1. Presented by Joanne Youn and Michael Durham November 15, 2013

2.  Background on Religious Freedom Restoration Act  Brief summary of “Employer Mandate” and “Market Reform” elements of ACA  Contraceptive Mandate  Penalties  Exceptions  Proposed Legislation and Religious Freedom Challenges  Options for Addressing the Mandate 2

3.  First Amendment guarantees freedom of belief but not necessarily freedom of conduct.  How do you deal with conflicts between generally applicable laws and individual religious conscience? 3

4.  Employment Division v. Smith (1990)  Generally applicable laws don’t violate the Free Exercise clause, even if they burden religious belief.  Exceptions for expressive conduct, church autonomy 4

5.  Congress’s attempt to “repeal” Smith decision and require accommodation unless the “compelling interest” test is satisfied.  Applies to all federal laws after 1993 unless they specifically state that RFRA is not applicable (ACA did not). 5

6.  Government may substantially burden a person’s exercise of religion only if it demonstrates that application of the burden to the person—  (1) is in furtherance of a compelling governmental interest; and  (2) is the least restrictive means of furthering that compelling governmental interest.  Judicial relief provided  Government must have a compelling interest not only in the general scheme, but also in applying that scheme to the religious objector. 6

7.  Patient Protection and Affordable Care Act legislation passed March 23, 2010  Key elements include the employer mandate and market reforms  Employer mandate  Current guidance provides that beginning in 2015, applicable large employers—employers with 50 or more full-time employees (including full-time equivalents)— are subject to an annual penalty of $2,000 per full-time employee (minus 30 full-time employees) if they fail to offer minimum essential coverage under an eligible employer sponsored plan (4980H(a)) to full-time employees and their dependents, not including spouses  Penalty assessed yearly based on a monthly calculation 7

8.  Full-time employees for applicable large employer status  Number of full-time employees determined at controlled group level based on previous year data  Full-time means 30 hours per week or 130 hours per month  Full-time equivalents—divide total hours of non-full- time employees by 120  Full-time employees for determining coverage/calculation penalty  Different measurement periods for ongoing and new employees; special rules for variable hour employees  Affordability and minimum value requirements 8

9.  Common control for tax-exempt organizations, generally  Common control if 80% of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization  Additional rule in Notice 89-23 for churches and qualified church-controlled organizations (defined in 3121(w)(3))  Common control if one organization provides 80 percent of another organization’s operating funds and there is a degree of common management or supervision between the organizations  Proposed regulations reserve on the applicability of the controlled group aggregation rules to government entities, churches or convention associations of churches  Good faith standard until further guidance  Anti-abuse rules 9

10.  Market reforms effective for plan years beginning on or after September 23, 2010  Coverage of certain dependents until age 26  Prohibition on lifetime limits on essential health benefits  Restriction on annual limits on essential health benefits  Appeals process and external review requirements  Prohibition on pre-existing condition exclusions for those under age 19  Prohibition on rescissions (retroactive terminations of coverage)  Patient protections (primary care provider designations, direct access to obstetrical and gynecological care, emergency services) 10

11.  Market reforms effective for plan years beginning on or after January 1, 2014  Prohibition on annual limits on essential health benefits  Prohibition on pre-existing condition exclusions for all  Required coverage of clinical trials  Required essential health benefits package (for individual and small group insured plans)  Prohibition on excessive waiting periods  Premium rating limitations  Guaranteed availability and renewability  Nondiscrimination against health care providers  Nondiscrimination based on health status (extended to individual coverage)  Deductible limits (for small group insured plans)  Out-of-pocket limits 11

12.  Certain market reforms have different applicable dates, including PHSA § 2713(a) (preventive services coverage).  Specifically, PHSA § 2713(a)(4) requires coverage with no cost-sharing for  with respect to women, such additional preventive care and screenings as provided for in comprehensive guidelines supported by the Health Resources and Services Administration (“HRSA”) for purposes of this paragraph. 12

