Frustration with the Premium Tax Credit, Designated Orders 11/19/18 – 11/23/18

We welcome Professor Samantha Galvin from the Sturm Law School at the University of Denver who brings us this weeks designated orders. She focuses on Premium Tax Credit disputes and the possibility of success in some cases where an insurance company or health insurance marketplace erred. Professor Galvin’s success in the second clinic case she describes makes me hopeful that the final thoughts in this post on APTC and third-party fraud were not entirely off the mark. Christine

Only four orders were designated during the week of Thanksgiving. I discuss one in detail and summarize the others below.

Frustration with the Premium Tax Credit

Ovid Sachi & Helen Sachi v. CIR, Docket No. 12032-17 (here)

This first order and decision was issued in a case involving the premium tax credit (“PTC”) under section 36B. Christine Speidel and I authored the Affordable Care Act (“ACA”) chapter in the most recent edition of Effectively Representing Your Client before IRS and it was my introduction to all things ACA.

A search of Tax Court opinions reveals that only ten cases, so far, mention the PTC. I anticipate that we will see more PTC related cases as time goes on, but it is still very much a developing area and this decision seems consistent with the others. Two early cases were discussed on PT here.


For those of you who may not know, the PTC is a credit available to taxpayers to whose incomes fall between 100% – 400% of the federal poverty line. It is intended to offset the cost of insurance premiums and make health insurance more affordable for middle and low-income taxpayers. The credit can be paid, either in part or in full, to the insurance company in advance and then taxpayers must reconcile the advance payments on form 8962 when they file their tax returns. Depending on the amount of credit received and the taxpayer’s modified adjusted gross income, the reconciliation may result in a refund if taxpayers were entitled to a larger credit than they received, or a balance due if taxpayers were entitled to a smaller credit or not entitled to any credit. I’ll avoid going into any further detail about the mechanics of the PTC, but for those looking for more information I encourage you to check out Chapter 29 in the 7th Edition of Effectively Representing.

This order itself is somewhat unexciting; respondent moves for summary judgment and petitioners do not respond. The Court goes on to provide some background information: petitioners received the PTC in 2015, but only reported half of their advance credits on  form 8962. Worse, the form’s reconciliation calculation showed that their income was higher than 400% of the federal poverty line rendering them ineligible for any credit. In their petition the taxpayers did not dispute the material facts (the total PTC amount and their modified adjusted gross income) but expressed frustration with the application process and confusing correspondence from the insurance company, the health insurance marketplace, and the IRS.

The order does not provide any information about whether the taxpayers correctly reported their anticipated income to the marketplace, or if they earned more income than expected – but these facts wouldn’t change the outcome of the case because the taxpayers are still responsible for repaying any excess credit in those situations. See McGuire v. C.I.R, 149 T.C. No. 9.

Taxpayer frustration in this area is sadly a common occurrence. We have had two Tax Court cases dealing with the PTC in my clinic. One case involved an incorrect form 1095-A which the marketplace refused to correct, but we were successful because the clients had documentation and receipts which allowed us to prove to the IRS what a correct form 1095-A would have looked like. The case was conceded by the IRS after we submitted this documentation to Appeals.

The other case involved advance PTC that was paid for a married couple; however, the insurer only effectuated a policy for the husband. The wife’s policy was never effectuated as evidenced by documentation provided to us, somewhat surprisingly, by the (now defunct) health insurance company. In other words, the Treasury was paying a credit to an insurer for a policy that did not exist, and as a result, the taxpayer never received any benefit. We were successful at the Appeals stage in the Tax Court process in this case as well.

We will see what happens in this area as it continues to develop, but it seems that success may be possible in cases where a taxpayer proves that the marketplace or insurance company made a mistake and the taxpayer did not benefit from the mistake.

Now, a summary of the other orders:

  • Napoleon v. Irabago & Zosima Irabagon v. C.I.R., Docket No. 1594-16L (here): This order and decision involves a sad instance of petitioners failing to understand their obligations in the Tax Court process and losing the opportunity to present evidence to reduce their liability. Petitioners initially petitioned the Tax Court on a notice of deficiency for 2010 and 2011. The petition was timely received but petitioners failed to pay the $60 filing fee despite being ordered to do so, and their case was ultimately dismissed. The IRS collection process proceeded, and eventually the taxpayers requested a collection due process hearing and then petitioned the Court on the notice of determination attempting to maintain their original argument (that they have proof of their expenses). Unfortunately, the Court no longer has jurisdiction to hear it.
  • Marvel Thompson v. CIR, Docket No. 29498-12 (here): This order grants respondent’s motion for summary judgment after the petitioner failed to respond. Although the Court said it could grant the motion without further analysis, it proceeds to discuss the merits of the case. Petitioner earned rents and royalties but didn’t file a return for tax years 2007 and 2008. I thought the case might take an interesting turn when petitioner stated that he had been incarcerated since 2004, so he could not have earned income, but in the end the Court finds that he has not met the burden of proving he did not earn the rent and royalty income while incarcerated.
  • Sue Hawkins v. CIR, Docket No. 19223-17 (here): After a decision was rendered in her case, petitioner wrote a letter to the Court which was accepted as a motion for reconsideration. The Court orders the IRS to respond and include information about how much of petitioner’s liability has been paid thus far. The Court also specifically orders petitioner to communicate and cooperate with the IRS as they prepare to respond to her motion and goes even further ordering that she answer their calls and letters. If she fails to do so, the initial decision will stand.




Third Party Fraud and APTC Repayment Liability

As we move into fall, it’s time for the 10.6 million individuals with “Obamacare” insurance to start thinking about 2019 open enrollment. The Centers for Medicare and Medicaid Services (CMS) released three reports in July illuminating aspects of the Health Insurance exchanges (or Marketplaces) created by the Affordable Care Act (ACA). These reports are described in detail by Katie Keith on the Health Affairs blog. Unsurprisingly, most people with 2018 Marketplace plans are receiving advance premium tax credits (APTC) to subsidize their premiums (87%, up slightly from 84% in 2017). CMS points out that premiums in the exchanges are rising and may be pricing out consumers who do not qualify for APTC.  

The Premium Tax Credit can make health insurance affordable for people without other options, but its structure of advance estimated payments combined with a sheer eligibility cliff when the advance payments are reconciled inevitably leads to harsh outcomes in some cases. (A few were discussed on this blog here.) As APTC absorbs the cost of premium increases, the stakes will only become higher for taxpayers. This blog post gives a brief background on APTC reconciliation in the context of the Tax Court’s deficiency jurisdiction, then highlights one circumstance in which taxpayers should be able to avoid APTC liability: fraudulent enrollment.  


Reconciliation of Advance Premium Tax Credits in the U.S. Tax Court 

The Premium Tax Credit is payable in advance through an ACA exchange, subject to reconciliation on each year’s tax return. See 42 U.S.C. § 18082section 36B(f). (“Marketplace” is the federal government’s preferred term in public communications; however, this blog will follow the statute and regulations in referring to exchanges.) Under section 36B(f), excess APTC awarded by an exchange is considered an income tax liability, subject to certain caps. If a household’s modified adjusted gross income reported on the tax return is above 400% of the federal poverty guideline, the taxpayers must repay all APTC received by themselves or their tax dependents. This eligibility cliff leads to harsh results as many including the National Taxpayer Advocate and the Tax Court have recognized.  

