Howard Delivery Services: Looking Back at the Future

The Affordable Care Act (ACA) has been a political lightning rod since its enactment in 2010. It has been the focus of numerous legal challenges in the courts and endless dispute in Congress. One of the more controversial components of the ACA is the employer mandate, which requires employers with an average of 50 or more full-time equivalent employees to offer health insurance or potentially pay a penalty. Assuming the ACA remains law,[1] does an employer’s legal obligation to supply health insurance impact whether claims for unpaid premiums for health insurance qualify for priority status as a “contribution” to an employee benefit plan under § 507(a)(5) of the Bankruptcy Code?

The Bankruptcy Code accords priorities among unsecured creditors’ claims for unpaid “wages, salaries, or commission”[2] and for unpaid contributions to “an employee benefit plan.”[3] These provisions clearly work together to provide employees with a payment avenue for traditional wages and fringe benefits. But does § 507(a)(5) extend to claims by insurance providers for unpaid health insurance premiums? The courts that have considered the question are split.[4] Interestingly, the Supreme Court might have indirectly resolved the matter.[5] In doing so, the Court may also have presciently foreclosed an alternative argument that such claims would not be entitled to priority based on the employer mandate — four years before the ACA was even enacted.

In Howard Delivery, the Court held that premiums owed by an employer to a workers’ compensation carrier are not “employee benefits” entitled to priority treatment under § 507(a)(5).[6] As part of its analysis, the Court distinguished between the contributions made to “bargained-for or voluntarily accorded fringe benefits” and the mandatory requirement in nearly all states in which employers participate in workers’ compensation systems.[7] This line of reasoning might have lent support to a theory that the employer mandate would similarly impact the § 507(a)(5) analysis when applied to providers of health insurance.

However, in Howard Delivery, the Court explicitly stated that it was not suggesting “that wage surrogates or supplements, e.g., pension and health benefit plans, would lose protection under section 507(a)(5) if a State were to mandate them. We simply count it a factor relevant to our assessment that States overwhelmingly prescribe and regulate insurance coverage for on-the-job accidents, while commonly leaving pension, health, and life insurance plans to private ordering.”[8] The dissent (Kennedy, J., Souter, J., and Alito, J.) interposed: “[I]t is difficult to imagine that if States began to mandate other kinds of benefits, those benefits would promptly fall outside § 507(a)(5). This would amount to saying that whenever some form of protection for employees comes to be accepted as so necessary for their welfare that it is mandated as an employer responsibility it is no longer a benefit.”[9] In any event, although not the dispute before the Court, both the majority and the dissent in Howard Delivery seemingly presumed and concluded that insurer claims related to health benefit plans fall within the § 507(a)(5) priority and that even if health insurance was someday mandated by law (i.e., the employer mandate under the ACA), the decision would remain the same.[10]

While Howard Delivery ultimately decided that insurer claims for unpaid workers’ compensation premiums are not entitled to priority status, the decision informally affirmed the First Circuit’s Saco Local decision that insurers’ claims for unpaid health insurance premiums are entitled to priority under § 507(a)(5). Indeed, in In re Tropicana Entm’t LLC,[11] the Delaware Bankruptcy Court relied upon the Howard Delivery analysis in ruling that an insurance provider’s claim for employee benefits (primarily health and dental premiums) was entitled to priority status. The court noted: “Although the holding does not apply directly to the matter before me, the Court’s discussion in Howard Delivery Service is instructive and appears to accept that a provider’s claim for employee benefits that is based on services rendered by the debtor’s employees during the relevant time period … is entitled to priority status, subject to the restrictions in § 507(a)(5)(B).”[12]

As the Tropicana Entm’t case shows, the Howard Delivery decision appears to have struck a significant blow to, and perhaps overruled, the cases that have held that § 507(a)(5) is not applicable to the claims of insurers for unpaid health insurance premiums.[13] At the same time, the court cast doubt on the viability of any argument that the employer mandate under the ACA is analogous to the mandatory workers’ compensation regime that was identified as a factor in the Howard Delivery decision declining to extend priority status to workers’ compensation carriers.