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U.S. Supreme Court Upholds ACA Subsidy Eligibility on Federal Exchanges

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The Supreme Court issued its opinion in King v. Burwell, holding that the Internal Revenue Service (IRS) may issue regulations to extend tax-credit subsidies to coverage purchased through Exchanges established by the federal government under the Patient Protection and Affordable Care Act (ACA). The six-to-three opinion was authored by Chief Justice John Roberts, who was joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan. Justice Scalia dissented, and was joined by Justices Thomas and Alito.


The case involved four Virginia plaintiffs who challenged the IRS ruling that individuals are eligible for the premium subsidy regardless of whether their state has a state-run or federally-run Marketplace or Exchange. The plaintiffs did not wish to purchase health insurance, and would have been required to with the availability of premium tax credits. They contended that Section 36B, by its plain language, only allowed premium subsidies for insurance purchased on Exchanges created by “states.” Since Virginia has a federally-run Exchange, plaintiffs claimed that they were not eligible for premium subsidies, rendering insurance unaffordable to them and exempting them from the ACA’s requirement to purchase coverage.

The Kaiser Family Foundation reports that currently there are 14 states with state-based Marketplaces, three with federally supported Marketplaces, seven with state-partnership Marketplaces, and 27 with a Federally Facilitated Marketplace (FFM).

Supreme Court ruling

Chief Justice Roberts, writing for the majority, boiled the case down to the question of “whether the Act’s tax credits are available in States that have a Federal Exchange.” The opinion begins by describing the ACA’s (or “the Act” as it is referred to in the opinion) three key reforms: (1) guaranteed coverage and community rating; (2) the individual mandate or the requirement for all Americans to maintain health insurance; and (3) making insurance affordable by giving refundable tax credits to individuals with household incomes between 100 percent and 400 percent of the federal poverty level (FPL). “These three reforms are closely intertwined,” and Congress was clear that the first reform’s success (guaranteed coverage and community rating) was upheld by the coverage requirement, which in turn would only be successful with the tax credits. This is because without tax credits, the cost of buying insurance would exceed 8 percent of income for a large number of Americans, exempting them from the coverage requirement. The Court ruled that the intertwined importance of the three was underscored by their uniform effective date of January 1, 2014.

To reach its decision, the Court declined to follow the two-step framework of Chevron USA v. Natural Resources Defense Council, that provides the Court a process to analyze an agency’s (in this case, the IRS) interpretation of a statute. Noting that this case falls under the exception of “extraordinary cases” the Court instead tasked itself with determining the correct interpretation of Section 36B. With that task in mind, Chief Justice Roberts noted it was the Court’s duty to “construe statutes, not isolated provisions.”

With a thorough look at the language in Section 18041 of the ACA, definitions provided by the ACA, and language in Section 18031 of the ACA, the Court could not conclude that the phrase “an Exchange established by the State” is unambiguous. As a result, the Court was forced to turn to the broader section of the ACA in order to determine the meaning of Section 36B. In its review of the language, Chief Justice Roberts wrote that “The Affordable Care Act contains more than just a few examples of inartful drafting” and provided the example that it contained three separate section 1563s. Chief Justice Roberts noted that Congress wrote key parts of the Act behind closed doors, rather than through a more traditional process, Congress used the reconciliation process to limit opportunities for debate and amendment, and “as a result, the Act does not reflect the type of care and deliberation that one might expect of such significant legislation.”

When turning to the broader structure of the Act, the Court held “the statutory scheme compels us to reject petitioner’s interpretation because it would destabilize the individual insurance market in any State with a Federal Exchange and likely create the very ‘death spirals’ that Congress designed the Act to avoid.” To follow the petitioner’s (or plaintiff’s) interpretation would lead to the removal of tax credits, which would then render the coverage requirement meaningless. With 87 percent of individuals purchasing insurance on the Exchange with help from subsidies, the impact would not be small. Citing Justice Scalia’s dissent in the cornerstone ACA case National Federation of Independent Business v. Sebelius, the Court held it was implausible for Congress to operate the ACA in this manner, as “without federal subsidies… the exchange would not operate as Congress intended and may not operate at all.”

The Court also considered, but rejected, the plaintiff’s argument that Congress was “not worried” about the effects of withholding tax subsidies from states who chose not to operate an Exchange because “Congress evidently believed it was offering the states a deal they would not refuse.” The Court disagreed, holding that by setting up a federal fallback in case a state opted out of operating its own Exchange, “it expressly addressed what would happen if a state did refuse the deal.”

