Joe Kristan is a CPA at Roth & Company P.C.
Last year's Supreme Court decision upholding the Affordable Care Act as a constitutional tax provision means that the court battles were over, right?
Hardly. And the continuing controversy will likely leave many taxpayers in suspense over their 2014 federal tax bills well into next year.
While the ACA has been ruled constitutional, the operation of the complex law remains at issue. Last month two important federal appeals courts reached opposite conclusions on whether policies purchased through federally-established exchanges are eligible for tax credit subsidies. The D.C. Court of Appeals ruled in Halbig that only policies purchased through state-established exchanges qualify for the tax credits. The Fourth Circuit, which covers Maryland, North Carolina, and Virginia, ruled that policies purchased on federal exchanges could earn tax credits.
The controversy is likely headed to the U.S. Supreme Court, but no ruling is likely until next year. That poses a problem for taxpayers, as the ultimate decision determines whether two key Obamacare taxes apply in 2014.
The ACA relies on tax penalties to encourage certain behavior by taxpayers. The "employer mandate" applies in 2014 to businesses employing over 100 "full-time equivalent" employees. Employers subject to the mandate face a penalty that is triggered when an employee qualifies for tax credits on the purchase of a policy on the exchange. No tax credits, no penalty.
The individual mandate applies when a qualifying individual fails to purchase an "affordable" policy -- taking the tax credits into account. If the courts hold that the tax credits don't apply to policies purchased on federal exchanges, then the individual mandate -- at the greater of $95 or 1% of your income -- will no longer apply to people in those states because the available policies would no longer be "affordable." More on how mandates may be affected here.
So what's a taxpayer to do? Of course, you should start by consulting your own tax adviser. While you can make a good argument that the D.C. Circuit decision for now gives you a defensible return position to not pay the tax, my inclination is to play it safe. While I think the D.C. Circuit's decision limiting tax credits to state-established exchanges is the correct reading of the tax law, the Supreme Court won't be asking my opinion. The Administration has asked the full D.C. Circuit to review the decision, which was made by a three-judge panel, so it could be reversed sooner. And if they disagree with me, the IRS won't let you use my opinion as an excuse.
That's why I consider it prudent to assume, in planning for the individual mandate and employer mandate, that the courts will uphold the credits. If you plan as if the mandate will apply, you will be managing your employee base, your insurance purchases, and your employee time policies, in ways to keep your costs down. You will also be setting aside funds to pay any mandate tax penalties that apply. And if the courts do the unthinkable and agree with me, you will find yourself with a windfall -- always a better result than a sudden unplanned tax liability.