Will § 4980H Require Judicial Amendment Too?

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Occasionally, a deep dive into a real world scenario opens our eyes to a plausible, alternate understanding of an important ACA term or rule.  Here’s one.  We’re embarrasssed to admit that our hours of study were provoked by what at first seemed to be a proverbial “stupid question.” Maybe there really aren’t any.

Absent applicable transitional relief, most of which vanishes after 2015, an ACA Applicable Large Employer that fails to offer Minimum Essential Coverage to at least 70% of its 2015 full-time employees and their dependents (95% in 2016) accrues 26 U.S.C. § 4980H(a) taxes monthly, at the rate of the number of its full-time employees for that month, less its allocable share of 80 (30 in 2016), multiplied by an “applicable payment amount.” Section 4980H(c)(1) sets that “applicable payment amount” at “1/12 of 2,000” – i.e., $166.67. As the TV pitch guys say, “But wait! There’s more!”

Section 4980H(b) imposes another employer mandate tax on ALEs that meet the MEC offer standard of § 4980H(a) but that overlook a few full-time employees, or offer coverage that is unaffordable or that provides sub-minimum value. Section 4980H(b)(1) tells us to calculate that tax monthly by multiplying the number of such employees with subsidized Exchange coverage by “1/12 of $3,000” – i.e., $250.  Here’s where the fun begins.

Section 4980H(c)(5) reads:

(5) Inflation adjustment

(A) In general

In the case of any calendar year after 2014, each of the dollar amounts in subsection (b) and paragraph (1) shall be increased by an amount equal to the product of—

(i) such dollar amount, and

(ii) the premium adjustment percentage (as defined in section 1302(c)(4) of the Patient Protection and Affordable Care Act) for the calendar year.

(B) Rounding

If the amount of any increase under subparagraph (A) is not a multiple of $10, such increase shall be rounded to the next lowest multiple of $10.

Section 1302(c)(4), a/k/a 42 U.S.C. § 18022(c)(4), tells us that the HHS Secretary will publish the “premium adjustment percentage” annually.

IRS FAQ No. 26 (2014) and all commenters (us, too) assumed that the premium adjustment percentage raises both the § 4980H(a) and the § 4980H(b) taxes. Consequently (shortcutting the analysis a bit), $2,000 has been understood to mean $2,084 under § 4980H(a) for 2015 and $3,000 has been understood to mean $3,126 under § 4980H(b) for 2015. However, we have wondered why IRS has not followed-up on the HHS premium adjustment percentage publication by updating its § 4980H guidance. See the current, relevant IRS web pages here and here.

A “stupid question” put us on the trail of a plausible explanation.  We had understood “subsection (b)” in § 4980H(c)(5)(A) as referring back, in shorthand fashion, to § 4980H(b), where we see the $3,000 amount, and had taken “paragraph (1)” as a reference to § 4980H(c)(1), where we read the $2,000 amount. But maybe, by “subsection (b) and paragraph (1),” Congress referenced only § 4980H(b)(1), which is, more precisely stated, where we find the $3,000 amount.  If so, only the $3,000 amount would be subject to annual adjustment. Congress would have to amend § 4980H to provide for annual inflation adjustment of the $2,000 amount or the IRS would have to do so by administrative action, hoping for helpful judicial interpretation.

Why might Congress have done that? If § 4980H(a) taxes were cheaper than compliant group health plans, and progressively moreso, an increasing number of small employers should be expected to pay the “(a)” taxes in lieu of offering coverage, leading to rising Exchange enrollments.  Soon, there might be little or no small group market outside the ACA Exchanges, with Healthcare.gov dominating the Exchange business.

Maybe that’s what the IRS has been pondering in silence for months.  Whichever way it wanted to go, maybe the IRS was hoping to receive extreme judicial deference in the King v. Burwell opinion before acting on this.  If so, it wasn’t worth the wait. Justice Roberts’ (6-3) majority opinion began by expressly disregarding the IRS rule on subsidy eligibility, at least in part because HHS, not IRS, was tasked with issuing such rules.

We have seen no evidence, beyond the textual ambiguity, indicating that Congress consciously intended to freeze the § 4980H(a) formula while adjusting the § 4980H(b) formula annually.  When two readings are equally plausible, courts normally defer to the enforcement agency’s interpretation. The IRS is the employer mandate enforcement agency, not HHS.  So, we would appreciate IRS guidance squarely addressing this ambiguity.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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