Wednesday, November 12, 2014

ACA Tax Credit Eligibility/Employer Mandate Fines Headed to the U.S. Supreme Court Ahead of Schedule - Employer ACA Liability Hangs in the Balance

By Patrick J. Hoban*

On July 25, 2014, Zashin & Rich Co., L.P.A. (“Z&R”) notified employers about the two conflicting opinions issued by federal courts of appeals over whether the IRS may grant tax credits to individuals who reside in states with Affordable Care Act (“ACA”) health care Exchanges established and operated by the federal government. See Halbig v. Burwell, No. 14-5018 (D.C. Cir. Jul. 22, 2014) (“Halbig”), King v. Burwell, No. 14-1158 (4th Cir. Jul. 22, 2014) (“King”).

The Halbig decision held that individuals who obtained health insurance through federal Exchanges were not eligible for tax credits under the ACA. However, the D.C. Circuit vacated Halbig on September 4, 2014, after the U.S. Department of Health and Human Services, the U.S. Justice Department, and the Internal Revenue Service (“IRS”) sought and were granted en banc review. At that point, there was no circuit split on the ACA tax credit issue as the Fourth Circuit in King upheld the IRS rule granting tax credits to individuals who obtained health insurance through federal Exchanges. However, the plaintiffs in King appealed the Fourth Circuit decision to the U.S. Supreme Court.

In the absence of a circuit split, many observers concluded that the Supreme Court would bide its time and await the decision of the full D.C. Circuit in Halbig. However, true to the unusual judicial and legislative events that have surrounded the ACA since its enactment in 2010, four justices of the Supreme Court granted review in King on November 7, 2014. This development renders the pending D.C. Circuit en banc decision in Halbig less significant as the issue will be addressed directly by the Supreme Court. It is expected that the Supreme Court will hear oral arguments this spring and render a decision by the end of June 2015.

As Z&R explained in its July Alert, the stakes for the ACA and employers’ liability under the Employer Mandate could not be higher. If the Supreme Court reverses King and strikes down the IRS rule, it will in effect render the Employer Mandate a nullity in the 34 states (including Ohio) which did not elect to establish “state operated” Exchanges. This is because employer fines under the Employer Mandate are conditioned upon full-time employees obtaining health insurance coverage through an Exchange and receiving tax credits to pay for that coverage under the ACA.

It is estimated that approximately 85% of individuals who obtained health insurance coverage through state and federally operated Exchanges in 2014 received some level of tax credit. In addition to disrupting the application of ACA Employer Mandate fines in states without state operated Exchanges, if the Supreme Court strikes down the IRS rule, it will significantly disrupt the application of individual taxes under the ACA’s Individual Mandate. Furthermore, such an outcome will pressure states that elected not to establish Exchanges to act to maintain existing ACA tax credit eligibility for their citizens.

In short, uncertainty will continue to surround the ACA’s Employer Mandate for some months. While a Supreme Court ruling on the “make-or-break” tax credit eligibility issue will clarify some questions, it is just as likely to generate more of the confusion that has characterized the ACA since 2010. As it has since the ACA was first introduced in 2009, Z&R will track ACA developments and provide regular updates and guidance to employers so they can successfully navigate the ACA maze.

Patrick J. Hoban, an OSBA Certified Specialist in Labor and Employment Law, practices in all areas of private and public sector labor relations. For more information about the ACA or labor & employment law, please contact Pat | pjh@zrlaw.com | 216.696.4441