Federal Court to Hear Oklahoma Attorney General’s Challenge to IRS Health Rule

With Internal Revenue Service (IRS) controversies continuing to make headlines, the agency faces a lesser known, but critical test in the days to come. On Thursday, the U.S. District Court for the Eastern District of Oklahoma will hear the federal government’s motion to dismiss Attorney General Scott Pruitt’s legal challenge to an IRS rule aiding implementation of the Affordable Care Act (ACA).

Pruitt’s lawsuit turns on whether the ACA’s subsidies for individuals to buy health insurance are available in states that declined to establish health insurance exchanges. Under the ACA, states were given the option to create state-based exchanges, or default to a federal exchange. Pruitt argues that the plain language of the ACA does not authorize subsidies in the 34 states that defaulted to a federal exchange; the IRS rule released last year maintains that subsidies are available in all states.

Pruitt contends that the IRS rule allowing for distribution of subsidies through federal exchanges unlawfully triggers tax penalties on employers that don’t comply with the ACA’s “employer mandate.” Under the employer mandate—the law’s requirement that businesses with 50 or more employees provide health insurance—fines can only be imposed if an employer does not offer government approved coverage and an employee is eligible for tax credits through an exchange. If tax credits aren’t available, the employer mandate penalties could be effectively eliminated. These penalties, Pruitt argues, put states at a “competitive disadvantage for jobs and job growth.”

Observers at the Kaiser Family Foundation note that the “claim that congress denied to the federal exchanges the power to distribute tax credits and subsidies seems correct as a literal reading of the most relevant provisions.” The non-partisan Congressional Research Service likewise notes the law “seems to be straightforward on its face,” in making subsidies available only in state-based exchanges.

Meanwhile, Pruitt claims the statutory differences between a federal and state exchange were intended to promote competitive federalism and state choice: “[t]he Act leaves this policy judgment to each State and provides a mechanism for each State to choose the alternative it thinks is better for its people.”

Before Pruitt’s arguments are heard, however, his challenge will have to survive this week’s hearing on the federal government’s motion to dismiss. The motion claims that Oklahoma lacks standing to challenge the IRS rule, and that in any case, the rule can’t be challenged until after subsidies are actually distributed. Pruitt argues that Oklahoma has standing under several claims, and that Oklahoma employers are already acting in anticipation of the employer mandate.

The outcome of the hearing will be closely watched. Last month, a group of employers and individuals in Kansas, Missouri, Tennessee, Texas, Virginia, and West Virginia filed a similar lawsuit in the U.S. District Court for the District of Columbia.

UPDATE: The federal government’s motion to dismiss case was heard by U.S. District Judge Ronald White on June 18th.  After a two-hour hearing, Judge White said a ruling would be made soon, but did not provide a deadline

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