Finally, the Court held that the structure of Section 36B suggests that tax credits are not limited to state Exchanges due to its definition of “applicable taxpayer.” Relying on a previous holding that Congress “does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions,” the Court concluded that Congress “would not have used such a winding path of connect-the-dots provisions about the amount of the credit.”

Affirming the 4th Circuit’s decision, the Court held that “Congress passed the Affordable Care Act to improve health insurance markets, not destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter. Section 36B can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt.”


Justice Scalia authored the dissenting opinion, leading with “The Court holds that when the Patient Protection and Affordable Care Act says ‘Exchange established by the State’ it means “Exchange established by the State or the Federal Government.’ That of course is quite absurd and the Court’s 21 pages of explanation make it no less so.”

Finding that “words no longer have meaning if an Exchange that is not established by the State is ‘established by the State’,” Justice Scalia went on to find that “the normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved.”

Holding that Congress knew how to equate two different types of Exchanges when it wanted to do so, and accusing the majority of engaging in “interpretive jiggery-pokery” Justice Scalia writes that although it might not make sense to only allow tax credits to those on state Exchanges, the result would be odd, not ambiguous.

Recognizing that mismatches often occur when lawmakers draft a single provision to cover diverse or different types of situations, Justice Scalia further disagreed that the structure of Section 36B provides support for tax credits for those on the federal Exchange, noting that many individuals are eligible for various tax credits at the outset only to later be provided a credit amount of zero due to income thresholds. Justice Scalia cited the child tax credit, the earned-income tax credit, and the first-time homebuyer tax credit as examples.

Justice Scalia argues that the Court is wrong in both its decision to consult statutory purpose and its analysis of it. Finding that the ambiguous language at issue was used in other parts of the law, Justice Scalia argues that this was not “a slip of the pen,” but purposeful by Congress. Justice Scalia argued that if Congress valued the ACA’s applicability to all, it had the power to make tax credits available on all Exchanges.

Again rejecting the Court’s reasoning in the earlier case (in which he dissented) National Federation of Independent Business v Sebelius, Justice Scalia noted “we should start calling this law SCOTUScare,” and in conclusion held that the majority opinion shows the “discouraging truth that the Supreme Court of the United States favors some laws over others, and is prepared to do whatever it takes to uphold and assist its favorites.”

Question of the Month: How is PPACA’s “IRS Form W-2 safe harbor” regarding affordability calculated? | Ohio Employee Benefits

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By Danielle Capilla, Chief Compliance Officer at United Benefit Advisors

Answer: Under PPACA, coverage is considered affordable if it costs less than 9.5 percent of an employee’s household income. Because employers are often unaware of an employee’s household income, there are three safe harbors that an employer can use to determine affordability. One is the “IRS Form W-2 safe harbor,” and under it coverage is applicationaffordable if the employee’s contribution for self-only coverage is less than 9.5 percent of his W-2 (Box 1) income for the current year. Box 1 reports taxable income and might be artificially low for an individual with high 401(k), 403(b) or Section 125 deferrals, or who takes unpaid leave. There are no adjustments to account for this.

Employers using the W-2 safe harbor may not change an employee’s contribution level (dollar amount or percentage) during the calendar year, or the plan year for non-calendar year plans.

If the employee is only offered coverage for part of a year, an adjustment to W-2 income is made by multiplying the IRS Form W-2 wages by a fraction equal to the number of calendar months for which coverage was offered over the number of calendar months in the employee’s period of employment during the calendar year. (If coverage is offered for at least one day during the calendar month, or the employee is employed for at least one day during the calendar month, the entire calendar month is counted in determining the applicable fraction.)

The W-2 safe harbor is considered the most flexible, but it is calculated at the end of the year, which does not give an employer the ability to make necessary adjustments. It has shortcomings for employees with significant pre-tax deductions or who take unpaid leave.

Employers may use different safe harbors for different employee groups, so long as the employee groups are based on reasonable classifications such as hourly or salaried employees, geographic location, and job category.

