The Supreme Court’s decision to allow individuals to continue to receive premium tax credits for purchasing insurance on federal health care exchanges removes the last major challenge to the new reporting and excise tax requirements for employers effective for 2015 and 2016.
The 6–3 decision in King v. Burwell
upholds IRS regulations that allow individuals to receive tax credit subsidies regardless of whether they purchase insurance on an exchange run by a state or the federal government. A group of individuals had argued that the plain language of the Affordable Care Act (ACA) provided tax credits for only individuals who purchase insurance on an exchange “established by the state.”
Only 16 states and the District of Columbia established their own exchanges, with the other 34 states allowing the federal government to operate an exchange on their behalf. If the ruling had gone the other way, approximately 6.4 million individuals in those states would have lost tax credits.
The individual credits are important for businesses because employers are generally subject to the excise taxes for failing to meet ACA health coverage requirements only if one or more of their employees receive premium tax credits to purchase insurance on an exchange.
The Court ruled that Congress intended for the credits to be available to taxpayers on both federal and state exchanges, and upheld the IRS regulations to that effect. This means that employers remain subject to all ACA rules regardless of where their employees are located or whether their employees receive coverage through a federal or state exchange. There are no other major judicial barriers to the ACA, so all employers should be complying with all ACA requirements.
The ACA created new health care-related requirements and excise taxes for both individuals and employers. Individuals are generally required to have health coverage or pay an excise tax. Taxpayers whose incomes fall between 100% and 400% of the poverty level and buy insurance on one of the new exchanges are eligible for tax credit subsidies.
For businesses, 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 (reduced to 70% for 2015), or if they offer coverage, but it does not meet minimum value and affordability requirements. For excise taxes to apply, the employer must have employees who receive premium tax credits.
The excise taxes became effective for the first time in 2015, although there is transition relief. Employers with between 50 and 99 full-time equivalent employees will not face excise taxes until 2016, and employees with 100 or more employees have a lower, 70%, coverage threshold. See our Tax Flash for more details on the transition relief. A more detailed article has information on calculating the excise taxes, meeting the 95% coverage threshold and applying the tests for minimum value and affordable coverage. More information is also available on determining who is considered a full-time employee and whether a worker is an employee or independent contractor.
In addition, employers are required to provide coverage statements to employees and the IRS for the first time for calendar year 2015. These reports are due by Feb. 1, 2016, and March 31, 2016, respectively. More information from Grant Thornton LLP is available.
The employer excise taxes and reporting requirements impose a substantial burden. The cost can also be severe for failing to report accurately, inadvertently missing the 95% coverage threshold or failing the minimum value and affordability tests. The rules are complex, and many employers will need to consider their options and the associated costs carefully. Contact Grant Thornton LLP if you would like to discuss your situation in more detail.
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