As an income tax liability, a taxpayer’s excess APTC may be redetermined by the Tax Court if the IRS issues a Statutory Notice of Deficiency and the taxpayer timely appeals. See sections 6211 through 6216. However, Tax Court review may not get the taxpayer the result they desire. Some of the most frustrating APTC cases for taxpayers involve government or third-party culpability. For example, in McGuire v. Comm’r, 149 T.C. 9 (2017), the exchange failed to process an income change that the taxpayers duly reported. It erroneously continued APTC payments even though the taxpayers’ income was too high. The Tax Court expressed sympathy but found there was nothing it could do to help the taxpayers avoid repayment, because they had received APTC to which they were not entitled. Likewise, in Gibson v. Comm’r, T.C. Memo. 2017-187, the taxpayers’ young adult dependent had signed up for APTC without the taxpayers’ knowledge. Since they did not disclaim their son as a dependent, the taxpayers were stuck with the repayment obligation.  

The problem for taxpayers hoping to avoid strict reconciliation is that section 36B simply does not have a mechanism to consider equity in the reconciliation of APTC. The U.S. Tax Court was created by Congress, not the U.S. Constitution, and as an “Article I” court its powers are limited to those granted by Congress. See Rawls Trading, L.P. et al. v. Comm’r, 138 T.C. 271, 292section 7442. In a nonprecedential case involving tax treatment of a retirement annuity, Judge Armen provided this explanation with helpful citations: 

Petitioners should understand that the Tax Court is a court of limited jurisdiction and that we are not at liberty to make decisions based solely in equity. See Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Woods v. Commissioner, 92 T.C. 776, 784-787 (1989); Estate of Rosenberg v. Commissioner, 73 T.C. 1014, 1017-1018 (1980); Hays Corp. v. Commissioner, 40 T.C. 436, 442-443 (1963), affd. 331 F.2d 422 (7th Cir. 1964) In other words, absent some constitutional defect, we are constrained to apply the law as written, see Estate of Cowser v. Commissioner, 736 F.2d 1168, 1171-1174 (7th Cir. 1984), affg. 80 T.C. 783 (1983), and we may not rewrite the law because we may deem its “‘effects susceptible of improvement'”, see Commissioner v. Lundy, 516 U.S. 235, 252 (1996) (quoting Badaracco v. Commissioner, 464 U.S. 386, 398 (1984)). Accordingly, petitioners’ appeal must, in this instance, be addressed to their elected representatives. “The proper place for a consideration of petitioner’s complaint is in the halls of Congress, not here.” Hays Corp. v. Commissioner, supra at 443. 

Zedaker v. Comm’r, T.C. Summary Opinion 2011-64. Given the statutory language and the Tax Court’s limited jurisdiction, taxpayers must generally seek remedies elsewhere for inequitable APTC debts.  

Addressing erroneous APTC: the exchange regulations 

A taxpayer who disputes the enrollment or APTC information provided to the IRS by the exchange should try to resolve the dispute with the exchange. It is always a good idea to try to address disputes through the exchange, even if you have a plausible argument in Tax Court. (There have been instances in which the exchange’s Form 1095-A did not match the insurance company records; it might be possible to prevail in Tax Court in such a case.) Exchanges do not like to make retroactive changes, however. After all, the federal government is relying on private insurance companies to offer insurance on the exchanges, and those companies can lose money from retroactive enrollment changes. The exchanges have tried to balance the financial needs of insurance companies with the reality that Form 1095-A can bring genuine errors and other compelling situations to light.  

In narrow circumstances, therefore, third-party misdeeds and exchange errors can entitle a taxpayer to nullify their exchange enrollment and avoid any APTC repayment obligation. Generally, the taxpayer must pursue this through the exchange or through their purported insurance company. Two recent practitioner inquiries reminded me that this is very much a live issue that needs to be identified as soon as possible when a taxpayer seeks assistance. Time is of the essence; the exchange regulations guarantee taxpayers only a short window to request retroactive changes.  

The CMS and Health and Human Services (HHS) exchange regulations at 45 C.F.R. § 155.430(b)(1)(iv) allow enrollees to retroactively cancel coverage when  

(A) The enrollee demonstrates to the Exchange that he or she attempted to terminate his or her coverage or enrollment in a QHP and experienced a technical error that did not allow the enrollee to terminate his or her coverage or enrollment through the Exchange, and requests retroactive termination within 60 days after he or she discovered the technical error. 

(B) The enrollee demonstrates to the Exchange that his or her enrollment in a QHP through the Exchange was unintentional, inadvertent, or erroneous and was the result of the error or misconduct of an officer, employee, or agent of the Exchange or HHS, its instrumentalities, or a non-Exchange entity providing enrollment assistance or conducting enrollment activities. Such enrollee must request cancellation within 60 days of discovering the unintentional, inadvertent, or erroneous enrollment. For purposes of this paragraph (b)(1)(iv)(B), misconduct includes the failure to comply with applicable standards under this part, part 156 of this subchapter, or other applicable Federal or State requirements as determined by the Exchange. 

(C) The enrollee demonstrates to the Exchange that he or she was enrolled in a QHP without his or her knowledge or consent by any third party, including third parties who have no connection with the Exchange, and requests cancellation within 60 days of discovering of the enrollment. 

This right to retroactive cancelation was added to the regulations in the Notice of Benefit and Payment Parameters for 2017, effective May 9, 2016. Note that there is no provision for erroneous APTC: if a taxpayer knowingly enrolled in coverage but received too much APTC, the exchange regulations do not offer a remedy.  

Insurance broker fraud is of particular concern and is a major reason that exchanges grant retroactive cancellations. One of the earliest reported examples came out of North Carolina in 2015. An insurance broker collected names and SSNs at homeless shelters, and ultimately enrolled 600 people. This earned him $9,000 per month in commissions, until the insurance company terminated the relationship. Some of the people enrolled were told they were getting “free insurance”, but others said they did not know they were signing up for insurance at all. The applications conveniently inflated the taxpayers’ income to exactly 100% of the federal poverty level, where they would not owe a monthly premium. While the broker collected his commissions, the enrollees were stuck with insurance that they could not use (for lack of funds to meet the deductible or cost-sharing) or did not know about.  Just having “free” insurance caused hardships for those who relied on programs for the uninsured to receive prescriptions and medical care.  

Reports of broker fraud continued in 2016 and 2017, leading CMS to hold a webinar and issue specific instructions to issuers on July 31, 2017, allowing enrollees meeting certain criteria to fast-track their cancellations. In the webinar slide deck, CMS notes: 

Many of the complainants only learned that they had been enrolled in QHPs when notified by the IRS that their tax refunds would not be processed until they submitted Form 8962 to reconcile their Premium Tax Credit. …Because contact information for consumers may not be correct, the 1095-As did not reach many of the enrollees. 

Also, many of the complaining consumers had other health insurance coverage.  

