What the health care credit decisions mean for employer health plans

CourthouseTwo major appeals courts released opposing decisions on June 22 that could profoundly affect whether employers will continue to face penalties for failing to meet the health coverage requirements in the Affordable Care Act (ACA).

The Fourth Circuit Court of Appeals upheld IRS regulations allowing individuals to receive premium tax credits to purchase insurance on federal health care exchanges, while the D.C. Circuit Court of Appeals invalidated the regulations and said the credits are available only on state-run exchanges.

The decisions are important for employers because whether individuals qualify for premium tax credits to purchase insurance through exchanges affects whether employers are subject to excise taxes for failing to meet ACA health coverage requirements. But the decisions are likely to be appealed, and the issue could take over a year to be resolved. In the meantime, employers should assume that the coverage requirements will apply when they go into effect in 2015 (or 2016 for employers with 50–99 full-time plus full-time equivalent employees).  See Tax Flash 2014-02 for details about when the excise taxes go into effect. In addition, employers are required to report detailed health care coverage information to employees and the IRS starting with 2015 data that is reported in January 2016. This reporting requirement is not affected by the court decisions.

The ACA generally imposes excise taxes, also called shared-responsibility payments, on employers with at least 50 full-time and full-time equivalent employees if they do not offer health care coverage to at least 95% of full-time employees, or if they offer coverage, but it does not meet minimum value and affordability requirements. For either penalty to apply, the employer must have employees who receive premium tax credits.

The premium tax credits are available under Section 36B of the Internal Revenue Code for taxpayers who fall between 100% and 400% of the poverty level and buy insurance on new exchanges created by the ACA.

The ACA generally requires states to create health insurance exchanges where taxpayers can buy coverage. If the state doesn’t create its own exchange, the ACA authorizes the Federal government to operate an exchange on behalf of the state. Currently, just 14 states and the District of Columbia run exchanges, and 36 states have exchanges run by the federal government.

Taxpayers have challenged IRS regulations under Section 36B, which allow eligible taxpayers to claim premium tax credits for buying coverage through a federal exchange, because the statutory language regarding eligibility for the credit refers only to state exchanges.

The D.C. Circuit Court ruled in a 2–1 decision that Section 36B authorizes credits or insurance only on state-run exchanges, not federal exchanges. The majority opinion ruled that the IRS regulations are invalid and that individuals buying credits on federal exchanges cannot use credits. The Fourth Circuit ruled in a 3–0 decision that the statute is ambiguous but that the IRS’s regulations are a permissible exercise of the agency’s discretion.

The two decisions reach opposite conclusions. If the regulations are ultimately ruled invalid, employers with employees only in the 36 states with federal exchanges would presumably no longer be required to pay excise taxes for any failure to meet ACA coverage requirements. Employers with employees in the 14 states that use state-run exchanges would still be subject to excise tax if the coverage requirements weren’t satisfied.

However, such a ruling could have broader implications for the ACA. If taxpayers had to pay more to buy coverage through federal exchanges and many employers didn’t face excise taxes, ACA policy goals and other requirements could be undermined and lead to additional administrative or legislative changes.

The current regulations will remain in effect while the appeals process continues. The litigants could petition the cases to be reheard en banc before the entire panel of judges in each circuit court, and they could eventually appeal to the Supreme Court. If a split between the circuits persists, the Supreme Court is likely to eventually resolve the case, but that could be more than a year away.

Meanwhile, employers should continue to make coverage decisions based on the assumption that employees who purchase insurance on a federal exchange may qualify for the premium tax credit. 

Eddie Adkins

Jeffrey Martin

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