Bankruptcy And IRC Section 4980H

• Published date: 01 April 2022
• Subject Matter: Tax, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Tax Authorities
• Law Firm: Freeman Law
• Author: Mr Gregory Mitchell

The recent bankruptcy case of In re Creative Hairdressers, Inc. et al, Case Nos. 20-14583 and 20-14584 (jointly administered) (Bankr. D. Md., March 3, 2022) involved the intersection of IRC section 4980H's employer shared responsibility payment and bankruptcy law.

Bankruptcy and Section 4980H's Employer Shared Responsibility Payment

This case addresses an interesting intersection of tax and bankruptcy law. Specifically, it looks at the bankruptcy court's treatment of claims made by the Internal Revenue Service (IRS) under '4980H of the Internal Revenue Code. The specific issue addressed is whether or not such claim is entitled to priority status as an excise tax under '507(a)(8)(E) of the Bankruptcy Code. Ultimately, the Court concluded that it is entitled to such priority status to the extent that such claim related to any payments required under the statute arising within three years from the petition date.

Section 4980H was added to the Internal Revenue Code by the Affordable Care Act ("ACA"), enacted on March 30, 2010. Section 4980H applies to applicable "large employers" (generally, employers who employ at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year). Section 4980H generally provides that an applicable large employer is subject to an assessable payment if either (1) '4980H(a) applies because the employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and any full-time employee is certified to receive a premium tax credit or cost-sharing reduction; or (2) ' 4980H(b) applies because the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage and one or more full-time employees is certified to receive a premium tax credit or cost-sharing reduction.

In this case, the IRS asserted a priority claim against the Debtors for the employer shared responsibility payment ("ESRP") under '4980H. Specifically, the IRS sought priority status as an excise tax under 11 U.S.C. '507(a)(8)(E). The Debtors objected, contending the ESRP is not an excise tax entitled to priority treatment, but is a nonpriority penalty. The parties also disputed when the "transaction occur[red]" that gave rise to the ESRP, as that phrase is used in 11 U.S.C. '507(a)(8)(E)(ii).

The Debtor was partially self-insured as defined by the ACA. The Debtors qualified as an Applicable Large Employer under the ACA. The Debtors offered minimum...