CMS also issued Examples for Issuers of QHPs in the Exchanges of Elements Demonstrating an Appropriate Rescission, which allows insurance companies to rescind coverage if they suspect fraud and the enrollee either confirms it or cannot be contacted. Finally, CMS’s instructions for broker fraud cases were reiterated on November 20, 2017. Fast-track cancelation is authorized for cases meeting five criteria: 

1. The consumer stated directly to CMS through the FFE Call Center that he/she did not enroll in the Exchange, did not give authorization or consent to an enrollment, and did not want the coverage;

2. The enrollment was completed by an agent or broker or an individual acting under the agent or broker’s direction or control;

3. The consumer is receiving 100% APTC or, if not 100%, the portion of the premium that is the responsibility of the enrollee was not made in whole or in part resulting in the termination of the policy;

4. The issuer has had no contact from the enrollees such as calls to customer service, emails, letters or any other direct contact, with the exception of communications from the enrollee stating that they did not know about or consent to the enrollment; 

5. No claims have been filed for any of the enrollees on each policy.

The regulation permitting cancelation can encompass a broader range of circumstances, but taxpayer representatives should check to see if their client meets the criteria for faster resolution of their dispute.  

One note on timing. While the regulation grants a 60-day dispute window, I would encourage advocates to try for cancelation in compelling situations even if the taxpayer discovered the fraudulent enrollment over 60 days ago. The regulation sets minimum requirements for exchanges to allow cancelations; it does not prevent an exchange from allowing a longer window or from making exceptions to the time limit under a reasoned, consistently applied policy. An exchange’s approach to cases beyond the 60-day window may vary also depending on whether the insurance company consents to the cancelation.  

Final thoughts 

If a taxpayer misses the 60-day dispute window, and the exchange refuses to cancel the coverage, is there any remedy in the Tax Court? As set out above, the taxpayer will likely not prevail by relying on equitable claims or principles. However, a legal argument based on analysis of the Code may have a chance of success. The case of Roberts v. Commissioner, 141 T.C. 569 (2013) (blogged by Scott Schumacher here) may provide some small hope by analogy. In his blog post, Scott explains the legal issue in Roberts: 

Roberts owned several IRA accounts, and during the year at issue, someone withdrew substantial amounts from those accounts.  Roberts said his now ex-wife forged his signature and took the money, while the ex-wife said that she had nothing to do with it.  The IRS took the position that even if she took the money, Roberts as the owner of the retirement accounts, was still taxable on the withdrawals.  

Thanks to the efforts of the University of Washington LITC, the taxpayer prevailed. Scott writes: 

Judge Marvel found that Roberts’ wife had in fact withdrawn the funds from his IRA accounts.  The Court went on to hold that because Roberts did not request, receive, or benefit from the IRA distributions, he was not a payee or distributee within the meaning of section 408(d)(1). 

Could a similar legal argument be made in the case of fraudulent exchange enrollment? If a taxpayer had no idea they were signed up for insurance and they meet all five criteria set out by CMS for expedited cancelation, were there actually “advance payments to [the] taxpayer” made within the meaning of section 36B(f)(2)? This may be ultimately a losing argument, but it could be one worth trying. It seems wisest to continue advocacy with the exchange, issuer and CMS, even if the taxpayer is pursuing an administrative or Tax Court appeal.


The Individual Mandate Loses Another Tooth

Christine Speidel brings us up to the minute on the individual mandate.  Keith

The Affordable Care Act has been limping along despite persistent efforts to roll back the law and loosen its interpretation and administration. Even the individual mandate remains in force for 2014 through 2018, to the chagrin of those who assumed that it would be repealed immediately or not enforced in the wake of 2017’s executive order. Nevertheless, the individual mandate is on its way out, and recent developments weaken its bite for the tax years to which it applies.  

The individual shared responsibility provision (ISRP) of the Code (section 5000A) requires most people to have health insurance, claim an exemption, or make an individual shared responsibility payment. In its preliminary review of the 2018 filing season, TIGTA reports that as of March 1 about 1.5 million tax returns reported ISRP totaling $993.9 million for 2017. Also, for the 2018 tax season the IRS implemented a filter to reject as incomplete returns which failed to report any of those three things. TIGTA reports that as of February 28, 2018 just over 104,000 “silent returns” had been rejected from e-filing.  

Taxpayers will have to report on their insurance status for at least one more tax season. In the December 2017 tax act, Congress reduced the penalty for not having insurance to $0 beginning on January 1, 2019. However, I’ve encountered people who believe the mandate is no longer in effect, including attorneys. I can understand why if they are checking the statute online. The way section 5000A was amended makes it look like the mandate is repealed already, but the effective date in the 2017 tax law says otherwise. The penalty is imposed per month without coverage or an exemption, and the Act § 11081(b) says “the amendments [to section 5000A] shall apply to months beginning after December 31, 2018.” Fortunately TIGTA reads that language the same way I do, so I can refer skeptics to their report.


Although the ISRP is still in effect, recent administrative guidance opens the door for many more taxpayers to get a hardship exemption. On April 9, 2018, the Center for Consumer Information & Insurance Oversight (CCIIO) issued guidance providing additional expansive examples of circumstances for which hardship exemptions will be granted. The guidance also indicates that applications will be accepted without documentation. The applicant must submit a brief explanation, and “should provide documentation” “when available”.  

Exemptions from the ISRP must ultimately be claimed on a tax return, but hardship exemptions must first be approved by the Marketplace. (The IRS Form 8965 instructions have a helpful chart explaining how to claim the various exemptions.) All states except Connecticut use the federal marketplace for hardship exemptions. 

Hardship is defined in the exchange regulations and includes the catchall, “other circumstances that prevented [a person] from obtaining coverage under a qualified health plan.” 45 CFR § 155.605(d)(1). HHS (through CCIIO) has elaborated on the regulatory definition in guidance, and it posts hardship information and application forms on   

The Marketplace hardship application lists 14 types of hardships, and the applicant must check off which boxes apply to them. The categories include homelessness, foreclosure or eviction, natural disaster, and domestic violence, among others, and the last category is “other”. These “category 14” hardship applications are reviewed on their merits and are well worth trying if your client can write a paragraph about why they should not have to pay a penalty. This has been the case for some time, but recent guidance provides reinforcement of the Marketplace’s current approach.  

The April 9 hardship guidance describes four additional examples of “category 14” hardships, which could apply to a significant number of people. Under the guidance, a hardship exemption may be granted if the applicant has no access to a Marketplace plan, or if there is only one insurance company offering plans in the applicant’s location. The latter is a major development. The Kaiser Family Foundation reported that “In 2018, about 26% of enrollees (living in 52% of counties) have access to just one insurer on the marketplace.”   

The guidance goes on to give two more examples of personal circumstances that will support a hardship exemption: first, people who object to buying a plan that covers abortion and have no other options in the Marketplace; and second, people whose personal circumstances create a hardship in accessing care through their Marketplace plans.  

