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Indiana Challenge to Obamacare Tax-Credit Rule Goes Ahead

The legal war over the meaning of an Affordable Care Act health-care tax credit provision that produced conflicting U.S. appeals court rulings intensified with a decision to let an Indiana challenge go forward.

U.S. District Judge William T. Lawrence in Indianapolis yesterday denied a request by the Internal Revenue Service to dismiss that part of the state’s 2013 lawsuit. Indiana claims the IRS rule allowing credits for those who sign up for Obamacare on federal exchanges is illegal because it conflicts with an ACA provision limiting such credits to state-exchange enrollees.

Lawrence’s ruling comes three weeks after U.S. appeals courts in Washington and in Richmond, Virginia, reached conflicting conclusions about legality of the subsidy for which about 4.5 million people have qualified. Indiana was one of the states that opted to not create an exchange.

In a 2-1 ruling in which the majority’s judges were appointed by Republican presidents, the Washington court deemed the IRS provision invalid, saying Congress authorized the subsidies only for state-exchange enrollees.

2010 Legislation

A three-judge panel comprised of Democratic nominees in Richmond later that day said while the law’s language is ambiguous, the IRS had discretion in writing rules that implemented President Barack Obama’s 2010 health-care reform legislation.

Neither decision has direct bearing on Indiana, which falls under the jurisdiction of the U.S. Court of Appeals in Chicago.

While allowing the main thrust of the state’s case to proceed, Lawrence dismissed the bulk of Indiana’s claims concerning federal infringement of its sovereignty.

The state won’t immediately appeal the ruling, according to a statement issued today by Attorney General Greg Zoeller’s office. Further arguments before Lawrence are set for Oct. 9.

“It was important to bring this question to the federal court before the IRS could impose Draconian tax penalties on state government and school corporations,” Zoeller said in the statement. “Ultimately our aim is for the court to remove the threat of multimillion dollar IRS penalties against the state of Indiana and its school corporations.”

Mark Hanson, a spokesman for the revenue service, declined to immediately comment on the court’s decision. The U.S. Justice Department didn’t respond to requests for comment.

No Harm

Lawrence rejected U.S. contentions that Indiana and the 39 state public schools systems that joined it in the suit would suffer no harm from the rule.

Still, the 2008 nominee of Republican President George W. Bush threw out the state’s claim that it may be compelled to comply with the coverage mandate even as Obama delayed that requirement to 2015.

He also rejected Indiana’s sovereignty claim. He said the state and 25 others lost that argument in the early stages of a 2010 Obamacare challenge that ended with the U.S. Supreme Court upholding the legislation as a valid exercise of Congress’s taxing authority.

Lawrence didn’t reach a final conclusion on whether the school districts could pursue such a claim.

In an amended complaint filed in December, Indiana claimed that if the law stands, the state would be compelled to comply with its minimum-coverage requirements and recognize as full-time employees workers it now classifies as less than full-time or pay a tax penalty.

Provision Triggered

That provision, the judge said, is triggered for employers when at least one of its full-time employees acquires insurance from an exchange and qualifies for the tax credit.

“If no federal subsidies are available in a state because the state has not established its own exchange, then employers in that state may offer their employees non-compliant insurance, or no insurance at all, without being exposed to any assessable payments under the ACA,” according to the state’s complaint.

The case is State of Indiana v. Internal Revenue Service, 13-cv-1612, U.S. District Court, Southern District of Indiana (Indianapolis).

To contact the reporter on this story: Andrew Harris in federal court in Chicago at aharris16@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net Peter Blumberg, Andrew Dunn

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