Just before the U.S. Supreme Court closed its 2014 term, two notable decisions were announced. Both have important tax consequences for individuals and businesses, nationwide and on a state level.
Premiums Tax Credit
Under the Affordable Care Act (ACA), an individual who purchases health coverage from a marketplace (also called an exchange), has household income below a set level, and meets certain other requirements can receive government assistance to pay the premiums. The assistance is in the form of the premium tax credit (Code Sec. 36B). The credit can be obtained on an advanced basis to pay the premiums or claimed as a tax credit when an eligible individual files his or her federal income tax return.
Eligibility for the credit was challenged because of the wording of the statute, which limits the credit to those enrolled in coverage through “an Exchange established by the State.” It was argued that the word “state” meant the credit applied only to those enrolled through a state-established exchange. At present, 27 states rely entirely on the federal marketplace, seven maintain partnership exchanges (HHS views them as federal exchanges), and three have federally supported state-based exchanges that rely on the federal IT platform; only 13 states have state-created exchanges. Individuals in states that did not set up their own exchanges could obtain coverage through the federal exchange (www.healthcare.gov), but as the argument went, they would be ineligible for the credit. Effectively, these individuals would be unable to afford the coverage.
One appellate court said the statute “unambiguously restricts” the tax credit to state-created exchanges (Halbig v. Burwell, CA-DC, 758 F. 3d 390, 394 (2014)). Another held that the credit applied to coverage obtained through any government exchange (King v. Burwell, CA-4, 759 F. 3d 358 (2014)). (The cases were originally brought against then Secretary of Health and Human Services Sebelius.)
Now the U.S. Supreme Court has settled the matter in favor of the Administration, which had argued for a broad interpretation (King v. Burwell, S.Ct., USTC ¶50,356). In a six to three decision, the majority concluded that the language of the statute referring to “State” should be read to include federal exchanges. Chief Justice Roberts, in the majority opinion, said “[t]he context and structure of the Act [ACA] compel us to depart from what would otherwise be the most natural reading [of this word].” The effect of the opinion from a tax perspective is to enable otherwise eligible individuals to claim the credit as long as they are enrolled for health coverage through a government exchange. The estimated 6.2 million individuals that would have lost their subsidy had the Court ruled to the contrary can continue to enjoy eligibility for the credit.
The decision reflects Chief Justice Robert’s view that, “Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them.” Strong dissenting opinions considered the majority opinion to be judicially out of line in trying to fix a poorly written statute. While it may have been the intention of Congress to grant the credit to enrollees in all government exchanges, the clear language of the law would appear to limit them to state exchanges.
While the decision puts to rest any other challenges to the premium tax credit, it does not end all legal challenges to ACA. There are more than 100 current cases challenging various aspects of ACA; these challenges include:
• House v. Burwell (DC DC, filed 11/21/14) in which the House of Representatives is challenging the costsharing reduction payments to insurers. The House argues that there needs to be explicit appropriations for these payments to be made. The House is also challenging the Administration’s delay of the employer mandate.
• Sissel v. HHS (CA-DC, appeal for a rehearing en banc filed 10/6/14) is challenging the constitutionality of ACA on the grounds that its enactment violated the Origination Clause of the U.S. Constitution, which requires bills that raise revenue to originate in the House of Representatives. Note: Another case making a similar argument was dismissed for lack of standing (Holtz v. Burwell, CA-5, 4/24/15).
• Post-Burwell v. Hobby Lobby Stores, Inc. (S. Ct., 2014-2 USTC ¶50,341), which allowed a privately held company to object to paying for some forms of contraception for their employees, did not end the matter. There are more than 100 active cases challenging the requirement that insurers and employers provide contraceptive coverage for enrollees without any accommodations on religious grounds.
• Kawa Orthodontics LLP v. Lew (CA-11, 12/2/14) is challenging the delay of the employer mandate. The Eleventh Circuit dismissed for lack of standing, but Kawa is appealing to the U.S. Supreme Court (writ of certiorari filed 5/19/15).
In addition, Congressional action may limit or change parts of ACA. On June 18, 2015 the House voted 280 to 140 in favor of the Protect Medical Innovation Act (H.R. 160), which would repeal the 2.3% excise tax on medical devices. This tax, which took effect in 2013, is imposed on manufacturers and importers of medical devices. Opponents of the tax who support repeal argue that it stifles innovation. The measure now heads to the Senate, where there appears to be some bi-partisan support. Of course, any passage must have sufficient support to withstand a presidential veto.
Also before Congress is a bill called the Middle Class Health Benefits Tax Repeal Act (H.R. 2050), which would repeal the so-called Cadillac tax. This is a 40% excise tax on insurance plans that cost more than $10,200 per year for individual coverage or $27,500 for family coverage and is poised to go into effect in 2018. The measure is supported by unions that offer members these general health benefits and by many other interest groups. It is projected by one professional services company (http://www.towerswatson.com/en-US/Press/2014/09/nearly-half-us-employers-to-hit-health-care-cadillac-tax-in-2018-with-82-percent-by-2023) that 48% of large employers would be affected in 2018 and, because of the way the law is written, as many as 82% of large employers would be affected by 2023.
The day after settling questions about the premium tax credit, the U.S. Supreme Court held that all states must issue marriage licenses to same-sex couples and recognize valid same-sex marriages entered into in other jurisdictions (Obergefell v. Hodges, S.C., 2015-1 USTC S.Ct., USTC ¶50,357). In a five to four decision, the Court held that the 14th Amendment guarantees the right of personal choice in marriage. From a tax perspective, the decision has far-reaching consequences.
State income taxes. The Court’s decision striking down Section 3 of the federal Defense of Marriage Act (DOMA) and requiring the federal government to recognize same-sex marriages (Windsor, S.Ct., 2013-2 USTC ¶50,400), prompted the IRS to issue guidance (Rev. Rul. 2013-17). That ruling allowed same-sex couples to file joint tax returns, starting in all open tax years; it did not require them to file amended returns claiming joint filing status before September 16, 2013. Now, states that had not recognized same-sex couples until the new decision could follow the IRS’s lead. This would allow those who chose to do so to file amended state income tax returns using married filing jointly status but likely same-sex couples would not be required to amend returns for open years if they did not want to do so. Note: If couples amend state income tax returns, it affects the itemized deduction for state income taxes claimed on federal returns. Thus, amended federal income tax returns would be necessary.
Certain tax rules should also be reviewed on a state income tax level. For example, health benefits provided to a same-sex spouse may have been taxed to the employee; this is no longer so. Similarly, other tax-free spousal benefits provided by employers may have been taxed to an employee with a same-sex spouse but is not tax free.
State death taxes. Executors of decedents who died in states with estate or inheritance taxes that have not previously recognized same-sex marriages may need to file refund claims. This would be necessary where property passing to a same-sex spouse had not previously received the same treatment as property passing to an opposite-sex spouse. What states are going to do about allowing claims against estates by same-sex spouses that had not been able to make them before the Court’s decision is uncertain.
While the high Court has settled certain important questions, there continues to be ambiguity and open tax questions. Settlement of these matters remains for another day.
Executive Editor Sidney Kess is CPA-attorney, speaker and author of hundreds of tax books. The AICPA established the Sidney Kess Award for Excellence in Continuing Education in his honor, best-known for lecturing to over 700,000 practitioners on tax. Kess is counsel at Kostelanetz & Fink and is consulting editor to CCH.