Practitioners whose clients paid or owe the ISRP for prior years should consider submitting a hardship exemption application and filing a protective claim for refund with the IRS. The exchange regulations allow hardship applications to be submitted “during one of the 3 calendar years after the month or months during which the applicant attests that the hardship occurred.” 45 CFR § 155.610(h)(2). The April 9 guidance indicates that the hardship must have occurred within the current calendar year or the prior two calendar years. (I nearly missed this but caught it in the Health Affairs blog.) So, the federal Marketplace’s position is that one could apply today based on a hardship from January 2016 or later. I am glad to have clarity on the Marketplace’s approach, but I question whether it makes sense. It seems that a 3-year period has been turned into less than 3 years, depending on when one’s hardship occurs. A calendar year is January 1 to December 31. If a hardship occurs in April 2018, isn’t the first calendar year after the month of hardship 2019? Alternately, if you’re using the second dictionary definition of “calendar year” (365 days), shouldn’t the applicant have 36 months after the month of hardship?  

To close out this ISRP update, last but not least I recommend reading the National Taxpayer Advocate’s Tax Day testimony before the House of Representatives. Her testimony touches on many areas of concern including taxpayer confusion about their ISRP obligations, and particular difficulties the Amish and Mennonite communities face in attempting to comply. These difficulties were not helped by the IRS mistakenly treating these taxpayers as “silent return” filers in 2017. The continuing and upcoming changes to the ISRP surely do not help either.

Priority Status of Individual Mandate Tax Obligation

In In re Chesteen, No. 17-11472 (Bankr. E.D. La. 2-9-2017), the bankruptcy court determined that the liability imposed by the individual mandate is not a tax but a penalty. The consequence of that determination is that the IRS has a general unsecured claim in the debtor’s bankruptcy case and not a priority claim. With the elimination of the individual mandate last year, this decision may not have a significant impact; however, it is another in a series of cases pairing back items in the IRC that are classified as tax for purposes of the bankruptcy code. Guest blogger Bryan Camp teed up this issue and correctly predicted the outcome in a post in 2016.


The debtor failed to sign up for health insurance. That failure resulted in a liability to the IRS. He filed for chapter 13 bankruptcy on June 8, 2017. Both the debtor and the IRS filed multiple schedules or claims listing varying amounts of priority tax liability; however, in the final claim filed by the IRS it listed, inter alia, the amount of $695.00 due for 2016 as an excise tax entitled to priority status. The debtor objected to the claim, arguing that it was not a tax but a penalty.

Excise taxes that arise within three years of the filing of a bankruptcy petition receive priority status pursuant to BC 507(a)(8)(E)(i). The individual mandate liability is imposed under IRC 5000A and is labeled as an excise tax. The label placed on a liability by the Internal Revenue Code does not control the character of a debt for bankruptcy purposes. As we have discussed previously here, and here, the Supreme Court has determined that a liability labeled as a penalty under IRC 6672 is, for bankruptcy purposes, a tax in Sotelo v. United States, 436 U.S. 268, 275 (1978) and that an excise tax under IRC 4971(b) is, for bankruptcy purposes, a penalty in CF&I Fabricators, 518 U.S. 213, 224 (1996).

The court in Chesteen cites to Sotelo and CF&I Fabricators and numerous other cases that have decided this issue. To decide whether the individual mandate is a tax or a penalty, the court must determine whether the primary purpose of the individual mandate serves to support the government or punish and discourage certain conduct. The court cited CF&I Fabricators for the proposition that the proper analysis turns on whether the liability acts more like a penalty or more like a tax. The IRS argued that the individual mandate excise tax had many characteristics similar to the trust fund recovery penalty imposed by IRC 6672. The court rightly rejected that argument. The individual mandate bears little resemblance to the TFRP in form or substance; however, that does not necessarily mean that it is a penalty.

The court found that it is “designed to deter citizens from living without health insurance.” While true, that also does not necessarily control the determination. Many taxes seek to encourage or deter certain behaviors. If ever tax that influenced behavior or, sticking to the negative side, tried to keep people from doing certain things the number of liabilities imposed in the IRC which achieved the label of tax for bankruptcy purposes could be quite small. Here, the court looked also at the limitation imposed on the collection of the individual mandate. The severe limitation on the IRS collection function with respect to this tax influenced the court in its thinking of the special nature of this liability.

The court also looked at the label Congress placed on the individual mandate. In the statute imposing this liability, Congress referred to the liability 18 times as a penalty and none as a tax. While not controlling, this labeling certainly played an influential role in the thinking of the court.


To my knowledge, this decision represents the first bankruptcy court to render an opinion on the character of the individual mandate. The court follows traditional analysis in reaching the conclusion that the liability falls more on the penalty side of the equation than the tax side. Much about provisions placed into the Internal Revenue Code such as the Affordable Care Act will fail traditional tests of tax. As Congress loads more and more non-traditional liabilities into the IRC, practitioners should push back hard on the label of tax which results in priority status, which results in non-dischargeability. These types of issues will continue to provide a battleground for the IRS.


Recent Tax Court Decisions Point Out ACA Pitfalls For Taxpayers

In today’s guest post we welcome back Christine Speidel. Ms. Speidel is an attorney with the Vermont Low Income Taxpayer Clinic and the Office of the Health Care Advocate, both at Vermont Legal Aid. She has a particular interest in health care reform as it affects low-income taxpayers. Christine is the author of the 2016 update of the Affordable Care Act chapter of “Effectively Representing Your Client before the IRS” and a nationally recognized expert on the intersection of tax law and health law. In today’s post, Christine discusses the Premium Tax Credit, and two situations where taxpayers were left with sizeable tax deficiencies after purchasing insurance.

An earlier version of this post appeared on the Forbes PT site on July 20, 2017.

The first round of deficiency cases involving the premium tax credit are still working their way through the Tax Court. So far, the decisions apply the law in a straightforward way, but they illuminate certain issues that may not be commonly known.


Not all ACA-compliant insurance plans qualify a taxpayer for PTC

The first opinion I am aware of is Nelson v. Commissioner, from April 2017. The holding is based on a straightforward application of the Code, but it exposes a confusing feature of the ACA: tax credits are only available for plans purchased through an ACA exchange. I.R.C. § 36B(c)(2)(A)(i). Government communications to taxpayers use the term Marketplace, which the Nelsons claimed was confusing and caused them to think that their health insurance qualified them for a PTC.

In 2014 the Nelsons purchased health insurance from Kaiser Permanente, and they claimed a premium tax credit (PTC) on their income tax return based on that coverage. After all, they had purchased a plan on the insurance “market.” However, the Service disallowed the claim when it did not see a record of any exchange plan for the Nelsons. As required by section 36B, the Court upheld the deficiency.

On its face, the Nelsons’ contention is plausible. The record does not have any details of the insurance plan that the Nelsons purchased, but it could have been perfectly good coverage. (In Vermont, the exact same insurance plans are sold on and off the exchange.) It seems strange that ACA-compliant insurance (in terms of benefits and plan design) might not qualify for a PTC just because of where it was purchased.

There is a further wrinkle that is not discussed in the Nelson case. In many states a taxpayer actually can purchase a PTC-qualifying plan directly from an insurance company. This is called “direct enrollment in a manner considered to be through an exchange”, and it is arranged between the exchange and its participating insurance companies. See 45 C.F.R. § 156.1230. This hybrid enrollment affords the taxpayer the right to claim a PTC, and a Form 1095-A with which to claim it. The exchange issues a 1095-A for exchange “direct enrolled” plans, as it does with ordinary exchange enrollments. For 2018, CMS is making direct enrollment more streamlined and will not require the insurer’s website to redirect the taxpayer to the exchange site for an eligibility determination, as has been the case in prior years. It will be very important for companies to communicate clearly so that consumers know whether they are purchasing a PTC-eligible plan.

