June 26, 2015

Supreme Court’s Recent Affordable Care Act Decision

By Michael D'Addio, Principal, Tax & Business Services

Supreme Court’s Recent Affordable Care Act Decision

The Supreme Court yesterday delivered its much anticipated decision in the case of King v Burwell, upholding premium tax credits under the Affordable Care Act (ACA) for taxpayers residing in states which have federal or federal-state Partnership Exchanges. For many, this case presented the strongest argument to upset the ACA, since it was based on the text of the law.

Only 14 states and the District of Columbia have established state Exchanges. Under the law, a state which does not establish its own health Exchange becomes subject to a federal-state partnership or federal-run health insurance Exchange. The statutory language specifically provides that premium tax credits, which help make the health insurance affordable, apply to eligible persons purchasing coverage from their local state Exchange. Since this language does not reference a federal or federal-state partnership Exchange, those opposed to the law argued tax credits could not be provided for insurance purchased from these Exchanges. This position effectively raises the cost of Exchange-based insurance for residents of these states and significantly impacts the overall economic structure of the ACA.

However, there was another potential harm to the Affordable Care Act. The position opposing credits in King v Burwell came from pro-business interests, arguing that the “employer mandate penalty” should not apply in these states. Large employers are required to provide affordable insurance coverage to full-time employees or face penalties. The penalties are triggered only when a full-time employee receives a premium tax credit for purchasing Exchange health insurance. The argument was that this condition could not be satisfied in a state with a federal or federal-state partnership Exchange.

The IRS had interpreted federal and federal-state partnerships as being surrogates for a state Exchange and stated in regulations that credits apply to all Exchanges. The Supreme Court agreed with this position as being the intent of Congress. The Court said that “the combination of no tax credits and an ineffective coverage requirement could well push a state’s individual insurance market into a death spiral – it is implausible that Congress meant the Act to operate in this manner. Congress made the guaranteed and community rating requirements applicable in every state in the Nation. But those requirements only work when combined with the coverage requirement and the tax credits – it stands to reason that Congress meant for those provisions to apply in every state as well.”

The decision of the court means that:

  • There is now certainty that the subsidies will apply to eligible individuals purchasing health insurance on a federal Exchange. Tax returns for 2014 (where premium tax credits were taken) will not have to be amended.
  • Large employers in states with federal Exchanges will be subject to penalties for failure to provide affordable health insurance coverage with minimum coverage where at least one full-time employees purchases coverage on the federal exchange and receives a premium subsidy.
  • Since the potential collapse of the ACA cannot now be anticipated, applicable large employers (whether in federal Exchange states or not) must comply with its rules, including satisfying the new tax reporting requirements for Forms 1094-C and 1095-C. Many businesses have not yet focused on this requirement. These companies have not yet instituted the systems to collect the information needed to complete these forms.
  • All employers (whether large employers or not) must deal with structuring appropriate programs in situations where employees purchase health insurance on the individual market (whether on an Exchange or not). Improper employer assistance payments can expose the employer to a $100 per day, per employee penalty.

If you have any questions about how this decision may affect your or your business, please contact your Marcum Tax Advisor.