PPACA Employer Penalties Challenged in Court

May 15, 2013

pic-healthOn May 2, seven plaintiffs from six states filed suit in the U.S. District Court for the District of Columbia challenging the Patient Protection and Affordable Care Act’s (PPACA’s) employer penalties in states with federal or partnership health insurance exchanges.  (Halbig v. Sebelius, Civil Action No. 13-623).

Constitutionally, the federal government cannot compel states to create health insurance exchanges, however PPACA provides various incentives for states to do so.  Nevertheless, the majority of states have declined to set up their own exchanges.  Only 18 states and the District of Columbia have elected to set up state health insurance exchanges.  Six states have established partnership exchanges in cooperation with the federal governmen.  See Majority of States Opt for Federal Health Exchanges for details.

The PPACA statute provides the premium assistance tax credit to “the taxpayer, the taxpayer’s spouse, or any dependent” enrolled “through an Exchange established by the State (emphasis added) under §1311 of the Patient Protection and Affordable Care Act.” See Internal Revenue Code §36B(b)(2)(A)).  The plaintiffs argue that federal and partnership exchanges are not “established by the State.” Therefore, the premium assistance tax credit should not be provided to those enrolled by federal or partnership exchanges and the Internal Revenue Service regulations permitting this are invalid.

This is doubly important because employer penalties may only be imposed on an employer if “at least one full-time employee of the applicable large employer has been certified to the employer under section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.”  See Internal Revenue Code §4980H(a)(2).  An applicable large employer is an employer with 50 or more employees (including full-time equivalent employees).  In short, if none of the employer’s employees receive a tax subsidy, then the employer penalty does not apply.

Thus, if the IRS regulations allowing premium assistance tax credits in states with a federal or partnership exchange are ruled invalid, individuals in states with a federal or partnership exchange will not receive premium assistance tax credits and if there are not premium assistance tax credits, then there can be no employer penalties under section 4980H(a)(2) in those states.

If the plaintiffs prevail, then premium assistance tax credits will only be available in 18 states and D.C. and employer penalties will only apply in those 18 states and D.C.

No matter the outcome in the District Court, the case is virtually certain to be appealed to the U.S. Court of Appeals for the D.C. Circuit.

To read the complaint in Halbig v. Sebelius, click Halbig v Sebelius Complaint 050213.

To read Internal Revenue Code section 36B (the premium assistance tax credit section), click here.

To read Internal Revenue Code section 4980H (the employer penalty section), click here.