Any plan that qualifies for the PTC should generate a Form 1095-A to the taxpayer. This is of little comfort to those who were expecting a 1095-A but do not receive one.

Taxpayers pay for Exchange APTC errors

Recently the Tax Court issued its first opinion on reconciliation of advance PTC (APTC) payments. The result is quite harsh: a semi-retired couple owes nearly $13,000 in additional income tax because Covered California miscalculated their eligibility for the PTC. Walker v Comm’r, T.C. Summary Opinion 2017-50. There is no indication that the taxpayers misrepresented their income; rather, it appears that the exchange erred in finding the Walkers financially eligible.

This outcome is no surprise; it is a foreseeable consequence of the system’s design. During the annual open enrollment period, exchanges estimate applicants’ annual income for the upcoming tax year and authorize health insurance subsidies based on that estimate. See 45 C.F.R. § 155.305. (Exchange open enrollment for 2018 is November 1 through December 15, 2017.) Taxpayers calculate their actual PTC over a year later, on the income tax return for the tax year. If the exchange authorized too little PTC, the taxpayer receives the additional amount as a refundable credit. If the exchange authorized too much, the taxpayer owes the excess as an additional income tax liability. I.R.C. § 36B(f)(2). (Taxpayers can also pay full freight and claim their entire credit at tax time. Most taxpayers who are eligible for the PTC cannot afford to do this. Nationally, about 83% of 2017 enrollees receive APTC.)

Unfortunately, it is not uncommon to see exchange errors in PTC determinations, particularly for 2014 when the system was brand new. For example, in early 2015 CMS acknowledged that had been inflating taxpayers’ income by counting all Social Security payments received by children. Anecdotally, several Vermont tax preparers have reported that clients with investment income were only asked about wages and other very common sources of income when they applied over the phone. Thus the exchange undercounted their income for the PTC and caused them an additional income tax obligation.

Data matching and other systemic protections are supposed to ensure that APTC determinations are as accurate as possible. However, not all of these systems have been developed or implemented, and certainly many were not for 2014. Indeed, last week the GAO issued a blistering report on deficits in HHS and IRS controls against improper PTC payments. GAO-17-467. Thankfully APTC calculators are available to check eligibility for the current year, so consumers and their advisors can double-check eligibility determinations that seem off.

Taxpayers up to 400% of the federal poverty level (FPL) are somewhat protected from exchanges under-estimating their income, since their excess APTC repayment obligation is capped. I.R.C. § 36B(f)(2)(B). Once 400% FPL is reached, however, the taxpayer must repay all erroneous APTC. This is why the Walkers have such a large deficiency. The Walkers reported an adjusted gross income of just over $63,000. If the Walkers’ household income (or modified adjusted gross income, which includes the nontaxable Social Security) had been $62,000 (just under 400% FPL for purposes of the 2014 PTC), their repayment would have been capped at $2,500. I.R.C. § 36B(f)(2)(B)(i); see also 2014 Form 8962 instructions, Table 1-1 and Table 5. There is an enormous liability cliff for taxpayers who reach the 400% FPL income level. The National Taxpayer Advocate discussed the problem in her 2015 Annual Report to Congress and her 2017 Objectives Report to Congress, particularly with respect to taxpayers who unexpectedly receive lump sum Social Security payments. Under current law, the cliff applies to all taxpayers regardless of fault or foreseeability.

The magnitude of the Walkers’ debt underscores how expensive comprehensive coverage with a capped out-of-pocket exposure can be for older people, and accordingly how valuable the PTC is for them. (For a nice visual of how PTC is calculated, see Figure 1 in this PTC fact sheet by the Center on Budget and Policy Priorities.) It also explains why some health policy experts believe that the ACA set its individual shared responsibility payment (ISRP) too low. The Walkers told the Court that they would not have purchased insurance if they had known they were not eligible for subsidies. This is completely plausible. If they had gone without insurance, the Walkers’ ISRP for 2014 would have been $431 (assuming both spouses were under 65). (Both the Taxpayer Advocate Service and the Tax Policy Center have ISRP estimators online. For readers using the TAS ISRP estimator, note that nontaxable Social Security is not counted in household income for the ISRP.) The ISRP was gradually phased in, so 2014 amounts are particularly low. However, even under the fully-implemented ISRP for 2016, a married couple under 65 with household income of $63,417 would only pay a penalty of $1,390. Compared to $13,000 for the exchange plan the Walkers chose, it’s conceivable that healthy taxpayers would take the risk. Even a bronze-level plan would most likely cost more than the Walkers’ ISRP.

The Walkers’ situation raises complicated policy questions about how best to strengthen the individual insurance market and provide robust coverage to people of all income levels and health statuses. Suffice it to say that there is no agreement in Congress on how to solve the problem.


What is the Meaning of the Affordable Care Act Executive Order

In today’s guest post we welcome back Christine Speidel. Ms. Speidel is an attorney with the Vermont Low Income Taxpayer Clinic and the Office of the Health Care Advocate, both at Vermont Legal Aid. She has a particular interest in health care reform as it affects low-income taxpayers. Christine is the author of the 2016 update of the Affordable Care Act chapter of “Effectively Representing Your Client before the IRS.”  Keith

The 2017 tax filing season is underway, and tax professionals are wondering what effect President Trump’s recent executive orders will have on their clients. At the top of the list is the January 20 order regarding the Affordable Care Act (ACA).

The most frequent and persistent question about the order is whether taxpayers can ignore the shared responsibility provision on their 2016 tax returns. Preparers have also asked whether taxpayers still have to reconcile advance payments of the Premium Tax Credit for 2016.

As others have explained (e.g. Timothy Jost, Nicholas Bagley), the executive order changes nothing right now for taxpayers or health insurance consumers. It does not change taxpayers’ obligations on 2016 tax returns.

It is understandable that people reading the order could misunderstand its effects. The order contains very broad language. It directs federal executive departments and agencies (including HHS, Labor, and the Treasury) to “exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications” within “the maximum extent permitted by law.” (Sec. 2.) The limiting clause is easy to skim over, but it is crucial.


The federal Administrative Procedure Act (APA) also limits the executive branch’s ability to quickly change federal regulations implementing the ACA. Indeed, the executive order recognizes that revision of existing regulations promulgated through notice-and-comment rulemaking must comply with the APA. (Sec. 5).

APA-compliant changes in federal rules cannot happen overnight. In implementing the laws passed by Congress, the executive branch may resolve ambiguities and fill in statutory gaps. However, when an agency changes its interpretation of a statute, for the new interpretation to have the force of law the agency must “display awareness that it is changing position and show that there are good reasons for the new policy.” Encino Motorcars v. Navarro, Slip op. at 9 (internal quotation marks omitted). It is easier to change federal agency interpretations that do not have the force of law (see Perez v. Mortgage Bankers), but the deference to be afforded those interpretations is a matter of hot debate and may ultimately depend on the future composition of the Supreme Court.

