New Obamacare Challenge: Lawsuit Says IRS Is Flouting the Law As Written by Congress

Susan Jones | May 2, 2013 | 6:33am EDT
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President Barack Obama hugs HHS Secretary Kathleen Sebelius and then-House Speaker Nancy Pelosi after signing the Obamacare law on March 23, 2010. (White House photo/Pete Souza)

( - Here comes another legal challenge to Obamacare: On Thursday, a group of small business owners and individuals in six states sued the federal government over an IRS regulation that they say goes beyond the "plain language" of the Affordable Care Act (ACA).

In a nutshell, the plaintiffs argue that federal subsidies intended to help lower-income people afford insurance are going to states that should not get them.

The way the Affordable Care Act is written, states that refuse to set up their own health care exchanges are not eligible for the federal premium subsidies.

But the IRS rule says lower-income people living in those states will get federal subsidies to help them pay for their insurance premiums -- even though the Affordable Care Act's statutory language limits those subsidies to exchanges established by the states.

The lawsuit says because of the IRS rule that illegally expands federal subsidies to all states, the plaintiffs "will be forced to either purchase or sponsor specific insurance that they otherwise would not purchase or sponsor, or expose themselves to financial penalties."

Bottom line: The plaintiffs want nothing to do with Obamacare, and they say the availability of federal subsidies will force them into it -- or penalize them for avoiding it.

Here's the background: To encourage states to establish their own health insurance exchanges, Congress offered low- and moderate- income residents premium assistance - in the form of refundable tax credits -- to help them buy insurance on state health exchanges.

States that refused to establish their own exchanges -- leaving it to the federal government instead -- would not get subsidized premiums.

As it turns out, a majority of states (33) have refused to establish their own health care exchanges. But regardless of statutory language limiting subsidized premiums to exchanges established by the states, the IRS has issued a rule authorizing federal subsidies even in states that are letting the federal government establish their exchanges for them.

Disbursing monies from the U.S. Treasury in this way exceeds the authority granted by Obamacare, the plaintiffs argue. As the lawsuit put it, "The IRS Rule squarely contravenes the express text of the ACA, ignoring the clear limitations that Congress imposed on the availability of the federal subsidies."

“Agencies are bound by the laws enacted by Congress,” said Sam Kazman, general counsel of the Competitive Enterprise Institute (CEI), which is coordinating the lawsuit. “Obamacare is already an incredibly massive program.  For the IRS to expand it even more, without congressional authorization and in a manner aimed at undercutting state choice, is flagrantly illegal.” 

The plaintiffs say while most subsidies benefit the recipient, the Obamacare subsidies "financially injure and restrict the economic choices" of certain individuals.

Here's why: If they were not eligible for federal subsidies, the plaintiffs say they would be exempt from Obamacare's individual mandate under a clause that applies to people for whom insurance is "unaffordable."

But with the federal subsidies, more people will be subject to the individual mandate, which requires just about everyone to buy health insurance, whether they want it or not – or pay a penalty.

The IRS rule also adversely affects employers, the lawsuit says. That's because the Affordable Care Act fines certain businesses ($2,000 per employee) if their full-time workers use federal subsidies to purchase coverage on an exchange instead of getting it through the company. "Thus, the IRS Rule also has the effect of triggering the employer mandate payment for businesses in states that declined to establish their own Exchanges."

The plaintiffs argue that the IRS -- by extending "unauthorized subsidies" to states that should not have them, are triggering mandates and fines against the plaintiffs.

"The IRS Rule thus injures all of these Plaintiffs," the lawsuit states, and it gives a number of examples, as follows:

Plaintiffs described in the lawsuit include a woman from Virginia, which is one of the states that has decided not to establish its own health insurance exchange.

Plaintiff Jacqueline Halbig earns most of her money from her one-woman consulting practice. Without the IRS rule extending federal subsidies to Virginia, Halbig would fall within Obamacare's unaffordability exemption, meaning she would not have to pay a penalty under the individual mandate (the mandate requires most people to buy health insurance or pay a fine to the IRS).

But because the IRS has expanded federal subsidies to all states, Halbig will be eligible for premium assistance. She will be able to afford insurance, and she will no longer qualify for the unaffordability exemption. "As a result," the lawsuit says, "Halbig will be forced to either pay a penalty or purchase more insurance than she wants. She is therefore injured by the IRS Rule, because it has the effect of either subjecting her to monetary sanctions or requiring her to alter her behavior to avoid those sanctions."

Another plaintiff is the Community National Bank of Kansas, which has 80 full-time employees. According to the lawsuit, "The Bank’s directors object to certain morally offensive provisions of the ACA (such as its definition of contraceptive and abortifacient drugs as 'preventive services') and have determined that the Bank would rather drop the health insurance it offers to its full-time employees than comply with those provisions."

However, dropping its own health insurance would expose the bank to heavy fines under Obamacare, because the IRS rule would make it possible for some of the banks' employees to get federally subsidized insurance from the health care exchange, which the federal government is establishing in Kansas. "The bank is therefore injured by the IRS Rule, because it has the effect of either subjecting it to monetary sanctions or requiring it to alter its behavior to avoid those sanctions."

The plaintiffs want the court to declare the IRS rule illegal, and they are seeking a preliminary and a permanent injunction to block its application.

Defendants named in the lawsuit include Health and Human Services Secretary Kathleen Sebelius, Treasury Secretary Jacob Lew,  and Acting Commissioner of the Internal Revenue Service Steven Miller.

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