The Supreme Court upholds new punitive taxes on thousands of Iowa employers and uninsured individuals. That’s the flip side of the decision yesterday ruling that tax credits remain available for health insurance purchased on the federal exchanges, despite the language of the Obamacare statute — a ruling characterized by the Des Moines Register as “Obamacare ruling protects 40,000 Iowans’ subsidies.”
Here’s what it means to those footing the bill:
– The employer mandates will take effect in all states as scheduled. The “Employer Shared Responsibility provisions” require employers to purchase “adequate” health coverage for employees. It applied in 2014 to employers with over 100 “full-time equivalent” employees in 2013. In 2015, it applies to employers who had over 50 full-time equivalent employees in 2014. It applies to government and non-profit employers, as well as to businesses.
Employers who fail to offer coverage to 95% of their FTEs and dependents are subject to a $2,000 penalty, pro-rated for months where coverage is lacking, for non-covered FTEs, with a 30-employee exemption. “Full-time Equivalent” means 30 hours per week.
The penalties kick in only if at least one employee claims the coverage tax credit. Yesterday’s decision ensures the mandate applies in all states — rather than just the 14 with state-run exchanges — because the triggering credits will remain available nationwide.
The individual mandate tax applies fully in all states. The “Individual Shared Responsibility Provision” penalizes individuals who aren’t covered at work and who fail to purchase “adequate” and “affordable” coverage. The penalty for 2015 is the greater of $325 ($162.50 for those under 18) or 2% of “household” income. It is prorated if coverage is obtained for some months and not others.
Yesterday’s decision broadens the reach of the tax because the penalty only applies if available coverage is “affordable.” The tax credits are used in computing “affordability,” so the availability of the credits nationwide broadens the tax to many more taxpayers.
The Section 36B tax credit remains available nationwide. This is the refundable credit that was the subject of yesterday’s decision. It is estimated when coverage is obtained and applied against coverage costs for the year. It is “trued up” when the taxpayer files their 1040 for the coverage year — a process that can sometimes mean more credit, but that sometimes triggers a big balance due. Because the credit phases out in steps, one extra dollar of income can trigger thousands of dollars of additional taxes:
Consider a middle-aged married couple earning $62,040, 400 percent of the FPL for a two-person household ($15,510.) If the second cheapest Silver plan in their area costs $1,200 per month, they would receive a subsidy of $8,506 in order to cap that plan’s price at 9.5 percent of their income. However, if they earned $62,041—only a dollar more—the entire subsidy would evaporate.
Because the $8,506 would have been applied to health premiums, the household would have to pay it back on April 15.
What do I think of the decision? In March I wrote:
In a less politically-sensitive context, one could expect a 9-0 or 8-1 decision against the IRS. That’s what happened in Gitlitz, where the court ruled that the IRS couldn’t regulate away a perceived misdrafting of the tax code’s S corporation basis rules that allowed a windfall to taxpayers whose S corporations had debt forgiveness income. “Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.” But because a decision against IRS here would invalidate key parts of Obamacare in most of the country, politics is a big part of the process.
That means I think the Scalia dissent gets it right, but we don’t get to file tax returns based on the dissent. It should give pause to those who write legislation, though — there’s no telling how the Supremes will read their work if they don’t like what it does.
Andy Grewal, Grewal: King v. Burwell — The IRS Isn’t An Expert? (TaxProf Blog)
Tyler Cowen, King vs. Burwell, and other stuff. “So on net I take this to be good news, although arguably it is bad news that it is good news.”
Megan McArdle, Subsidies and All, Obamacare Stays
Alan Cole, James Kennedy, King v. Burwell: Supreme Court Upholds Subsidies to Federal Exchanges (Tax Policy Blog)
Roger McEowen, The U.S. Supreme Court and Statutory Construction – Words Don’t Mean What They Say (AgDocket)
Stuff other than the Supreme Court decision:
Jason Dinesen, Choosing a Business Entity: Sole Proprietor
Joseph Thorndike, Rand Paul’s Tax Plan May Be Radical, But It’s Not Impossible (Tax Analysts Blog) “But radical doesn’t mean impossible. Since proportionality lies at the heart of Paul’s plan, history suggests it might have a shot.”
Ethan Greene, Net Investment Income Tax Handicaps Those Meant to Benefit (Tax Policy Blog). “The irony of the NIIT is it taxes the very demographic it was intended to aid; that is, retirees relying on their savings and investment, and those with disabilities, counting on trust income or estate inheritance to maintain their quality of life.”
Donald Marron, Everything You Should Know about Taxing Carbon. (TaxVox)
TaxProf, The IRS Scandal, Day 778
Caleb Newquist, The Accounting Profession’s Murky Future (Going Concern)