July 13, 2012
Authored by: benefitsbclp
Just when you thought we were done with lawsuits over health reform, you may be surprised to learn that there is and could be more litigation in 2015. Several dozen cases have been filed by various religious organizations pertaining primarily to mandates with respect to contraception. Later litigation, if it arises, will likely be about the employer “play or pay” (aka shared responsibility) penalties/taxes.
Under PPACA, the employer penalties/taxes are triggered when an employer either (a) doesn’t offer coverage or (b) offers coverage that is “unaffordable” or “does not provide minimum value” (we’re still waiting on definitive guidance on those terms). However, for the penalties/taxes to be triggered, at least one of an employer’s employees has to receive premium assistance (i.e., a tax credit) or a cost-sharing reduction on insurance purchased through an exchange. However, the tax credit in Section 36B of the tax code requires that the exchange be established by a State (whether this State-run exchange limitation also applies to cost-sharing reductions is less clear).
Here’s the rub: if a State fails to implement an exchange on its own, the federal government is supposed to create a fallback exchange for that State. But note the last sentence in the paragraph above. According to the statute, policies purchased on a federally-run exchange are not eligible for the tax credits (or, possibly, cost-sharing reductions). This means that, in a State with a federally-run exchange, it is theoretically possible for an employer not to be assessed a penalty because employees in that state should not be eligible for tax credits (and possibly cost-sharing reductions). Note that Texas governor Rick Perry recently stated that his State will not establish an exchange, and it is assumed that some others might take this position.
The IRS has “solved” this problem in its regulations by saying that the tax credits apply to any exchange, State- or federally-run. Some commentators have suggested that this is beyond the IRS’s statutory authority, meaning that they are going beyond what the law allows. The IRS counters by saying its rule is consistent with the purposes of the statute.
As a practical matter, multi-state employers may not get away so easy, as they are likely to have employees in States that operate their own exchanges. Additionally, most employees eligible for the tax credit will likely also be eligible for cost-sharing reductions and the statute appears to allow those reductions for coverage through the federal exchanges. Finally, depending on the results of the November elections, the statute could be revised to be clearer that the tax credits apply to all exchange coverage, not just coverage from State-based exchanges.
If the statute is not revised and a small employer in a state with a federally-run exchange is assessed a penalty/tax because an employee receives a premium tax credit, that employer may challenge the assessment on the grounds that the IRS’s rules are beyond its statutory authority. This means we will continue court-watching well into 2015 and beyond.