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Senate Committee explores options if Supreme Court strikes down premium tax credit regs

The Senate Committee on Small Business & Entrepreneurship (SBC) held a hearing on April 29 called “King vs. Burwell Supreme Court Case and Congressional Action that can be taken to Protect Small Businesses and Their Employees.” According to SBC Chairman David Vitter (R-LA), the purpose of the hearing was to discuss the case, which will decide the validity of IRS’s regs under the Affordable Care Act’s (ACA’s) premium tax credit provision, and the effect on small businesses and their employees if the Court rules in favor of the plaintiffs and strikes down the regs. The Committee also discussed possible actions that Congress could take in response.

Background on ACA provisions. The ACA’s “individual mandate” under Code Sec. 5000A requires non-exempt U.S. citizens and legal residents for tax years ending after Dec. 31, 2013 to maintain minimum essential health insurance coverage (e.g., government-sponsored programs, eligible employer-sponsored plans, and plans purchased in the Exchange—see below) or pay a penalty. However, there are a number of situations in which individuals are exempt from the penalty, including where there is no affordable health insurance coverage option available.

The Code Sec. 36B credit is designed to make health insurance affordable for taxpayers who meet certain qualifying requirements. It is available for individuals who purchase affordable coverage through Exchanges.

States may establish and operate Exchanges pursuant to 42 U.S.C. § 18031 (ACA §1311), or the federal government may establish and operate an Exchange in place of the state where a state has chosen not to do so consistent with federal standards pursuant to 42 U.S.C. § 18041 (ACA § 1321).

Exchanges make premium assistance payments (also called “subsidy” or “advance” payments) on the individual’s behalf to health plans, based on information available at the time of enrollment; then, at return time, the individual reconciles the actual credit that he is due with the amount of the subsidy payments that were made. (Code Sec. 36B(b)) (See Weekly Alert ¶  18  05/24/2012 for more details on Code Sec. 36B and its regs.)

In describing the premium assistance amount, Code Sec. 36B(b)(2)(A) refers to “the monthly premiums for…qualified health plans offered in the individual market…which were enrolled in through an Exchange established by the State ” (emphasis added) under §1311.

The issue. In May of 2012, IRS issued regs that interpreted Code Sec. 36B to allow credits for insurance purchased on either a State or federally-established Exchange. Specifically, the regs provide that a taxpayer may receive a tax credit if he is enrolled in one or more qualified health plans through an Exchange, which IRS defined as an Exchange serving the individual market for qualified individuals, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by Health and Human Services (HHS). (Reg. § 1.36B-1(k))

By making credits more widely available, the reg gives the individual and employer mandates—key provisions of the ACA—broader effect than they would have if credits were limited to state-established Exchanges. In fact, most of the 50 states have not created exchanges.

Court challenge. Taxpayers brought suit against IRS and HHS (Health and Human Services), arguing that Reg. § 1.36B-1(k) invalidly interpreted Code Sec. 36B(b)(2)(A). On Nov. 7, 2014, the Supreme Court agreed to resolve a Circuit split between the Fourth Circuit upholding the reg, and the DC Circuit invalidating the reg, by reviewing King v. Burwell, (CA 4 7/22/2014) 114 AFTR 2d 2014-5259.

The Supreme Court held oral arguments on March 4. A decision is due by the end of June.

SBC hearing. In his opening remarks, Committee Chairman Vitter stated that the purpose of the hearing was to discuss the consequences of the Supreme Court ruling in favor of the taxpayers—including the consequences for individuals who purchased a policy on a Federal exchange, the effect on employers, and action that Congress could take.

The first to testify was Michael Cannon, Director of Health Policy Studies at the Cato Institute, a conservative organization. In addition to being generally critical of the ACA, he criticized the Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) for not informing enrollees that their subsidies “could disappear with one court ruling.”

According to Mr. Cannon, the “most important way this Committee and other congressional committees can prepare for a King ruling, and ensure that Congress provides appropriate assistance to those affected by the ruling,” is to hold investigative and oversight hearings to determine, among other things, whether and how HHS and CMS are planning to protect enrollees in the event that the regs are struck down. He said that HHS Secretary Sylvia Burwell “could at any time announce that she would issue hardship exemptions to any enrollee who loses a subsidy,” or announce the creation of special enrollment period to allow affected enrollees to switch to lower-cost plans. He further opined that, depending on the findings of the hearings, it might be appropriate to hold the enrollees harmless through 2015 by “requir[ing] participating insurers to keep covering those enrollees at the same premium enrollees were paying before the subsidies were invalidated.”

Next was Linda Blumberg, Senior Fellow at the Urban Institute, an organization that has been described as a “leading liberal think tank.” She began her testimony by talking about the positive effect that the ACA reforms have had on the percentage of small firm employees and self-employed individuals with health insurance, and stated that if the ACA’s premium tax credits and cost-sharing reductions are eliminated in the states with federally-run Exchanges, the number of uninsured individuals in those states would increase by 8.2 million. This, is turn, would affect the mix of health risks in the insurance market since the healthy who lose their tax credits would likely be the first to drop their coverage, which in turn would increase average premiums for those who remained (which would also include individuals who were never eligible for tax credits) and perhaps price some of them out of the market.

She stated that “[s]mall firm employees, the self-employed, and their family members benefit disproportionately from changes the ACA brought to the nongroup insurance markets,” and would be “disproportionately harmed” by the elimination of premium tax credits. According to Ms. Blumberg, “[n]ew legislation to re-instate the ACA’s financial assistance in any state in which it would be prohibited would be required to reverse such damage.”

The last witness was Jeffrey H. Anderson, Executive Director of the 2017 Project, a conservative group. He was very critical of the ACA, but was also critical of the health care system that was in place before the ACA and the fact that many repeal efforts don’t provide a viable alternative to replace it. He also said that, if the Court rules for the taxpayers, Congress will have a “prime opportunity” to put forth such an alternative.

To that end, he described the 2017 Project’s “Winning Alternative to Obamacare.” The proposal would offer tax credits for individuals who buy health insurance instead of receiving it on a tax-favored basis from an employer—effectively offering a corresponding tax break in the individual market. Specifically, there would be a refundable health insurance tax credit of $1,200 for those under 35 years of age, $2,100 for those between 35 and 50 years of age, and $3,000 for those over 50, in addition to $900 per child. It would be available to taxpayers who purchase health insurance through the individual market, including an employee of a small business who chooses to buy insurance in the individual market rather than through his employer. The proposal also includes measures that would address pre-existing conditions and generally lowering health costs.

References: For the premium tax credit, see FTC 2d/FIN ¶  A-4241; United States Tax Reporter ¶  36B4; TaxDesk ¶  138,700; TG ¶  1381.

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