiring Wheaton College, a religious university, to file a self-certification with their TPA in Wheaton College v. Burwell; however, the scope of that holding was limited to Wheaton College.) Guidance issued by the Departments in late August addresses both of these questions.

Departmental Guidance Issued Subsequent to Hobby Lobby

Consistent with the Court's order in Wheaton College, the Departments issued new interim final rules on August 27, 2014, which allow a "religious employer" or other "eligible organization" to notify the Secretary of HHS, instead of its insurer or TPA, of its religious objection to coverage of contraceptive services, so long as the notice to HHS includes certain specified information about the employer and the plan. The Departments would then notify the relevant insurer or TPA, requiring them to provide contraceptive coverage directly to the organization's covered employees, and designating such insurer or TPA as the plan administrator for purposes of such coverage.

INSIGHT: One question raised (but not answered) by the new interim final regulations is whether an insurer or TPA would be considered an ERISA fiduciary where such insurer or TPA is required to act as the plan administrator for purposes of administering contraceptive coverage benefits to the employees of an employer exempted on religious grounds.

The Departments also issued proposed regulations on August 27, 2014 (the "Proposed Regulations") that would, pursuant to the Court's decision in Hobby Lobby, expand the definition of an "eligible organization" exempt from PPACA's contraceptive services requirement to include certain closely held for-profit entities that take a valid action in accordance with their governing structure under state law to state their religious objections to providing contraceptive coverage. The Proposed Regulations also request comments on two proposed definitions of "closely-held corporation," one based on the number of owners of the corporation (such as having 100 or fewer owners), and the other based on having a certain percentage of the corporation's equity owned by no more than a certain number of owners (such as having 50% owned by five or fewer owners). Further, the Proposed Regulations request comments on the number of for-profit entities that might claim the exemption if they were to be considered an "eligible corporation," a figure the Departments noted in the preamble to such Proposed Regulations was likely to be small.

INSIGHT: The definitions of "closely held corporation" proposed in the Proposed Regulations do not require such a corporation to be owned and/or controlled by members of a single family, even though the Court's discussion of the owners' familial relationships seemed integral to its decision in Hobby Lobby. However, the final regulations issued by the Departments could add such a requirement in response to comments received regarding this point. If the existence of a familial relationship were required, questions would likely need to be answered regarding how such a requirement would relate to the closely-held ownership requirement, and which familial relationships would be recognized (for example, whether spouses and in-laws would count as "family").


Although several months have passed since the Supreme Court issued its decision in Hobby Lobby, the implications of its effect on corporations holding sincere religious beliefs are not yet fully known, and subsequent guidance issued by the Departments does little to address questions raised by the decision, such as the issues mentioned in the above "Insights" and others too complex to raise in this article. Looking at the bigger picture, despite the fact that Hobby Lobby may only directly impact a small percentage of employer-sponsored plans, the case serves as a good reminder that while there may be differences of opinion about specific PPACA rules and requirements, PPACA itself is not going away any time soon, and all employers need to continue to monitor new developments and implement strategies for PPACA compliance. We would be happy to assist you in this process.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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