Practice Areas

Could WI Exempt Employers from the Health Care Reform Law's Employer Mandate Penalties?

May 23, 2012
Joshua L. Cannon

On May 23, 2012, the IRS issued final regulations under Code section 36B, which provides a health insurance premium tax credit for individuals who obtain health insurance coverage through a health insurance exchange created pursuant to the Patient Protection and Affordable Care Act (“PPACA”).  For employers, these regulations are important because they provide guidance on whether an employee is eligible to receive a premium tax credit under section 36B, which is the triggering mechanism for employer liability under the penalty provisions of Code section 4980H.  This article summarizes an issue that may be of relevance to employers that do business in a state that fails to create its own exchange, and instead, has an exchange operated by the federal government.

After the IRS issued proposed regulations for the section 36B premium tax credit, many, including Senator Orrin Hatch, recognized a potential “glitch” in the requirements for claiming this credit.  In order to receive the credit, the statutory language in section 36B explicitly requires that the individual enroll in a qualified health plan “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.”   Noticeably absent from that statutory reference is any mention of the exchanges to be set up by the federal government due to a state’s failure to do so, which is discussed in Section 1321(c) of PPACA.  Nonetheless, the IRS proposed to define “Exchange” for the purposes of the credit to include these “federal exchanges.”   

The final regulations do not change this definition of “Exchange.”   The IRS explained in the final regulations that the rule in the proposed regulations was maintained “because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.”  Nonetheless, the IRS has arguably overstepped its regulatory authority in adopting this regulation, even under the highly-deferential standard set forth by the Supreme Court in Mayo Foundation for Medical Education and Research v. United States, which applied the test set forth in Chevron USA Inc. v. Natural Defense Council, Inc.  Under the Chevron test, a regulation promulgated by the IRS can be set aside only if it either conflicts with the unambiguously expressed intent of Congress or it is “arbitrary, capricious or manifestly contrary to the statute.”

Given that each state is to have an exchange ready for operation by January 1, 2014, and that by January 1, 2013, the Secretary of Health and Human Services is to determine whether a state will have an operational exchange by 2014, this issue may become increasingly important over the next several months.  Employers looking for ways to challenge liability for the employer penalties imposed by section 4980H may want to consider this issue if they conduct business in a state which has a federally-operated exchange.

TAX ADVICE LIMITATION:  To ensure compliance with the requirements of Circular 230, we inform you that any tax advice contained above is not intended or written to be used and cannot be used (i) by any taxpayer for the purpose of avoiding penalties that may otherwise be imposed under the Internal Revenue Code or (ii) by anyone for the purpose of promoting, marketing or recommending to another party any entity, investment plan or arrangement addressed herein.