June 24, 2015

The Supreme Court of the United States is expected to rule by the end of June on the latest challenge to the Affordable Care Act in the case of King v. Burwell.

To help accountants and business owners understand the potential outcomes, Paychex has provided the following overview of the issue at the heart of the case, what the outcomes could look like, and potential consequences.

The Issue at the Heart of the Case The plaintiffs in King v. Burwell argued that the IRS is not allowed to give premium tax credits to people who purchase health insurance plans through federally established marketplaces, also known as exchanges. At the heart of their argument is a specific phrase in the Affordable Care Act. In the section describing the formula used to calculate premium tax credit amounts, the Act specifically states “…an Exchange established by the State.” The plaintiffs contend that based on this language, people who have purchased plans through federal exchanges should not be eligible for the premium tax credits.

Possible Outcome: The Court Rules in Favor of the Defendant If the Supreme Court rules in favor of the defendant, in this case the federal government, the ACA will go unchanged and the people who purchase health insurance through the federal marketplace will continue to qualify for premium tax credits, continuing the current practice.

Possible Outcome: The Court Rules in Favor of the Plaintiff If the Supreme Court were to rule in favor of the plaintiffs, essentially negating the availability of premium tax credits in the majority of states, there could be a significant impact on the following:

Premium Tax Credits: The possible impact here is that millions of individuals in states that do not run their own marketplaces would lose the tax credits that make insurance affordable. Currently, these credits are applied directly to their marketplace insurance. Because the credits are not really determined until the individual files their 2015 tax return in 2016, the credit they would be entitled to would theoretically be $0. This means individuals who have already received credits for 2015 would owe that money back to the IRS. In the long term, this lack of access to the tax credit may make insurance unaffordable for millions of individuals.

Employer Shared Responsibility: Under the existing law, employers subject to employer shared responsibility, or ESR, payments face potential penalties if they do not offer adequate and affordable coverage to their full-time employees and their dependents, and if at least one full-time employee receives a premium tax credit for coverage obtained through a marketplace. In states where the tax credit is removed, the penalty may no longer apply.

Individual Mandate: The individual mandate requires that most individuals and their dependents maintain health insurance, have an exemption, or pay a penalty when filing a federal income tax return.  An individual will qualify for an exemption from this provision if they lack access to affordable coverage, meaning that the cost of maintaining such coverage is greater than 8.05 percent (adjusted annually) of their household income and is thus considered unaffordable.  By removing the availability of premium tax credits to help subsidize coverage, the coverage available through the federal exchanges may no longer be considered affordable, thus exempting many individuals from this provision and its penalties.

Health Insurance Markets: The loss of premium tax credits may cause a large number of individuals to leave the marketplace because they can no longer afford the cost of coverage. However, individuals who are sick may continue to maintain their coverage.  Since the ACA requires that insurers place all individuals in the same risk pool, the above scenario may lead to increases in the cost of coverage (adverse selection).

What It Means for Small Businesses As mentioned, the end of the premium tax credits in affected states could mean the trigger for the penalty associated with employer shared responsibility requirements would change in those states, but small businesses may face a few other consequences. For example:

  • With many people losing access to affordable insurance coverage, small businesses would most likely face intense pressure to offer insurance to employees, and;
  • Increased premium costs across the board may also make it harder for small businesses (those with 50 to 100 employees) to provide affordable, essential coverage to employees.

What’s Next? The Supreme Court is expected to make a decision on or before June 30. Regardless of how the court rules, accountants should pay attention to the outcome and be prepared to advise your clients accordingly.

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