Unlawful Aliens and ACA Tax Credits

by Andy Grewal — Tuesday, Mar. 31, 2015

In my prior post, I explained how Treasury/IRS regulations contradict Section 36B and essentially extend premium tax credits to the lawfully residing dependents of an unlawfully residing alien.

I posited that a controversy could arise when the extension of that credit triggered an employee penalty. To avoid a penalty under Section 4980H(a), an employer must provide healthcare to all of its full-time employees and their dependents. If employees have to go to the exchanges to get health coverage and a “premium tax credit . . . is allowed or paid with respect to the employee,” the penalty applies.

I read the statute as triggering the penalty where an unlawful alien employee gets coverage for his lawfully residing dependent, even if the employee does not himself enroll (unlawful status precludes enrollment). Because dependents can’t take premium tax credits, any credits arising from their health coverage necessarily would go on the unlawful employee’s return — an unlawful person can be an applicable taxpayer under Section 36B. Thus, the statutory standard is satisfied. The dependent generates a credit, but the “premium tax credit . . .is allowed or paid with respect to the employee.” Section 4980H does not seem to require that a tax credit arise with respect to the employee’s own health coverage.

However, the preamble to the employer penalty regulations offers an employer-sympathetic interpretation and concludes that a credit with respect to “coverage for a dependent only will not result in liability for the employer under section 4980H.” T.D. 9655 (2/14/2014). The IRS does not explain its reasons for that interpretation, although maybe there is some other statute in the ACA that leads to that result (comments on this point would be helpful).

In any event, given the IRS’s view, it seems unlikely that Section 4980H would establish a basis to challenge the IRS’s extension of the premium tax credit to the dependents of unlawful aliens. I’ve toyed with various scenarios, but they all seem fairly far fetched. Suppose, for example, that an an unlawful Parent and lawful Child were both full-time employees at the same company and the Parent obtained exchange coverage for the Child, In these circumstances, Section 4980H would be triggered, but only if, notwithstanding full-time employment, the Child remained a dependent of Parent within the meaning of Section 152. Also, Parent and Child would have to be working at miniscule wages to make the IRS regulation relevant, since the regulation applies only when household income is below the poverty line.

I suspect that any controversy over the IRS’s expansion of 36B(c)(1)(B) would play out in the political arena, not the courtroom. The IRS does not offer an explanation for rewriting the statute, but I take it that the agency wanted to help very poor, lawfully residing dependent aliens obtain health coverage. However, given Section 36B’s structure, the tax credits will actually go to an unlawful alien. Given the media’s typical coverage of legal issues, I could easily see reports abouts how the IRS has issued an invalid regulation to give free tax credits to unlawful aliens. I suspect that’s not going to sound great, and if the IRS is going to bend Section 36B, it might be politically wiser to say that the Section 36B(c)(1)(D) dependency restriction does not apply to lawful aliens who are dependents of unlawful aliens. Providing tax credits directly to lawful aliens, however, would change the analysis under Section 4980H, and conforming regulations would be required.

By Andy Grewal

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