Notice & Comment

Employer Consequences of the Illegal ACA Tax Credit Expansion

In my prior posts, I have discussed two Treasury/IRS regulations that contradict the language of Section 36B. The first regulation rewrites Section 36(c)(1)(B) and extends the ACA tax credit, in a roundabout way, to unlawful aliens. However, as I previously noted, it’s doubtful that the employers of the unlawful aliens would face any adverse consequences from that extension, although the political issues are sensitive. The second regulation, Reg. 1.36B-2(b)(6), which I discussed here, rewrites Section 36(c)(1)(A) and extends the premium tax credit to some persons whose incomes fall below the threshold required to claim the credit (100 percent of the relevant poverty line).

In this post, I want to explain the adverse employer consequences that may follow from that extension. Generally speaking, Section 4980H imposes a penalty on employers when even one of their full-time employees receives a credit under Section 36B for a single month. Consequently, if the IRS expands the scope of persons eligible for a credit, as it did under Reg. 1.36B-2(b)(6), an employer faces a greater risk of paying the Section 4980H penalty.

At first glance, it might seem like the regulation would be unlikely to carry employer penalty consequences. Section 4980H looks to full-time employees, and the regulation extends the tax credit for persons whose actual incomes fall below the poverty line. If a single person were employed for a full year at federal minimum wage, her income (52 x 40 x 7.25 = $15,080) would generally exceed the poverty line amount ($11,070) and the regulation would be irrelevant (MAGI computations could bring the income down further, though).

However, it’s easy to imagine circumstances where a full-time, minimum wage employee would become eligible for the premium tax credit by virtue of the regulation. The employee might, for example work less than the full year, in which case she might, on an annual basis, earn less than the poverty amount. Also, the statute defines “full-time” to include a 30-hour work week, such that a full-time employee can be very close to the poverty level (52 x 30 x 7.25= $11,310). Or, the employee might have dependents, in which case the poverty line amount would increase to take into account the increased family size and a 40-hour a week salary would keep her below the poverty line.

The IRS’s rewrite of the statute thus carries consequences beyond those associated with enrollees. In making this point, I hope it’s clear that I’m not trying to deny help to some of our society’s most vulnerable persons, who may be caught by the Medicaid gap and who could benefit from the rule (about 4 million people). Rather, I wish to address the arbitrariness of IRS action in the ACA context. A complex regime cannot be fairly administered when the words of the law are routinely flouted, especially when the granting of benefits to one group potentially triggers penalties for others. My hope is that our elected representatives will reach some compromise that addresses the defects in the existing legislation in a way that respects the rule of law.

By Andy Grewal