13. 13

14.  Excise tax liability for failure to comply with market reforms (4980D)  $100 per day “with respect to each individual to whom such failure relates”  Penalty assessed for each day until the failure is corrected  Self-assessed on Form 8928; failure to file can result in interest. 14

15.  Exceptions and limitations on 4980D penalty:  if due to reasonable cause and not willful neglect, No penalty if cured within 30 days of discovery (or, for church plans, within 270 days of IRS finding a violation) penalty capped at $500,000 per year, and may be waived.  Small employers that provide health insurance coverage solely through a contract with a health issuer may avoid penalty if violation is solely due to health insurer’s lapse. 15

16.  Exceptions and limitations on 4980D penalty:  if due to reasonable cause and not willful neglect, No penalty if cured within 30 days of discovery (or, for church plans, within 270 days of IRS finding a violation) penalty capped at $500,000 per year, and may be waived.  Small employers that provide health insurance coverage solely through a contract with a health issuer may avoid penalty if violation is solely due to health insurer’s lapse. 16  “Ordinary business care” standard  Normally, intentional violations don’t qualify  But reasonable cause may exist if written advice from a qualified professional indicates that requirement doesn’t apply.  At least one case has found reasonable cause because of a good faith RFRA claim.

17. 17

18.  HRSA guidelines issued August 1, 2011—applicable for plan years beginning on or after August 1, 2012  Regulations authorize a “religious employer” exemption, definition was modified effective August 1, 2013  Temporary enforcement safe harbor for some employers effective until plan years beginning on or after January 1, 2014, at which time “eligible organization” accommodation is available 18

19.  Does not apply to grandfathered plans  Plans that were in existence on March 23, 2010 that have not undergone significant changes since that date  Employers with less than 50 full-time employees  Includes full-time equivalents  Controlled group level  Do not have to offer coverage  Not actual exception to contraceptive mandate Must comply with contraceptive mandate if coverage is offered  “Religious employer” exemption and “eligible organization” accommodation  Interpreted by the government to apply employer-by- employer 19

20.  Although previously more narrowly defined, the current definition of “religious employer,” effective August 1, 2013, is simply  An employer that is organized and operates as a nonprofit entity and is a church, integrated auxiliary, convention or association of churches, or the exclusively religious activities of any religious order 20

21.  “Eligible organization”  (1) Opposes providing some or all of the contraceptive services required to be covered by the mandate on account of religious objections  (2) Organized and operates as a nonprofit entity  (3) Holds itself out as a religious organization  (4) Self-certifies that it satisfies the criteria in items (1) through (3) – form available on DOL website 21

22.  Accommodation for fully insured plans  Provide self-certification to insurance issuer  Insurance issuer provides separate payments for contraceptive services without cost on the plan or participants  Accommodation for self-insured plans  Provide self-certification to third party administrator (“TPA”)  TPA becomes “plan administrator” with respect to contraceptive services  TPA must provide separate payments or arrange for separate payments for contraceptive services  Reimbursement through adjustment to federal exchange user fees 22

23.  Disagreement About the Accommodation  Catholic Health Association initially expressed concerns about the mandate, but has accepted the accommodation as a reasonable compromise  U.S. Conference of Catholic Bishops continues to believe that the accommodation is inadequate to address the 1 st Amendment concerns of religious employers and notes that it does not provide any protection for for-profit businesses that oppose the mandate 23

24.  Numerous law suits (Becket Fund counts 75+)  Many religious organizations’ cases were dismissed or held in abeyance until final rules came out, but are now being refiled  Preliminary injunctions granted in a clear majority of for-profit cases Already lots of exceptions—why not one more? Most influential reason for denying injunction is that for-profit business can’t exercise religion. 24

25. 25 Preliminary injunction wins in 10 th, 8 th, 7 th, and D.C. circuits (9 th circuit has some favorable precedent) Preliminary injunction losses in 3 rd and 6 th circuits

