July 28, 2014

Coalition Sues U.S. Treasury to Stop IRS Tax Penalties Under Affordable Care Act

In one of at least seven current lawsuits involving the Affordable Care Act, a coalition of 12 businesses and individuals has filed suit against the Department of the Treasury seeking to halt implementation of ACA tax penalties in states that haven't set up health insurance exchanges. The IRS issued new tax rules in 2012 in anticipation of the health care law, and the coalition claims some of the rules directly contradict Congress's intent.

When the ACA goes into effect next year, employers will be required to pay excise tax penalties if they do not provide minimal health insurance coverage for full time employees. In such cases, the employee could be given a tax credit in order to purchase the insurance through a state-run insurance exchange authorized by the law.

So far, however, 33 states have either refused to implement the insurance exchanges or have been unable to get them ready in time for open enrollment, which is to take place on Oct. 1. In those states, the federal government will have to set up the exchanges, which still may not be ready in time.

In states with no insurance exchanges, the plaintiffs argue, the IRS should not be able to implement either the tax penalties or the corresponding credits because the law does not explicitly authorize the IRS to do so. Furthermore, the lawsuit claims, the tax credits and penalties contradict Congress’s intent when passing the law. The concept of the ACA as a tax scheme was brought up for the first time in National Federation of Independent Business v. Sebelius, the U.S. Supreme Court case that upheld the constitutionality of the law last June.

"The IRS rule we are challenging is at war with the act's plain language and completely rewrites the deal that Congress made with the states on running these insurance exchanges," says a lawyer representing the coalition.

A spokesperson for the Treasury Department responded that the agency is “confident that providing tax credits to individuals in every state is supported by the statute and our authority to interpret it."

The case is currently before a federal district court, as are at least six other cases brought against the law in other courts, and will likely have little nationwide impact on the trial level. More important will be rulings announced on appeal, particularly if any of the cases makes its way to the Supreme Court.

Source: Thomson Reuters News & Insight, “U.S. healthcare law opponents sue Obama officials over IRS rules,” Patrick Temple-West, April 3, 2013

© 2014 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.

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