Some changes in ACA implementation could happen relatively quickly, but to date no concrete changes have been announced by the relevant federal agencies. Current federal law and regulations provide for flexibility and discretion in certain areas. The Department of Health and Human Services (HHS), for example, has discretion to define hardship criteria for exemption from the individual shared responsibly provision. 45 C.F.R. § 155.605(d). HHS could broaden the hardship circumstances it recognizes, within the bounds of the current regulation. HHS has recognized additional hardships several times in the last few years, most recently last August. Also, anecdotal reports indicate that HHS’s view of applications claiming a non-listed hardship circumstance was more favorable in 2016 than it was in 2014. Case by case review is more consistent with the statutory and regulatory language than HHS’s initial, more limited approach. Expanded hardship exemptions can only go so far, though. A hardship exemption that effectively eliminates the penalty would conflict with Section 5000A.

There will certainly be legal debate over how far the Administration can go without a change in the law. The executive branch enjoys broad enforcement discretion, but that discretion is limited by the Constitution’s requirement that the President “take care that the Laws be faithfully executed.” (Art. II Sec. 3) Jonathan Adler’s essay discussing the limits of enforcement discretion is worth reading for those interested in this issue.

The Trump Administration may seek to rely on the Obama Administration’s delayed implementation of several ACA provisions (including the individual and employer mandates) as precedent allowing them to “waive, defer, grant exemptions from, or delay the implementation” of ACA provisions. Even if the Obama Administration’s implementation delays were lawful (which is debatable), it does not logically follow that a new Administration can “defer” or “delay” implementation of a provision three years after its actual implementation. This argument simply does not make sense for the individual shared responsibly provision or for premium tax credits. Not all provisions of the ACA have been fully implemented (such as the Cadillac Tax), and this argument may be more successful in those areas.

Given all the uncertainty, what can tax advisors and preparers do to help their clients?

First, no one should advise or assist a taxpayer to file a false tax return in the hopes that the law will not be enforced or will be changed at some future date. Even preparers who are not subject to Circular 230 face potential criminal charges under Section 7206(2) if they assist in the filing of a false tax return. Unhappy clients can be reminded that Congress passes the laws, and presidential executive orders do not change laws or regulations.

Taxpayers can file an extension if they prefer to wait and see whether Congressional or agency developments will affect their 2016 tax obligations.

Taxpayers who might qualify for a hardship exemption under the language of HHS’s regulation should be encouraged to apply. This is consistent with existing practice by consumer advocates. The regulatory language is broader than the specific hardship circumstances listed in guidance and on the website. If an application is filed with HHS, a hardship exemption can be listed as “pending” on Form 8965.

The bottom line is that there are changes to come, but so far nothing has changed for tax year 2016 returns.



Is the Liability a Taxpayer Incurs under the Affordable Care Act for Failing to Obtain Health Insurance a Tax or a Penalty for Bankruptcy Purposes

Today we welcome back guest blogger Professor Bryan Camp of Texas Tech. Professor Camp writes today on the issue of the proper classification of the liability imposed for failure to obtain health insurance. The issue can apply to many excise taxes and has importance in the bankruptcy context.    

Before getting to Bryan’s post, I want to comment a misleading statement I made in the post last week entitled Bankruptcy Court Jurisdiction Over a Tax Claim. In that post I questioned the timing of the filing of their bankruptcy petition because I said they should have waited until three years had passed from the due date of the returns for all years. The issue has applicability to Bryan’s post and he gets it right. Thanks to Ken Weil for pointing out to me that if they filed a Chapter 13 plan and if they completed their plan there is no need to wait three years from the due date of the return to file bankruptcy if you seek to discharge a penalty. For debtors who complete a Chapter 13 plan, the discharge is covered by B.C. 1328(a). Prior to 2005, this provision gave what was called a superdischarge to debtors completing their Chapter 13 plans and made that chapter especially attractive to debtors with late filed returns, fraudulent returns and lots of other penalties. The changes in 2005 watered down the broad scope of the B.C. 1328(a) discharge but did not change the superdischarge of penalties. So, the timing of the bankruptcy vis a vis penalty discharge very much depends on the chapter of bankruptcy debtors choose and their ability to complete their Chapter 13 plan. Keith

Whether a debt is a tax or a penalty is not always easy to determine. The Supreme Court has weighed in on this topic twice, first in Sotelo v. United States, 436 U.S. 268 (1978)(in a case involving the trust fund recovery penalty) and then in United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996)(in a case involving the excise tax for failure to properly fund a pension plan). In each case the Court determined that the label in the statute did not match the true nature of the statute.

Whether a liability in the Internal Revenue Code is a tax or a penalty has importance in the treatment of the liability in bankruptcy cases. Taxes can rise above other unsecured claims and have priority status in the payout process. Penalties cannot have priority status as unsecured claims. The latest liability to raise issues concerning its status as a tax or a penalty is the liability for failing to obtain health insurance. The liability arises because the Affordable Care Act (ACA) seeks to have as many individuals enroll as possible to make the pool of insured individuals better. Internal IRS guidance directs its employees to categorized the ACA penalty as an “excise tax” for bankruptcy purposes. See IRM (“The individual SRP liability will be treated as an excise tax under USC § 507 (a)(8)(E).”)

For the reasons discussed below the fold, I do not think the courts are likely to consider the ACA penalty an excise tax which can achieve priority status. They are more likely to classify it as a penalty which will become a general unsecured claim.


First, the ACA calls it a penalty and not a “tax.”  IRC 5000A(g) provides that “the penalty provided by this section shall be…assessed and collected in the same manner as an assessable penalty under subchapter B or chapter 68.”  The Congressional decision to label this exaction a “penalty” and not a “tax” was a critical reason why the Supreme Court held that challenges to the penalty were not barred by the Anti-Injunction Act.  National Federation of Independent Business v. Sebelius, 132 S.Ct. 2566, 2582-3.  The Court found that, although the label did not matter for constitutional purposes, it did matter for purposes of figuring out the relationship of the ACA penalty with other statutes because statutes “are creatures of Congress’s own creation. How they relate to each other is up to Congress, and the best evidence of Congress’s intent is the statutory text.”  As in the NFIB case, here we have to figure out the relationship between the use of the work “tax” in the bankruptcy code and in the tax code.  Accordingly, the Congressional decision to label the payment as a penalty, and to direct that it be collected in the same manner as other assessable penalties, establishes a strong presumption that it is not a tax for purposes of other statutes, including the Bankruptcy Code.

Therefore, I don’t see a bankruptcy court treating the ACA as an excise tax or any other kind of tax.  I’m betting the IRS guidance is calling it an excise tax because section 5000A is in the excise tax chapter.  Theoretically, one might defend the penalty as an excise tax because it is imposed on taxpayers for engaging in certain transactions—or failing to engage in specified transactions, which is economically the same thing.  But I don’t see either of these two rationales for treating the ACA penalty as an excise tax as being very strong.


