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PPACA and Penalties: State v. Federal Exchanges

Posted in Plan Administration, Welfare Plans

As we get closer to full enactment of PPACA, the issue of penalties and cost-sharing comes closer and closer to the forefront.  Within this penalty consideration comes the issue of whether or not a state exchange is established.  As of December 14, 18 states have committed to establishing a state exchange and 24 states have committed to participating in the federal exchange.  This becomes significant because of the issue over whether employers who operate in states that DO NOT have a state-established exchange will face penalties.

See, the trigger for penalties is whether a large employer has one or more employees who participate in an exchange who are eligible for tax credits.  But a strict reading of the rules indicates that tax credits are only available to employees who participate in state exchanges.  There is no similar provision for credits for those who participate in the federal exchange.  So if the plain language is read literally, a person who participates in the state exchange who is eligible for a tax credit would trigger a penalty to his employer, whereas a participant in the federal exchange could not get a tax credit and so his employer would not face a penalty.

For example, a large employer in New Jersey (opting for the federal exchange) could opt to not offer health insurance and avoid the $2,000 per person penalty because none of those employees would be eligible for tax credits.  A large employer in New York (opting for the state exchange) would face a penalty if any of its employees participated in the exchange and received tax credits.  As you can imagine, this makes New York appear much less hospitable to business because of the potential penalty.

Of course there will have to be further guidance on this issue and there is already litigation pending by one state challenging the application of the statute.  While many commentators expect the IRS to opine that the law was intended to provide credits for those in the federal exchange as well, the statute does not provide for that extension and the IRS is not free to interpret laws; it can only act on laws as written.  So watch carefully for what your state is doing with respect to the exchanges.  If they go with state exchanges (like New York and California), penalties should be a concern.  If they go with the federal exchange (like Pennsylvania and New Jersey), there may still be penalties, but we can’t be certain until we get further guidance.