Topics: health care, PPACA Affordable Care Act, Affordability, W-2 safe harbor, affordable health care

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Two PPACA Taxes Might Get the Ax | Employee Benefits Advisor

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By Jennifer Kupper, In-house Counsel for iaCONSULTING, a UBA Partner Firm

Section 9010 of the Patient Protection and Affordable Care Act (PPACA) imposes a fee on each covered entity engaged in the business of providing health insurance for United States health risks. This is known as the Health Insurance Providers (HIP) fee or the Health Insurers Tax (HIT) tax. The first filings were due from covered entities taxby April 15, 2014, and the first fees were due September 30, 2014. Self-insured plans are not covered entities for the purpose of the HIP Fee. The HIP fee is an important revenue source for PPACA, amounting to $8 billion in 2014 and rising to $14.3 billion by 2018. While fully insured plans are not directly responsible for the HIP fee, the Congressional Budget Office was correct when it indicated that it would be “largely passed through to consumers in the form of higher premiums.” Some premiums have increased as much as 4.5%.

Introduced in the House by Rep. Charles Boustany, Jr. (R-La.) and Rep. Kyrsten Sinema (D-Ariz.) on February 12, 2015, for the third time in as many years, H.R. 928 is titled To repeal the annual fee on health insurance providers enacted by the Patient Protection and Affordable Care Act. The bill has one provision: “The Patient Protection and Affordable Care Act is amended by striking section 9010.” There are currently 225 co-sponsors. A similar measure was introduced in the Senate. S. 183, the Jobs and Premium Protection Act, was referred to the Senate Finance Committee and currently has 31 co-sponsors.

Cadillac Tax

Internal Revenue Code Section 4980I imposes an excise tax on “high cost plans” effective 2018. This tax is commonly known as the “Cadillac Tax,” dubbed for its fee on “richer” benefits.

Generally, and one must speak generally because regulations have not been issued, if a group health plan’s cost for applicable coverage goes beyond the statutory thresholds, then a 40% excise tax will be assessed on the excess amounts. The annual thresholds are $10,200 ($850per month) for individual coverage and $27,500 ($2,291.67 per month) for coverage other than individual coverage. The Cadillac Tax applies to fully insured and self-funded plans.

It is reported that nearly half of employer-sponsored health plans could trigger the tax. One reason for this is that larger groups must sponsor a base plan that meets minimum value in order to avoid a potential PPACA Employer Shared Responsibility tax (IRC Section 4980H(b)). Another reason is that “applicable coverage” includes major medical coverage, including prescription drug costs; contributions to medical flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement arrangements (HRAs), and Archer medical savings accounts (MSAs), if certain conditions are met; coverage for on-site medical clinics; retiree coverage; coverage only for a specified disease or illness; and hospital indemnity or other fixed indemnity insurance.

On February 11, 2015, Rep. Frank Guinta (R-N.H.) introduced H.R. 879, Ax the Tax on Middle Class Americans’ Health Plans Act. The bill has 31 co-sponsors and was referred to the House Ways and Means Committee.

For the answers to the top 5 questions about the Cadillac Tax, read our recent blog.

For more information about Cadillac Tax inclusions and exclusions, cost of coverage calculations, changes in coverage and more, download UBA’s PPACA Advisor: Highlights of the Excise Tax on High-Cost Plans (the “Cadillac Tax”).

Topics: PPACA Affordable Care Act, Jennifer Kupper, excise tax, Cadillac Tax, Health Insurers Tax, Health Insurance Providers fee

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PPACA’s Impact on How CDHPs and HSAs Work Together | Employee Insurance Ohio

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By Bill Olson, Chief Marketing Officer at United Benefit Advisors

Employer health savings account (HSA) funding strategies have changed in recent years in response to the Patient Protection and Affordable Care Act (PPACA) and its impact on employer-sponsored health insurance plans. Employers are contributing less, on average, to HSAs and the increase in popularity of cost-saving consumer-driven health plans (CDHPs) has also had a major impact on how employers use these accounts.In 2014, employees saw a 10 percent decrease in their average single HSA employer contribution from the previous year, from $574 in 2013 to $515 in 2014, according to new data released from the 2014 UBA Health Plan Survey, the largest health benefits survey in the nation. Average family contributions also decreased 7 percent during the same period, from $958 to $890.There are many additional factors that will impact an employer’s HSA contribution strategy, says Mark Sherman, Principal of LHD Benefit Advisors, a UBA Partner Firm. Sherman says such factors include the deductible amount, the employee premium contribution, the out-of-pocket maximum, and whether there are other types of plans offered.