26.  Standing: religious organizations more likely to be held capable of “exercising religion.”  Religious orgs. can raise church autonomy claims  Government accommodation strengthens its argument that it has infringed religious freedom no more than necessary.  But new exception for religious employers also suggests that exceptions are manageable, so why not one more.  Church groups are arguing that the new rules distinguishing between integrated auxiliaries and other religious nonprofits violate the establishment clause.  What are considered exclusively religious activities of a religious order? Can government draw these distinctions? 26

27.  Proposed legislation  Repealing the Affordable Care Act  Changing definition of full-time employees  Delaying employer mandate further  Exempting certain types of employers (e.g., educational institutions) from employer mandate  Creating broader religious exceptions to contraceptive mandate  Limiting application of HRSA guidelines? 27

28.  PHSA § 2713 limits other preventive services requirements  Coverage without cost-sharing required for “evidence- based items or services that have in effect a rating of “A” or “B” in the current recommendations of the United States Preventive Services Task Force”  Certain recommendations excluded by the statute—“for the purposes of this Act, and for the purposes of any other provision of law, the current recommendations of the United States Preventive Service Task Force regarding breast cancer screening, mammography, and prevention shall be considered the most current other than those issued in or around November 2009.” 28

29.  For now, take the position that RFRA precludes the contraception coverage requirement  Viability may depend on jurisdiction  Also may depend on breadth of violation and record of religious opposition  Nontrivial risk of penalties, particularly if Supreme Court resolves RFRA claims adversely.  Consider taking steps to limit penalty exposure by establishing “reasonable cause”  In the interim, organization may need to file Form 8928 29

30.  Establish/shore up integrated auxiliary status  Must be a 501(c)(3) and a public charity – standards have changed, especially for 509(a)(3) orgs  Must meet an affiliation test: Majority control; Another 509(a)(3) relationship group ruling or facts and circumstances.  Must be internally supported  Consider getting an IRS ruling or legal opinion 30

31.  Establish / shore up integrated auxiliary status  Must be “internally supported,” meaning that EITHER: It does not offer admissions, goods, services, or facilities for sale, other than incidentally, to the general public (unless charges are nominal or an insubstantial portion of cost), OR It does not receive more than 50% of its support from:  governmental sources,  public solicitation of contributions,  receipts from the mission-related sale of admissions, goods, performance of services, or provision of facilities. 31

32. 32 Option 1: Face Inward No admissions, goods, services, or facilities for sale to the public except incidentally Exception if charge is nominal or an insubstantial portion of the cost. Two Paths to Internal Support & Integrated Auxiliary Status Option 2: Keep “bad” support < 50% Must total below 50% of support

33.  Strategies for attaining integrated auxiliary status  Explore increasing other kinds of revenue donations from the church / affiliates / members Investment income, UBIT, royalties, etc.  Could more support come through church?  Where are endowments or other large revenue streams held?  Merge in for-profit subsidiaries?  But remember liability concerns 33

34.  Accept accommodation  Self-certification triggers obligation of insurer or third-party administrator to provide benefits; may authorize TPA to do so as a plan administrator.  Groups may have sincere differences about whether accommodation still leaves them involved in providing contraception or facilitating abortion  Groups with multiple subsidiaries should take care regarding their for-profit subsidiaries, which may not be eligible for the exemption. 34

35.  Stop providing health plans altogether  For applicable large employers, this would avoid 4980D penalties but result in smaller penalties under 4980H  Depending on degree of control, employers in a church group may not have to aggregate with other entities in the system, and may each separately qualify as small employers.  What options are there for employees not covered by their employer? 35

36. ______________________________________________ Disclaimer This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome. Attorney Advertising It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation. © 2013 Caplin & Drysdale, Chartered All Rights Reserved. Joanne C. Youn jyoun@capdale.com (202) 862-7855 Michael W. Durham mdurham@capdale.com (202) 862-5031 36