ACA payments get priority in bankruptcy, appeals court rules

(Reuters) - A federal appeals court ruled on Wednesday that payments individuals owe to the Internal Revenue Service for failing to obtain health insurance under the Affordable Care Act should be given priority in bankruptcy.

The 3rd U.S. Circuit Court of Appeals affirmed a lower court's ruling that payments owed to the IRS are entitled to be paid off before other debts in a Chapter 13 bankruptcy because they qualify as taxes. The decision came in the case of a Pennsylvania couple who filed for bankruptcy in 2019 owing $927 to the IRS for failing to obtain health insurance as required by the ACA.

The individual mandate of the landmark healthcare law had required Americans to obtain health insurance or make a so-called "shared responsibility payment," but that requirement was eliminated for individuals in late 2018.

A representative for the IRS declined to comment. A lawyer for Robert and Bonnie Szczyporski did not immediately respond to a request for comment.

Wednesday's decision was the first precedential opinion on the issue from an appeals court, but mirrors findings from a similar ruling from the Bankruptcy Appellate Panel of the 6th Circuit in March.

In a Chapter 13 bankruptcy, a government entity’s claims for tax payments have priority over other types of debts in certain circumstances, including if they are measured by income. The Szczyporskis argued that the money they owe to the IRS for not obtaining health insurance is a penalty, not a tax, and not entitled to be paid before their other debts.

But the three-judge 3rd Circuit panel disagreed, finding that the ACA payment is a tax with respect to a bankruptcy case because it is “an involuntary pecuniary burden upon individuals who fail to maintain minimum health insurance coverage.”

Moreover, the judges held that the payment the Szczyporskis owe to the IRS was measured in large part by the couple’s income, meaning it qualifies for priority status under bankruptcy law.

“When Debtors incurred the obligation in 2018, the payer’s household income played an essential role in determining the amount of the [payment] owed,” U.S. Circuit Judge Thomas Hardiman, who penned the decision, wrote.

Circuit Judges Patty Shwartz and Brooks Smith joined Hardiman in the decision.

Last year, the U.S. Supreme Court rejected a Republican bid to invalidate the ACA, preserving former Democratic President Barack Obama's signature healthcare law for the third time since its 2010 enactment.

The case is Szczyporski v Internal Revenue Service, 3rd U.S. Circuit Court of Appeals, No. 21-1858.

For the Szczyporskis: Sergey Joseph Litvak of Litvak Legal Group

For the IRS: David Hubbert, Pooja Boisture and Ellen DelSole of the U.S. Department of Justice

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ACA tax obligations have priority in Ch. 13 bankruptcy: appeals panel

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