Tax vs. Penalty, Round Two: Interpreting the ACA’s Assessable Payment as a Tax for Federal Award Cost Allowances

INTRODUCTIONOn March 23, 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act (ACA).1 Representing a massive overhaul of the U.S. health care market, the ACA seeks to lower skyrocketing national health care spending and, relatedly, to facilitate near-universal health insurance coverage.2 The primary way that the ACA seeks to achieve universal health coverage is by mandating that individuals either purchase health insurance or pay a penalty-called a "shared responsibility payment"-to the Internal Revenue Service.3 Another important provision of the ACA, codified at Section 4980H of the Internal Revenue Code (I.R.C.), regulates the employerprovided health insurance market-the primary financing source of health insurance in the United States.4 Section 4980H requires employers with an "average of at least 50 full-time employees" to offer affordable health insurance to their employees or, instead, make an "assessable payment" to the IRS.5Congress's decision to label the exaction in I.R.C. § 4980H an assessable payment poses a problem for certain nonprofit employers that use federal grant awards to fund their operations because of specific restrictions attached to these awards by the Office of Management and Budget (OMB).6 This is because the OMB allows nonprofit organizations and other nonfederal entities to use federal awards for taxes, but not for fines or penalties.7 Because of the am- biguity inherent in the I.R.C. § 4980H term "assessable payment," it is unclear whether the exaction for failing to offer affordable health care would be considered a tax or a penalty.8This Note argues that an assessable payment imposed by I.R.C. § 4980H should be considered a tax for federal award cost allowances.9 This conclusion is partly based on the U.S. Supreme Court's 2012 decision in National Federation of Independent Business v. Sebelius (NFIB), in which the Court wrestled with a similar tax versus penalty issue and held that the ACA's individual mandate exaction could reasonably be interpreted as a tax despite Congress referring to it as a penalty.10 Using the NFIB Court's analysis, an assessable payment in I.R.C. § 4980H should be considered a tax because: (1) the exaction effectively functions as a tax; and (2) the exaction's particular characteristics are more consistent with those of a tax than a penalty.11 Though the NFIB Court was dealing with a constitutional-and not purely interpretive- question, its analysis of the effects of theACA's individual mandate exaction- an exaction similar to the one imposed by I.R.C. § 4980H-and subsequent scholarship support this Note's conclusion that such an assessable payment should be interpreted as a tax under OMB federal award cost principles.12Part I examines the enactment, objectives, and some intricacies of the ACA, focusing on I.R.C. § 4980H and its effect on the employer-provided health insurance market.13 Part II analyzes the OMB's restrictions on the use of federal awards by nonprofit organizations and other nonfederal entities.14 Then, Part III analyzes methods for distinguishing taxes from penalties, including the test articulated by the NFIB Court.15 Finally, Part IV applies this analysis to I.R.C. § 4980H's assessable payment and concludes that it should be interpreted as a tax.16I. THE ACA: A SINGLE, COMPREHENSIVE SOLUTION TO REFORM THE HEALTH CARE MARKETThe ACA is the most extensive reform of the American health care system in decades and aims to achieve nearly-universal health care coverage in the United States, while lowering the amount of spending in the health care industry.17 To accomplish these lofty objectives, Congress included provisions in the ACA that impose new requirements on insurers, states, individuals (through the so-called "individual mandate"), and employers (through the so-called "employer mandate").18 Collectively, these provisions aim to reduce the number of uninsured individuals, which in turn would allow health care providers to pass on the savings to health insurers, which could then translate into savings for families purchasing insurance. …