Fed or State Exchange? It Will be an Issue

A glitch in the Affordable Care Act may cause more trouble than originally anticipated when it comes to the fed or state exchange.  In the original formation of the bill, tax credits were set up for individuals who cannot get coverage at their place of employment and have to purchase insurance from the state exchanges.  At the same time, the law instructs the Fed to set up an exchange to provide access in states that refuse to set up exchanges of their own.  Florida is one of the states that will likely not shell out the funds necessary to build these exchanges.

Here is the issue: the Affordable Care Act fails to provide a tax credit to individuals who buy health insurance from the federal exchange.  In other words, families who buy from state exchanges get a tax credit, families who buy from the federal exchange don’t.  At least that is how the law is written.

The IRS intends to follow the spirit of the law, rather than the letter.  Currently the IRS is planning to allow the tax credit for families who buy from the federal exchange as well.  As a result of the IRS’ unusual generosity, many have glossed over this error.  After all, no one fights with the IRS unless they are taking away tax credits and deductions.

So who would object?  Kiplinger notes in their mid-July newsletter that businesses with 50 or more employees will.  In fact, they have a $50,000 or more reason to object.  Starting in 2014, businesses with 50 or more employees who do not provide affordable health insurance to their employees will be fined $2,000 per employee.  If those employees get the tax credit for buying from exchanges, that penalty increases to $3,000.

In other words, if the tax credit extends to those who buy from federal exchanges, businesses will be paying an extra $1,000  in penalty taxes per employee in those states.  That additional penalty could reach millions of dollars for large companies.

As of right now, the law is on the side of the businesses.  The controversial nature of the bill has prevented any significant amendment process besides fixing things that are unpopular for everybody, such as the 1099 rule.  If this error can’t be fixed through the legislative process in the next year and a half, ACA may be going back to court.