Another “Glitch” with the ACA Tax Credit?

by Andy Grewal — Monday, Mar. 30, 2015

As the end of the Supreme Court’s current term nears, all eyes are on King v. Burwell, in which the Court will address whether premium tax credits under the Affordable Care Act extend to purchases of health plans on federally established exchanges. As I learn more about Section 36B, however, I’m growing increasingly concerned that a government win won’t end the controversy surrounding the premium tax credit. I spent a couple hours with the Section 36B regulations and it seems like there is at least one other “glitch” that could cause controversy.

Under Section 36B(c)(1), a taxpayer can take the premium tax credit, and will qualify as an “applicable taxpayer,” only if her annual household income equals at least 100 percent of the relevant poverty line amount. Congress presumably believed that persons with less income would be covered by different social programs related to health care, like Medicaid, and the extension of the premium tax credit to our country’s poorest individuals was unnecessary.

Some lawfully present aliens, however, are not eligible for social programs, including Medicaid. To help this group, Section 36B(c)(1)(B) generally says that if a lawfully present alien’s household income does not exceed the relevant poverty line amount and the alien is ineligible for Medicaid by reason of her immigration status, the alien will be treated as if her household income were equal to 100 percent of the poverty line. In other words, a lawfully present alien will be treated as having met the floor required to claim the premium tax credit.

So far so good. But the Treasury regulations under Section 36B(c)(1)(B) do not track the statute. The statute demands that the taxpayer herself be lawfully present in the United States and be ineligible for Medicaid by reason of her immigration status. The regulations, however, extend the special statutory rule whenever “the taxpayer or a member of the taxpayer’s family is lawfully present in the United States,” and “the lawfully present taxpayer or family member is not eligible for the Medicaid program.” Treas. Reg. 1.36B-2(b)(5).

The regulation thus casts a net wider than the statute. The taxpayer herself might not satisfy the Section 36B(c)(1)(B) requirements, but she will receive tax credits if, for example, one of her dependent family members satisfies those requirements.

If the taxpayer is simply getting credits that would otherwise go to her lawfully present dependent, I suppose there’s no major harm here. However, under Section 36B(c)(1)(D), dependents can’t take the premium tax credit on their own. Any credits for dependents must latch on to an “applicable taxpayer.” Thus, the Treasury regulation expands the number of persons eligible for the premium tax credit.

It’s hard to get worked up over extending tax credits to our nation’s poorest, but the unfortunate structure of the ACA may lead to controversy. Under Section 4980H(a), a business can face severe penalties if it fails to offer health insurance coverage and even one of its employees receives a premium tax credit. Thus, the invalid extension of the tax credit, even when made to a sympathetic individual, can trigger adverse consequences.  [Update: See this post for further thoughts on standing.]

The issues I’ve raised here are obviously less significant than the broad issues at issue in King v. Burwell. However, I think the expansion of Section 36B(c)(1)(B) presents a potentially clearer instance of administrative overreaching. At least for King, the Treasury briefly explained its interpretation of Section 36B(b)(2), and reasonable minds can disagree on the outcome of the case. However, the Preamble to the regulations on lawful residents simply parrots the statutory language, giving no hint as to the expansion provided by the actual regulations. I’m struggling to discover any statutory basis for that expansion.

There may also be many other circumstances under the ACA where administrative regulations contradict the statute — I stumbled upon Treas. Reg. 1.36B-2(b)(5) just while doing some cursory research. (Section (b)(6) of the regulations also seems off to me, but I’m still looking into it.) Let’s hope that our elected representatives can find a way to fix the statute, lest every Term yield another case dealing with the premium tax credit.

By Andy Grewal

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