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Regulators Seek To Define 'Closely Held Corporation' for Contraceptive Coverage Purposes

Regulators Seek To Define 'Closely Held Corporation' for Contraceptive Coverage Purposes

September 3, 2014 — In light of the Supreme Court's Hobby Lobby ruling, federal regulators are requesting comments on how to define a "closely held corporation" for the purposes of determining which private companies can refuse to provide contraception coverage in their employer-sponsored health plans, Steven Davidoff Solomon -- a law professor at the University of California-Berkeley -- writes in the New York Times' "Dealb%k" (Davidoff Solomon, "Dealb%k," New York Times, 9/2).

In the Hobby Lobby decision, the Supreme Court ruled that closely held corporations cannot be required to provide contraceptive coverage to their employees if the corporations' owners have religious objections to contraception (Women's Health Policy Report, 6/30). However, the high court did not explicitly define the term "closely held corporation."

As a result, HHS, IRS and the Employee Benefits Security Administration last month proposed a rule to define the term as it pertains to the federal contraceptive coverage requirements under the Affordable Care Act (PL 111-148).

Potential Definitions

The proposal did not include a specific definition but laid out two potential options and called for public comment on how to determine which organizations should be eligible for the accommodation.

The first approach would define such entities as those "where none of the ownership interests in the entity is publicly traded and where the entity has fewer than a specified number of shareholders or owners." The government noted that under some existing tax provisions, closely held corporations could be defined as those with up to 100 shareholders. Such a standard "could describe most private corporations," according to Davidoff Solomon.

The second approach would define such entities as those in which "a specified fraction of the ownership interest is concentrated in a limited and specified number of owners." This approach would mean that the number of shareholders would not matter but that a certain percentage of the ownership would have to be controlled by a certain number of owners.

Davidoff Solomon: Proposed Definitions Miss the Mark

According to Davidoff Solomon, "Both government approaches appear to ignore the real basis of the Supreme Court's decision."

Davidoff Solomon writes, "Justice Alito held that a corporation could assert religious protections under the Religious Freedom Restoration Act (PL 103-141) when the interests of the corporation and the shareholders were identical so that the religion of the owners could be imputed to the corporation." He continues, "[I]f you follow the court's inclination, the test appears to be a small number of shareholders -- full stop."

Davidoff Solomon suggests applying principles in a doctrine from corporate law called "veil-piercing," which "looks to whether the identity of the shareholders and the corporation is indistinguishable and they are acting as one." He adds, "It is typically limited to companies that have only a few shareholders -- certainly fewer than five or so because of the difficulty in identifying mutual interests."

The courts use this doctrine to "pierce" the "limited liability shield of a corporation and hold shareholders personally liable," which means "[t]he irony is that the shareholders of companies that assert they can take advantage of the Hobby Lobby decision may find that they are liable for the company's debts as they acknowledge grounds to pierce the corporate veil," Davidoff Solomon notes.

Davidoff Solomon suggests that "any rule is likely to face a court challenge and could wind up before the Supreme Court again. And perhaps Congress may even get its act together and weigh in." He concludes, "In other words, the fight over which among millions of corporations can assert religious protections has only just begun" ("Dealb%k," New York Times, 9/2).