“When HSA products were new, the employer could take the premium savings and fully fund the deductible. Now, however, premium reductions are not as great as they once were. As premiums increase, employers naturally opt to put their contributions toward premiums first and will slowly reduce their HSA funding to the point where, in some cases, it becomes entirely the employee’s responsibility,” says Brian M. Goff, President & CEO of Insurance Solutions, another UBA Partner Firm.

The CDHP Link

The survey results indicate a correlation between enrollment in HSAs and CDHPs, linking higher HSA contributions to increased enrollment in the cost-saving plans.

CDHPs have proven to generate cost savings, according to UBA surveys. The average annual health plan cost per employee for all plan types in 2014 was $9,504. In fact, CDHPs appear to have the lowest annual costs per employee, specifically 6.4 percent less expensive than average. In contrast, preferred provider organization (PPO) plans cost 9.7 percent more than CDHPs, yet they continue to dominate the market in terms of plan distribution and employee enrollment.

“While CDHP offerings are up 8 percent from 2012, they are largely unchanged from 2013,” says Les McPhearson, CEO of UBA. “From an enrollment standpoint, however, CDHPs have seen increases of more than 30 percent in the last two years (15.6 percent to 20.6 percent), despite overall decreases in employer contributions to HSAs. For large employers and some industries, even modest increases in HSA contributions can be a key part of the puzzle in migrating employees to lower cost CDHP plans.”

“HSA-based plans are still growing in popularity,” continues Sherman. “In fact, for many employers (especially those who have already offered HSA-based plans), the current movement is to offer a full replacement solution, often with two or more HSA-based plans to allow for employee choice,” says Sherman.

To read the full press release announcing the latest findings related to HSA funding, click here.

For the latest health plan cost trends, download the UBA Health Plan Survey Executive Summary. To benchmark your plan to others in your region, industry or size bracket, contact a UBA Partner near you to run a custom benchmarking report.

Topics: health plan benchmarking, CDHPs, PPACA Affordable Care Act, health savings account, HSA, consumer-driven health plan, 2014 Health Plan Survey, HSA funding

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Independent Contractor vs Employee | Ohio Benefits Broker

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By K. Michael Ward
The Wilson Agency
A UBA Partner Firm

whichAs a business professional who is trying to classify a worker, it is important to remain compliant with the IRS regulations that determine whether an individual providing services to your organization should be classified as an independent contractor or an employee.

Furthermore, the “employer mandate” section of the Patient Protection and Affordable Care Act (PPACA) requires companies with 50 or more employees to either provide adequate and affordable coverage to their workers or pay tax penalties. United Benefit Advisors (UBA) has developed a guide to help employers determine how many employees they have for several purposes under PPACA. Those who think they are exempt need to make sure they are counting employees correctly so they’re not surprised with penalties.

The guide provides the definitions of full-time employees, how to count part-time employees on a pro-rata basis, how to treat seasonal employees, who the law considers an “employee,” counting hours correctly, determining average hours worked, penalties that result if a “large employer” doesn’t offer coverage, applying the requirement to offer coverage, paying the penalty, and eligibility for the Small Business Health Options Program (SHOP).

Your UBA Partner Firm can help you find the compliance solutions specific to the issues your company is facing. Visit the UBA website to learn more.

Why does it matter?

Not correctly classifying an individual as an employee can lead to an employer being required to pay taxes, such as unemployment tax, that would have been required of the employer if the individual had been correctly classified. The organization may also be held liable for overtime pay, resulting in a costly expense for the organization. In certain situations, the issue can escalate leading to civil lawsuits against the employer.

How do I know how to classify individuals?

Generally, an individual is an independent contractor if the employer controls only the final result of the work and not when, where and how it will be done. Therefore, employers cannot demand that independent contractors work a “9-5” schedule in their office. If the person is an independent contractor, they are free to perform the work on a beach at 4 a.m., as long as they produce the services for which they were hired.

An individual may also be classified as an employee if the company provides the majority of the equipment used to perform the services. Independent contractors will generally work with their own equipment and are unlikely to be reimbursed for any equipment purchases required to perform the job.

Some others factors to take into consideration are the time period of hire and whether the individual provides services that are integral to the business. If an individual has been hired on an indefinite basis, versus for a specific project or time period, and/or provides key services, then the employee may be classified as an employee.

There are a variety of other nuances that can determine whether an individual is an independent contractor or an employee. Therefore, it is advised that you speak with a professional before taking action that could have an adverse effect on your business.

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