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Health exchange subsidies can trigger employer penalties

Wording confusion could limit penalties for employers

Health exchange subsidies can trigger employer penalties

WASHINGTON—Only weeks after the Supreme Court upheld the constitutionality of the health care reform law's individual mandate, a new Patient Protection and Affordable Care Act controversy is brewing, and it has high stakes for millions of uninsured U.S. residents and employers.

The controversy, which already spilled into Congress and could move to the courts, involves a crucial part of the law aimed at extending health care coverage to the nation's uninsured.

Under the law, federal premium subsidies will be available to the lower-income uninsured—those making up to 400% of the federal poverty level—to purchase coverage in state insurance exchanges starting in 2014.

If certain conditions are met, when eligible lower-income individuals use premium subsidies to purchase exchange coverage, their employers can be hit with big financial penalties.

In the case of employers with at least 50 employees that do not offer qualified coverage, if just one full-time employee is eligible for a premium subsidy and uses it to purchase coverage offered through an exchange, the employer would pay a $2,000 penalty for each of its full-time employees, excluding its first 30 employees.

And in the case of coverage that fails a health care law “affordability” test—in which premiums are determined to be unaffordable if the premium for single coverage exceeds 9.5% of an employee's wages—an employer would be liable for a $3,000 penalty for each affected employee who uses federal premium subsidies to purchase coverage.


The latest controversy involves a divergence between the actual legislative language involving premium subsidies and subsequent Internal Revenue Service regulations.

The PPACA says premium subsidies are available to eligible individuals who purchase coverage through an exchange “established by the state.”

But subsequent IRS regulations—finalized this year—say the subsidies also would be available to those buying coverage in exchanges established by the federal government.

The “provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a state exchange, regional exchange, subsidiary exchange and the federally facilitated exchange,” according to the IRS regulation.

“Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to state exchanges,” according to the regulation.

But that interpretation has drawn fire from some Republican lawmakers. Last month, Tennessee Republican Reps. Scott DesJarlais and Phil Roe introduced a proposal that would effectively bar the IRS from enforcing the rule.

And Sen. Orrin Hatch, R-Utah, in a letter sent last year to IRS Commissioner Douglas Shulman and Treasury Secretary Timothy Geithner, wrote: “Simply put, under current statutory law, there is no premium assistance the extent that an exchange is a federally facilitated exchange.”

Regardless of why the legislative language “precludes the application if premium credits to any federal exchanges,” it is up to lawmakers, not regulators, to make any changes, Sen. Hatch wrote.


The issue of what types of exchanges at which individuals can use premium subsidies to buy coverage has assumed a growing importance as more states say they will not set up exchanges. Experts say that anywhere between one-third to one-half of states may not establish exchanges, leaving that role to the federal government.

But if premium subsidies are available only to those getting coverage in state-established exchanges—as some Republican lawmakers and others say—the uninsured in other states would lose access to the subsidies, said Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.

In turn, those individuals' employers would not face penalties for not offering coverage or for coverage that flunks the health care reform law's affordability test because those penalties are triggered only if an employee uses a subsidy to buy coverage in an exchange.

Some observers say a simple drafting error may be why the legislative language states the premium subsidy is available for coverage only in state exchanges.

“This was undoubtedly a drafting error or oversight that was not corrected. It is very hard to see any policy justification for making subsidies available from state exchanges and not through a federal exchange. I don't think that was ever contemplated,” said Paul Dennett, senior vp-health care reform with the American Benefits Council in Washington.

“It is hard to imagine that there would be federal exchanges without premium subsidy eligibility,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.


Ultimately, the issue may end up being resolved in court.

“This could end up the next big litigation” involving the health care reform law, said J.D. Piro, a senior vp with Aon Hewitt in Norwalk, Conn.

But those filing suit might have difficulty getting courts to overturn the IRS regulations.

“The bar for succeeding would be very high,” Mr. Dennett said. Those bringing suit would have to prove that regulators acted in an arbitrary way in drafting the premium subsidy/exchange rules, he added.