A good case to consider is In re Marcucci, 256 B.R. 685 (D. N.J. 2000), where the district court agreed with four bankruptcy courts that certain payments mandated by the State of New Jersey—payments quite similar in structure and purpose to the ACA penalty—were not excise taxes but were penalties.  In Marcucci, the court considered the character of a “motor vehicle surcharge” that New Jersey imposed on drivers who were considered high risk or convicted of certain traffic offenses.  These mandated payments to the state were to help the state fund a pool of money intended to even out the risk among all drivers.  The surcharges had been imposed by private insurers but the New Jersey legislature decided that the market was unfair and inefficient and so rather than indirectly regulating surcharges, decided to have the surcharge program administered by the DMV.   The state argued that these were excise taxes but the court disagreed.

The court first noted that “in cases where the Supreme Court has considered whether a particular exaction was a tax for bankruptcy purposes, the Court looked beyond the titular label given to the exaction and examined its actual operation” and “[t]he proper analysis therefore is to assess whether the attributes of the state’s claim, as provided by state law, fit the definition of a tax within the meaning of the Bankruptcy Code.”

The court then decided that the surcharge’s function was more like a penalty than a tax.  “In contrast to a neutral tax, the surcharge system is designed to deter poor driving habits. As discussed above, the legislative history of the Insurance Reform Act implies that the surcharges are intended to penalize “bad drivers”. That the surcharge system requires payment of outstanding surcharges before allowing a driver to return to the roadways should not be confused with a general tax imposed upon all drivers for the privilege of driving. A motor vehicle surcharge is not a generic exaction imposed to raise revenue for the government, but a penalty imposed as a result of specific motor vehicle violations. The State merely appropriates the monies obtained from specifically established assessments to fund the Merit Rating Plan.”  (internal quotes and citations omitted)

The NJ surcharge at issue in Marcucci is quite similar to the ACA shared responsibility payment.  The ACA penalty is imposed more as a consequence for violating the Individual Mandate (and, consequently, to encourage compliance) than to raise revenue.  See Jordan Barry and Bryan Camp, “Is the Individual Mandate Really Mandatory,” Tax Notes, June 25, 2012, p. 1633.

Second, however, just because the ACA penalty is not a tax does not automatically disqualify it from priority status.  Some penalties get priority status in bankruptcy and some do not.  Section 507(a)(8)(G) describes the kind of penalties that get priority status as “[a] penalty related to a claim of a kind specified in this paragraph and in compensation for actual pecuniary loss.” The legislative history provides that such claims cannot be punitive in nature and that in regard to taxes such claims represent collection of the principal tax liability under the misnomer of a “penalty” See 124 Cong. Rec. H. at 11,096 and 11,113 (Sept. 28, 1978).  For this reason, these types of penalties are called “pecuniary loss penalties.”  All other penalties are nonpecuniary loss penalties and they are treated as general unsecured claims.

I think it likely that a bankruptcy court would consider the ACA penalty to be a nonpecuniary loss penalty.  First, note that the penalties described in 507(a)(8)(G) must be BOTH “related to” a tax described in paragraph (8), AND have the purpose of compensating the government for actual pecuniary loss.  The ACA penalty is sui generis.  It is simply not connected to any of the taxes described in paragraph 8.  Therefore, it cannot be a pecuniary loss penalty, even if it was, in some sense, designed to compensate the government for some pecuniary loss.  Further, I really do not see a court finding that the purpose of the penalty is to compensate for pecuniary loss.  The NJ state government made a bold attempt to convince the court in Marcucci that the surcharge imposed on bad drivers was

In addition to the priority issue I would be remiss to omit a word about dischargeability.  The starting point for discharge of non-priority tax penalties is governed by §523(a)(7).  Non-pecuniary loss penalties may not get priority status, but they also may not be discharged in bankruptcy if they arose within three years prior to the petition date.  The one exception to the 523(a)(7) rules are for debtors who successfully complete their Chapter 13 plans. They get a “super discharge” which, per §1328(a) includes an unqualified discharge of all non-pecuniary loss penalties. Chapter 13 debtors who fail to complete their plans, however, get the usual rules. §1328(b).

Here’s what the relevant part of §523(a)(7) provides:

A discharge…does not discharge an individual debtor from any debt-




(7) to the extent such a debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty-


(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or


(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition;



11 U.S.C. § 523(a)(7).

The Ninth Circuit did a nice job in parsing this forest of double negatives in McKay v. U.S., 957 F.2d 689 (9th Cir. 1992). Here’s that Court’s explanation,

Carefully parsed, the section initially makes nondischargeable a “debt that is for a fine, penalty or forfeiture payable to and for the benefit of a governmental unit.” Withdrawn from this class, however, are any such fines, penalties, or forfeitures that are “compensation for actual pecuniary loss.” These are dischargeable. The double negative, “does not discharge” and “not compensation for actual pecuniary loss,” accomplishes this end.

Another group of penalties are withdrawn from the nondischargeable group. These appear in parts (A) and (B) of § 523(a)(7). Part (A) withdraws tax penalties attributable to taxes which are not nondischargeable. That is, part (A) makes dischargeable tax penalties attributable to dischargeable taxes. This follows because part (A) relates “to a tax of a kind not specified in paragraph (1) of this subsection.” 11 U.S.C. § 523(a)(7)(A) (emphasis added). Those types specified in paragraph (1) are not dischargeable taxes. In relevant part “paragraph (1) of this subsection” makes not dischargeable “any debt” that is “for a tax … with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” 11 U.S.C. § 523(a)(1)(C).

The other group of penalties withdrawn from the nondischargeable group is described in part (B). It is quite straightforward. It makes dischargeable any tax penalty “imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition.” A penalty imposed on unpaid taxes accruing more than three years before the filing of the bankruptcy petition is dischargeable.


The bottom line for me is that bankruptcy courts will likely treat the ACA penalty as a general unsecured claim, which means it stands way back in the payout line. The trick is to be sure that the due date of any return that omits paying the ACA penalty is older than three years before the bankruptcy petition date unless your client is one of those rare debtors who successfully completes their Chapter 13 plan, and then they do not need to worry about that.


Review of the First Tax Year of the Affordable Care Act and Look Ahead: Part 3

Today we have the third and final installment of our review of the ACA in 2015 and preview of the ACA in 2016. Keith

Section 1411 Certifications

Employer liability for a shared responsibility payment is contingent upon receipt of a “Section 1411 Certification” relating to a full-time employee. See, I.R.C. §§ 4980H(a)(2), 4980H(b)(1)(B). The Section 1411 Certification notifies an employer that an employee received a subsidy through Section 36B or through an exchange. Subsidies include both PTCs and cost-sharing reductions (CSRs). Id. The statute places responsibility for the certifications on the Secretary of the U.S. Department of Health and Human Services (HHS) and the exchanges. See, Patient Protection and Affordable Care Act (ACA) § 1411(e)(4)(B)(iii), P.L. 111-148 (codified at 42 U.S.C. 18081(e)(4)(B)(iii). However, the exchange regulations provide that a “notice” will be sent by an exchange following an initial subsidy determination, and the official Section 1411 Certifications will be sent by the IRS. See, 45 C.F.R. § 155.310(h) & (i). Presumably, the IRS certifications will be sent following final determinations of PTC eligibility for a tax year.


