State and 39 schools ask court to spare them from employer mandate

Below is a news release issued from the Office of the Indiana Attorney General:

FOR IMMEDIATE RELEASE:
Thursday, October 9, 2014

State and 39 schools ask court to spare them from employer mandate
AG:  Federal court hears arguments in legal challenge to ACA tax penalties

INDIANAPOLIS – Today in U.S. District Court, attorneys for the State of Indiana and 39 school corporations argued their case in their legal challenge asking the court to strike down the “employer mandate” tax penalties of the Affordable Care Act or ACA.

U.S. District Court Judge William T. Lawrence heard oral argument from the State and schools and from the federal government defendants in the lawsuit State et al. v. IRS et al., one of several legal challenges to the ACA’s employer mandate currently pending before the nation’s federal courts.

“Before we plaintiffs accept the federal government’s claim that it can impose burdensome employer mandate penalties on state government and schools, we first must ask whether the federal law truly authorizes that – and the court is the proper place to bring that question to be answered. We appreciate the opportunity for the state and schools to present our arguments,” Indiana Attorney General Greg Zoeller said.

The Attorney General’s Office represents the state government plaintiffs in the legal challenge filed against the Internal Revenue Service last year; the 39 school corporations in Indiana who are co-plaintiffs are represented by a private law firm, Bose McKinney and Evans LLP.

The Affordable Care Act mandates that employers with 50 or more full-time workers provide employer-sponsored health insurance; if employers don’t, then they face a tax penalty if even one of their workers obtains insurance with tax credits using the new healthcare purchasing exchanges.  Under the ACA, the IRS tax penalty employers face for noncompliance is equal to $2,000 per employee for every employee in the organization, even if only one worker were misclassified for benefits and obtained insurance with tax credits through the exchanges.

In their lawsuit, the State and schools contend that under the 10th Amendment, the federal government cannot impose such employer penalties on state and local government employers which are separate levels of government; such penalties would be an unconstitutional tax.  Moreover, the plaintiffs contends the IRS is interpreting the Affordable Care Act incorrectly, and that the wording of the ACA that Congress passed allows the IRS to impose tax penalties only in those states where healthcare purchasing exchanges are operated by the state government, and not elsewhere.

Sixteen states and the District of Columbia operate state-run exchanges and eight states have joint federal-and-state-run hybrid exchanges. Indiana is one of 26 states that opted not to establish its own state-operated insurance purchasing exchange, meaning the federal government operates an exchange for Indiana residents.  The plaintiffs’ lawsuit contends the plain wording of the ACA statute is clear:  That without a state-operated exchange, Indiana therefore is exempt from the employer mandate tax penalties of the ACA, the IRS cannot penalize the state government or school corporations and the IRS’s broad interpretation of the ACA – applying the mandate to all states – exceeds its authority and violates the Administrative Procedures Act.

Zoeller noted the employer mandate penalties are not merely a nuisance or inconvenience.  Many schools rely upon part-time employees such as bus drivers, cafeteria workers and coaches who would not qualify for full-time employee insurance, but a single mistake in health benefits classification could trigger Draconian tax fines for a small public school corporation.  For state government itself, with 28,000 executive branch workers, a similar error in misclassifying just one full-time employee for benefits as part-time could potentially trigger $56 million in IRS tax penalties, if the IRS’s interpretation of the ACA were implemented.  In light of the risk to their resources, the plaintiffs urge the U.S. District Court to declare the employer mandate does not apply in exempt jurisdictions such as Indiana where purchasing exchanges aren’t state-operated.

At today’s oral argument, Indiana Solicitor General Thomas M. Fisher argued for the state government and attorney Andrew McNeil argued for the 39 school co-plaintiffs.  Neither the state’s nor schools’ attorneys represent private employers or private individuals in this lawsuit. The IRS and other federal defendants were represented by attorneys from the U.S. Department of Justice.  Judge Lawrence took the arguments under advisement and will rule on motions for summary judgment at a later date.

The State et al. v. IRS et al. case is one of several legal challenges questioning whether the IRS correctly interprets the ACA as passed by Congress.  On September 30, a separate federal district court in Oklahoma considering a similar case struck down the insurance tax credits in that state, on the grounds that the ACA did not authorize them in a state without a state-run exchange.  An appeal of that case is expected.  A similar ruling in July by a three-judge federal appeals panel in Washington D.C. awaits review by the full appeals court.  Yet another federal appeals court in Virginia allowed subsidies via federal exchanges, and that case has been appealed to the U.S. Supreme Court.

NOTE:  More information about the State et al. v. IRS et al. lawsuit is at this link.  http://bit.ly/Tng93D  
Additional details are at this link: http://bit.ly/1gJDVRw

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MEDIA CONTACT:
Bryan Corbin
Public Information Officer
Office of the Indiana Attorney General
317.233.3970
Bryan.Corbin@atg.in.gov

About Jim Hamilton

I am an employee benefits partner with Bose McKinney & Evans LLP. My broad-based practice covers health and welfare arrangements, insurance, executive compensation and federal and state taxation. Among other areas, I have specific experience with PPACA, HIPAA, COBRA, ERISA and numerous other state and federal laws affecting employee benefit plans.
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