Another Illegal Expansion of the ACA Tax Credit

by Andy Grewal — Monday, Apr. 6, 2015

In a prior post, I wrote about Treasury/IRS regulations that contradict Section 36B and extend the ACA premium tax credit to some low-income unlawful aliens. In this post, I want to discuss another regulation that contradicts the statute. Although Section 36B provides tax credits only if your household income falls within a certain range (100 to 400 percent of the relevant poverty line amount), Treas. Reg. 1.36B-2(b)(6) rewrites the statute and provides credits to those who fall below the 100 percent amount.

Under the regulation, a person becomes an “applicable taxpayer” and therefore eligible for ACA tax credit if she gets health insurance on an exchange, the exchange estimates that her income falls with the 100-400 percent range, and she in fact gets advance payments, even though her annual household income is less than the 100 percent amount required by law.  Being an applicable taxpayer carries significant consequences and can cause one’s employer to face severe penalties under Section 4980H. (More on that in a later post.)

It’s easy to come up with a policy supporting this re-write of Section 36B, but I can’t identify any statutory authority for doing so. Policy-wise, the regulation addresses a problem related to imperfections in the Exchange regime, under which differences between estimated household income and actual household income can lead to tax repayments. But authority-wise, Congress plainly and unambiguously limited the premium tax credit to persons who come within the 100 and 400 range; the Treasury lacks the authority to grant credits to persons outside that range.

Of course, I don’t blame the beneficiaries here. Say all you want about multinationals or private equity managers lobbying hard to get special tax breaks, but I don’t think that our country’s poorest persons somehow banded together and lobbied the IRS to give away the store.

Still, as a legal matter, Treas. Reg. 1.36B-2(b)(6) reflects a disturbing rule. Although the regulation contemplates that an “exchange” will estimate your income, the exchange does so with user-provided information. Consequently, the regulation encourages taxpayers who are below the statutory minimum of 100 percent to inflate their income, especially if they aren’t eligible for Medicaid. Unscrupulous tax advisors or enrollment counselors might also instruct taxpayers to game the system and get free tax credits. This is reminiscent of the EITC regime, where phantom income can be used to abuse the tax system.

The regulation also encourages inappropriate behavior because it turns low-income persons into “applicable taxpayers” only if advance payments are actually made. Usually, taxpayers can get premium tax credits in the form of either advance payments or refundable tax credits. But the regulation rewards those who inflate their income at enrollment time and offers no benefits for the cautious taxpayers who want to claim a credit only at the end of the year.

The Treasury’s lack of transparency regarding the regulation also raises concerns. The Preamble to the regulation cites no statutory authority for re-writing Section 36B. It says only that the IRS is intending to “clarify” the statute, but I’m not sure what’s unclear about the 100-400 percent range. More confusingly, the IRS rejects extending the regulation to persons who end up above the 400 range, noting that that interpretation is “contrary to the language of Section 36B.” Apparently, it’s ambiguous whether 50 is less than 100, but unambiguous that 450 is greater than 400.

I seriously wonder whether a statutory regime can succeed where the agencies charged with its enforcement freely rewrite it. I’ve only dabbled in the ACA, focusing on a handful of issues related to the premium tax credit, but I’m getting the sense that there are likely endless scenarios where the statute says one thing but the IRS or HHS say another. Trying to trace every regulation to some statutory authority (or lack thereof) would likely be an illuminating, if dreadfully dull, project. But whether you support the ACA or against it, you should agree that it’s confusing for the public to hear the lawmakers saying one thing and the administrators saying something completely different.

By  Andy Grewal

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About Andy Grewal

Law Professor, University of Iowa

Cite As: Andy Grewal, Another Illegal Expansion of the ACA Tax Credit, Yale J. on Reg.: Notice & Comment (Apr. 6, 2015), http://yalejreg.com/nc/another-illegal-expansion-of-the-aca-tax-credit-by-andy-grewal/.

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