Without State Exchange, Ohio Small Businesses Have Standing to Sue IRS

Without State Exchange, Ohio Small Businesses Have Standing to Sue IRS
January 10, 2013

Jon Cassidy

Jon Cassidy writes for Watchdog.org. (read full bio)

Now that Republican Governor John Kasich has decided Ohio will not establish its own health insurance exchange, small business owners with more than fifty employees may have legal recourse to block a potentially ruinous requirement to provide employees government-approved health care plans.

Maurice Thompson, director of the 1851 Center for Constitutional Law in Ohio, says the state’s small businesses now have standing to sue the Internal Revenue Service to block a new tax the IRS is imposing in order to force business to provide health care coverage.

The Patient Protection and Affordable Care Act, commonly known as Obamacare, requires businesses with more than 50 employees to provide government-approved health care plans or face a tax penalty. But due to the way the law was written, the requirement depends on the existence of a state-run health insurance exchange.

“The Act’s ‘employer mandate’ taxes employers up to $3,000 per employee if they fail to offer required health benefits. But that tax applies only if employers receive tax credits or subsidies to purchase a health plan through a state-run insurance exchange,” Thompson said.

Statute Doesn’t Authorize Implementation

Under a strict reading of President Obama’s law, the states must set up exchanges in order to enforce the mandates and distributie the subsidies, Thompson says. The law does not authorize the federal government to offer tax credits or subsidies through its own exchanges. Rather, it continually refers to “an Exchange established by the State.”

Thus far, just 18 states have announced plans to set up their own exchanges. Many of the rest will leave it to the federal government, including Ohio.

The reason that matters, according to Jonathan Adler, a professor at Case Western Reserve University School of Law, is the “tax credits and subsidies for the purchase of qualifying health insurance plans in state-run Exchanges serve as more than just an inducement to states. These entitlements also operate as the trigger for enforcement of the Act’s ‘employer mandate.’”

Without that state-based implementation trigger, there’s no tax penalty, according to a strict reading of the law, as noted by the nonpartisan Congressional Research Service. Their staff wrote in a memo to members of Congress that a “strictly textual analysis of the plain meaning of the provision would likely lead to the conclusion that the IRS’s authority to issue the premium tax credits is limited only to situations in which the taxpayer is enrolled in a state-established exchange. Therefore, an IRS interpretation that extended tax credits to those enrolled in federally facilitated exchanges would be contrary to clear congressional intent … and likely be deemed invalid.”

Penalties Possible Nonetheless

That “likely… invalid” interpretation is exactly the one the IRS settled on when it issued a rule May 18 treating federal exchanges the same as state exchanges. According to Adler, in defending the rule the IRS couldn’t point to any section of law that established tax credits for federal exchanges. Instead the agency argued its “interpretation” was “consistent with the language” in the law and Obamacare’s “legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges.”

The IRS rule amounts to a new tax that wasn’t authorized by Congress, Adler says. It remains to be seen whether small businesses will ultimately be penalized for refusing to comply with an IRS rule that may be invalidated.

“Whether a small business owner will be subject to fines or penalties for failing to provide health insurance to his employees will depend on whether the IRS rule is upheld,” Adler said. “The IRS rule, by providing tax credits and subsidies in federal exchanges, triggers the penalty on employers. Small business owners who are concerned about this may want to consider filing suit against the IRS rule, as this is the only way to protect themselves from the threat of penalties under the employer mandate.”

Ohio Group Preparing Lawsuit

Although it’s usually difficult for taxpayers to sue the federal government to block illegal actions, in this case even supporters of Obama’s law, such as Timothy Jost, a professor at the Washington and Lee University School of Law, concede employers could have grounds to bring suit against the IRS rule.

The “only viable challengers to the law are employers who may in the future have to pay an exaction because they fail to offer their employees insurance,” Jost wrote in a July 2012 article in Health Affairs.

Thompson says that group of plaintiffs could include Ohio employers. His group will “begin to prepare litigation that ensures that Ohio employers will not be subjected to the $3,000 per employee fine, and that Obamacare ultimately collapses under the weight of its own legal infirmities,” he said.

Oklahoma already is suing to block the IRS rule, arguing it “has no basis in any law of the United States; and directly conflicts with the unambiguous language of the very provision of the Internal Revenue Code it purports to interpret.” Depending on the outcome of this lawsuit, Ohio small businesses and those in other states without state implemented exchanges could soon have reason to file suit also.

Jon Cassidy (jon@ohiowatchdog.org) writes for Ohio Watchdog.

Jon Cassidy

Jon Cassidy writes for Watchdog.org. (read full bio)