Thomas Wechter

A Status Report of the Individual Insurance Mandate and the Taxing Power

Now that there is a split among the circuits, the Supreme Court is expected to address the issue of the constitutionality of the Health Care Act.

October 13, 2011
by Thomas Wechter, JD, LLM

General-Individual Mandate

Beginning in 2014, new Section 5000A, sometimes referred to as the “individual mandate,” added by the 2010 Healthcare Act requires nonexempt individuals to have a minimum level of health insurance coverage for themselves and their dependents or suffer a monetary penalty administered under the code. Exempt individuals include those with qualifying religious exemptions, those in a health care sharing ministry, individuals not lawfully present in the U.S. and incarcerated individuals.

The Individual Mandate Penalty

The per-adult annual penalty amount for an individual who fails to maintain minimum essential health insurance coverage is equal to the greater of a flat-dollar amount per individual and dependent (not to exceed 300 percent in total of the flat-dollar amount) or a percentage of income. The flat-dollar amount is $95 for 2014, $325 for 2015 and $695 for 2016 and thereafter with a cost-of-living adjustment. The percentage of income is a function of household income over a threshold amount of income required for that individual to file tax return. The percentage is one percent for 2014, two percent for 2015 and 2.5 percent for 2016 and thereafter. However, the annual household penalty may not exceed the national average annual premium for bronze-level plans offered through the state exchange for the household size.

The penalty is imposed on those who fail to maintain minimum health insurance coverage for three consecutive months. It is referred to as an additional amount owed with the taxpayer’s annual return, but is not subject to the usual code enforcement provisions and noncompliance is not subject to criminal or civil penalties. Further, the Internal Revenue Service (IRS) does not have the power to use liens or levies to collect the penalty, but must rely upon setting off unpaid penalties against an individual’s refund or instituting a civil action against the individual to collect the penalty.

Challenges to the Constitutionality of the Healthcare Act

Soon after the Healthcare Act was enacted, opponents filled lawsuits attacking the minimum essential coverage requirement on constitutionality grounds. So far two appellate courts have rendered decisions on the constitutionality of the individual mandate requirement and one appellate court has rendered a decision on the basis of the Anti-Injunction Act. There are numerous other lawsuits in various district courts challenging the constitutionality of the individual mandate, one of which is currently on appeal to the D.C. Circuit. In each case, the opponents of the Healthcare Act attacked the constitutional basis for the individual mandate, while the government defended it under the Commerce Clause and the taxing power. In each case, when defending the individual mandate under the taxing power, the government argued that the penalty provisions function as a tax and that placing administration of the penalty with the IRS and the codification of the penalty in Title 26 showed that Congress intended the penalty to be a tax. In addition, the government defended the individual mandate under the Anti-Injunction Act, codified in code section 7421(a), which prevents courts from hearing suits for the purpose of restraining the assessment or collection of taxes. Due to the word constraints of this article, the Commerce Clause arguments and analysis will not be discussed. They generally turn on the question of whether the mandate falls within Congress’ power to regulate activities that substantially affect interstate commerce.

The Constitutional Taxing Power

Congressional taxing authority stems from Article I of the Constitution. Section 8 of Article I gives Congress the “Power to lay and collect Taxes, Duties, Imposts and Excises,” as long as such taxes, duties, imposts and excises are uniform throughout the United States. Section 2 of Article I, places a limit on direct taxes that they have to be apportioned among the States, according to the census. Under the Sixteenth Amendment, taxes on income, from whatever source, are not required to be apportioned, even if such taxes are direct taxes.

If the individual mandate penalty is a tax, it would raise constitutional concerns only if it was found to be a direct tax that was not a tax on income. This is because it would have to satisfy the apportionment requirement of Section 2 of Article I and there is no indication that it will be apportioned among the states based on population. However, if the penalty was found to be a tax on income, the 16th Amendment would protected it and its lack of apportionment would not raise constitutional concerns, since it would appear to satisfy the uniformity requirement being geographically neutral.

Appellate Court Decisions

The three appellate courts that have addressed the issue are: Florida v. U.S. Department of Health and Human Services, Nos. 11-11021 and 11–11–067 (11th Cir. 2011); Thomas More Law Center, et al. v. Obama et al. No. 10-2388 (6th Cir. 2011) and Liberty University Inc., et al. v. Timothy Geithner et al., No. 10–2347 (4th Cir. 2011)

In Florida, the Eleventh Circuit held that the minimum essential coverage requirement is unconstitutional under the Commerce Clause. It also held that the individual mandate penalty was not a “tax,” thereby rejecting the government’s alternative argument that the individual mandate is constitutional under the taxing power. The Eleventh Circuit said that “the individual mandate is not a tax, but rather, as the statute itself repeatedly states, a ‘penalty’ imposed on an individual.” The court relied upon the repeated reference to the payment under the individual mandate as a “penalty” and that the section does not call the required payment a tax at any point. In addition, as relied upon by the court, the individual mandate provision begins by stating that each individual will ensure that he has a specific insurance coverage rather than “there is hereby imposed … a tax,” as the other excise tax provisions. In Florida, the Eleventh Circuit severed the individual mandate provisions as unconstitutional, but left the remainder of the Healthcare Act in place.

In Thomas More Law Center, the minimum essential coverage requirement was upheld as a constitutional exercise of the Commerce Clause, but was held not to be a tax. The Sixth Circuit pointed out that the individual mandate penalty was not included among the penalties on individuals who fail to pay their taxes and was not included in the penalties deemed to be included in any reference to taxes. The court further noted that Congress placed the individual mandate penalty in a different chapter from the chapter containing penalties related to the enforcement of traditional taxes and Congress did not include a provision treating the individual mandate penalty as a “tax” as it did with the penalties provided by the other chapters.

In Liberty University, Inc., the Fourth Circuit held that that the Anti-Injunction Act barred the suit because the IRS would collect the penalty under its authority to assess and collect taxes. The court reasoned that based upon past Supreme Court cases, the term “tax” in the Anti-Injunction Act should be interpreted to include the individual mandate penalty because the IRS would collect the penalty under its authority to assess and collect taxes. The majority stopped short of finding the penalty a “tax,” but in a concurring opinion, Judge James A. Wynn Jr. found the penalty constituted a constitutional excise tax, on the basis that taxable income is used as a grounds for the penalty and its enforcement is through income-tax returns.

On September 26, 2011, the government gave up its opportunity to seek rehearing en banc in Florida. On September 28 the plaintiffs in Florida filed petitions for certiorari, joining the Thomas More Law Center case that was already docketed for certiorari. On the same day the solicitor general filed a response in Thomas More Law Center asking the Supreme Court to accept the Florida case for argument


In light of the highly political nature of the Healthcare Act itself, it is too difficult to predict the outcome. We will all have to wait until the dust clears.

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Thomas R. Wechter, JD, LLM (Tax), is a partner with Duane Morris LLP in the Chicago office and concentrates his practice in tax planning for individuals, corporations and partnerships and in tax controversy matters in front of the IRS and before the Tax Court, U.S. Court of Federal Claims and the District Courts.