Exchanges will eventually begin sending notices to the employer of any employee who is granted APTC or cost-sharing subsidies. See, 45 C.F.R. § 155.310(h). These notices will advise the employer of their right to appeal the subsidy decision through the exchange. Id. The employer notice and appeal provisions have not yet been implemented, to my knowledge, by any exchange. The federal exchange intends to send employer notices beginning in 2016. See, CCIIO, Frequently Asked Questions Regarding The Federally-Facilitated Marketplace’s (FFM) 2016 Employer Notice Program (September 18, 2015), available at However, HHS recently proposed amendments to the rules governing employer notice, so it is possible that implementation will be postponed again. See, Notice of Proposed Rulemaking, Patient Protection and Affordable Care Act: Benefit and Payment Parameters for 2017 (publication scheduled for Dec. 2, 2015).

In addition to the exchange’s employer notice program, the Service will adopt procedures to certify to an employer that an employee received a PTC or CSR. See, 45 C.F.R. § 155.310(i); see also discussion at 79 Fed. Reg. 8566. The IRS has not yet issued any sub-regulatory guidance or procedures for Section 1411 Certifications.

Section 1411 is not a model of clarity. See, ACA § 1411(e)(4)(B)(iii) (codified at 42 U.S.C. 18081(e)(4)(B)(iii). Under the statute and current regulations, payment of a CSR can be sufficient to trigger an ESRP. Under 45 C.F.R. § 155.555(l), the outcome of an employer appeal can affect the employee’s eligibility for subsidies going forward. It is therefore somewhat puzzling that the federal government appears to be advising employers that the outcome of an exchange appeal will make no difference as to whether an ESRP will be owed. See, CCIIO, Frequently Asked Questions Regarding The Federally-Facilitated Marketplace’s (FFM) 2016 Employer Notice Program p. 1 (September 18, 2015), available at (“The IRS will independently determine any liability for the employer shared responsibility payment without regard to whether the Marketplace issued a notice or the employer engaged in any appeals process.”); Decisions Employers Can Appeal, at (“IMPORTANT: This appeal will NOT determine if an employer has to pay the fee.”).

On the other hand, it makes more sense to determine ESRP liability after tax returns and information returns have been filed for the year. Exchange appeals are not an exclusive remedy; additional appeals can be provided under subtitle F of the Code (Procedure and Administration). See, ACA § 1411(f)(2)(A) (codified at 42 U.S.C. 18081(f)(2)(A)). If employers could be held harmless for failing to appeal through an exchange, this would be preferable. Exchange appeals by employers could be frustrating and futile exercises on both sides. Exchange notices will be sent to all employers whose employees are granted subsidies, even those who are not in danger of owing an ESRP. Some employers may panic at an exchange notice and file an appeal, when in fact that employee’s receipt of a PTC does not subject them to an ESRP. An exchange will not know whether an employer is an ALE, or whether the employee is considered a full-time employee under Section 4980H. The exchange will not know whether the employer uses an affordability safe harbor or qualifies for Section 4980H transition relief.

It will be interesting to see whether any employer shared responsibility payments are assessed based on the receipt of CSR where the employee is ultimately determined ineligible for a PTC under Section 36B. There is no reconciliation for cost-sharing reductions, so the government has no opportunity to recoup erroneous CSR payments absent taxpayer misrepresentation or fraud.

ACA Section 1411 provides very limited exceptions to the strict confidentiality of tax information established by Section 6103. Employers may be frustrated with any appeal process because the employee’s tax return information cannot be disclosed, so the employer will not be able to fully understand or challenge the employee’s receipt of a subsidy. The exchange may release the employee’s name and whether the employee’s income is above or below the affordability threshold; nothing more is permitted without an employee waiver. See, ACA § 1411(f)(2)(B) (codified at 42 U.S.C. 18081(f)(2)(B)).

The Section 1411 Certification is of very high importance. The development of procedures around the Certification will be an important area to watch as implementation of the ACA continues in 2016. As employers start to be notified that workers have received a subsidy, education and training on the ACA’s protections for both employers and employees will be needed.

Worker Classification and ACA Protections from Employer Retaliation

Under Section 4980H, an employee’s receipt of a health insurance subsidy could cost their employer a substantial sum of money. Employees may be worried about getting their employers in trouble by applying for health insurance subsidies. Also, the ESRP provides another incentive for employers to misclassify employees as independent contractors.

Section 1558 of the ACA protects employees from retaliation for receiving a PTC, CSR, or for engaging in whistleblower conduct regarding any violation of Title I of the ACA. Title I of the ACA includes a variety of insurance market reforms, such as the prohibition against preexisting condition exclusions. This statute only protects employees. When advising taxpayers, LITCs should keep in mind the potential for misclassification and consider whether a misclassified taxpayer could be protected under Section 1558.

The Occupational Safety and Health Administration (OSHA) is tasked with enforcing ACA Section 1558. Interim final regulations were published in the Federal Register in 2013. 78 Fed. Reg. 13,222 (Feb. 27, 2013). OSHA has also published a short fact sheet summarizing the law and the complaint process.

If an employee believes his or her employer has violated Section 1558, the employee must file a written complaint with OSHA within 180 days of the retaliation. OSHA investigates complaints and may order a wide range of relief, including reinstatement, back pay, monetary damages, and legal fees.

It is possible to file a complaint online. The current complaint form does not include a checkbox for receipt of a PTC. Employees alleging retaliation on that basis would need to check “other” in response to question 25 on the complaint form.

A second whistleblower provision is located in the Code and predates the ACA. Section 7623 provides for whistleblower informant awards to individuals whose disclosures result in the assessment and collection of tax. An informant award can be between 15 and 30% of the amount collected, depending on several factors. The worker classification of the applicant does not affect eligibility.

It is possible that a worker who blows the whistle on misclassification of employees could seek an informant award under Section 7623 based on the subsequent collection of an ESRP. As discussed at several recent American Bar Association Tax Section meetings, relief from employment tax liability under Section 530 of the Revenue Act of 1978 (P.L. 95-600) does not affect a worker’s status under Section 4980H and does not affect any potential ESRP. See, discussion in preamble to final rule, Shared Responsibility for Employers Regarding Health Coverage, at 79 Fed. Reg. 8,567-8,568 (Feb. 12, 2014). Reclassification of workers for Section 4980H purposes could result in a substantial ESRP.

LITCs should be generally aware of the whistleblower provisions potentially available to taxpayers, and of the new potential consequences of a change in worker classification. Worker classification affects employer liability for the ESRP, and access to employer-sponsored insurance for employees impacts PTC eligibility. It also affects whether a worker is protected from retaliation under ACA Section 1558. It seems likely that most questions and problems about retaliation will revolve around workers receiving subsidies through an exchange. However, LITCs must also be aware of the broader health insurance and shared responsibility issues when advising a taxpayer, particularly if there is a potential worker classification issue.


The implementation of the ACA has come a long way in the last two years, but there is much that is still unknown. LITCs will be better prepared for controversy referrals and technical assistance inquiries if we are aware of the issues facing health care enrollment assisters. LITCs can provide crucial insight into the tax system for health care attorneys and assisters. LITCs can also be strong advocates for low-income taxpayers as IRS personnel and taxpayers alike are figuring out the law and the appropriate procedures.