Congressional ObamaCare Exemption Also Illegally Tax-Free

Congress's ObamaCare exemption

President Obama intervened earlier this month to ensure that his administration’s Office of Personnel Management (OPM) would, through its rulemaking process, preserve Congress’s and its staff’s 72% average employer contribution on the impending ObamaCare exchanges.  The legality of the OPM proposed regulations that shift the Federal Employee Health Benefit Plan (FEHBP) contributions to the exchanges has already been the subject of significant controversy, particularly because it appears to contradict the intent of Sen. Chuck Grassley’s (R-IA) amendment to PPACA (Section 1312) to require that Congress/staff live by the same rules as the rest of us.

But there’s another level to OPM’s rulemaking that directly violates PPACA: Congress/staff’s payments for ObamaCare coverage will be illegally offered on a tax-free basis. PPACA has specific provisions designed to ensure that employees are taxed on ObamaCare exchange coverage.  The OPM rulemaking openly disregards those requirements.

Employer Notice of Exchange Highlights Loss of Employer Contribution and Tax-Free Payment

PPACA imposes a mandatory employee notice requirement on employers that essentially requires them to advertise the ObamaCare exchanges to their employees.  The notice must be distributed by October 1, 2013, the first date that the exchanges are (theoretically) to begin accepting applicants for 2014 coverage.

Among the many interesting aspects of the DOL’s model notice is a prominent note on page one describing the loss of employer contributions and the loss of tax-free payments for individuals who opt to go the ObamaCare exchange route:

Note: If you purchase a health plan through the Marketplace instead of accepting health coverage offered by your employer, then you may lose the employer contribution (if any) to the employer-offered coverage. Also, this employer contribution -as well as your employee contribution to employer-offered coverage- is often excluded from income for Federal and State income tax purposes. Your payments for coverage through the Marketplace are made on an after-tax basis.

The DOL might want to add an asterisk for any confused Congress/staff readers.

Stand-Alone HRA Not an Option for the 72% Employer Contribution

A health reimbursement arrangement (HRA) is an employer-sponsored group health plan that allows employers to credit a fixed tax-free dollar amount to employees for health expenses.  ObamaCare is not kind to such consumer-driven health vehicles.  PPACA Section 2711 prohibits group health plans from imposing most dollar annual limits as of 2014.

An HRA, by its account-based nature, includes dollar annual limits.  The Departments responsible for implementing ObamaCare have permitted HRAs to continue only if they’re “integrated” with other major medical coverage that does not have annual limits, but that other coverage must be another employer-sponsored group health plan.

The ObamaCare exchanges, except in limited circumstances for small employers, offer individual health policies.  As I’ve written about previously, this means the federal government can’t use an HRA to fund the employer share of the Congress/staff’s coverage on the ObamaCare exchanges.

OPM FAQ Refers to Tax-Code Section 125, Which Prohibits Tax-Free Coverage

OPM’s proposed regulations never address the tax consequences of the Congress/staff ObamaCare exemption.  That issue is instead buried in an obscure sub-regulatory FAQ, much in the same manner as the out-of-pocket maximum delay that has come to light recently.

Here’s how the OPM FAQ describes how Congress/staff will receive their ObamaCare coverage tax-free (emphasis added):

Q. How are employer contributions for health care coverage premiums treated under the Affordable Care Act and for Federal tax purposes with respect to Members of Congress and congressional employees on the Exchange?

A. …

Section 1312(d)(3)(D) of the Affordable Care Act provides in relevant part that

“[n]otwithstanding any other provision of law … the only health plans that the Federal Government may make available to Members of Congress” and certain congressional staff are those offered through an Exchange or provided under the Affordable Care Act. This provision effectively requires substituting, in the case of Members of Congress and the applicable members of their staffs, a choice among individual qualified health plans offered through an Exchange for their current choice among plans that have contracted with FEHB. Section 1312(d)(3)(D) of the Affordable Care Act provides that this arrangement is permissible in the case of Members of Congress and congressional staff employed by the official office of the Member of Congress explicitly stating that the requirement applies notwithstanding any other provision of law. Therefore, the arrangement described is not subject to the rule in the Affordable Care Act that prohibits an employer from providing a qualified health plan through an Exchange as a benefit under its cafeteria plan. …As a result, participation in the arrangement will not result in any income or wages to the participating employee. Moreover, contributions pursuant to a salary reduction election by employees toward the cost of coverage under this arrangement may be excluded from income and wages under the same terms that employee contributions to FEHB coverage are excluded today.

The problem is the cafeteria plan rule referred to by OPM specifically prohibits this tax-free arrangement.  Cafeteria plans are governed by Section 125 of the Internal Revenue Code.  Section 1515(a) of PPACA amended Section 125 to provide that individual ObamaCare exchange coverage, which is what Congress/staff will be purchasing in 2014, is not a qualified benefit:

SEC. 1515. OFFERING OF EXCHANGE-PARTICIPATING QUALIFIED HEALTH PLANS THROUGH CAFETERIA PLANS.

(a) IN GENERAL.—Subsection (f) of section 125 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

‘‘(3) CERTAIN EXCHANGE-PARTICIPATING QUALIFIED HEALTH PLANS NOT QUALIFIED.—

‘‘(A) IN GENERAL.—The term ‘qualified benefit’ shall not include any qualified health plan (as defined in section 1301(a) of the Patient Protection and Affordable Care Act) offered through an Exchange established under section 1311 of such Act.

In other words, there’s no way for employees to contribute to ObamaCare exchange coverage on a pre-tax basis through Section 125, and there’s no way for employers to offer tax-free flex credits for ObamaCare exchange coverage through Section 125.

PPACA Section 1515 does offer a limited exception for employers that can participate in the exchanges for group coverage:

‘‘(B) EXCEPTION FOR EXCHANGE-ELIGIBLE EMPLOYERS.—

Subparagraph (A) shall not apply with respect to any employee if such employee’s employer is a qualified employer (as defined in section 1312(f)(2) of the Patient Protection and Affordable Care Act) offering the employee the opportunity to enroll through such an Exchange in a qualified health plan in a group market.’’

However, this option (known as the SHOP exchange) is available only to small employers with 100 or fewer employees (50 in some states) until 2017 (PPACA Section 1312(f)(2)).  Congress/staff will not be receiving group coverage through a SHOP exchange, and therefore there is no legal method for their ObamaCare coverage to be tax-free.  OPM, at President Obama’s direction, has directly violated ObamaCare’s own tax requirements to allow Congress/staff’s ObamaCare coverage to be tax-free.

Defund Now Before It’s Too Late

This is another egregious example in a rapidly growing list of the Obama administration’s blatant disregard of statutory law.  President Obama appears to believe that the executive branch has the authority to selectively enforce, not enforce, or completely rewrite acts of Congress, particularly when it comes his signature legislative achievement.  It’s a modus operandi that has the potential to boil over into a full-blown Constitutional crisis.

Congress has the opportunity to send a message that this cannot stand by defunding ObamaCare when the CR expires September 30, 2013.  As a policy matter, government-driven health care will not work.  As a procedural matter, the Constitution’s separation of powers cannot be flouted.  January 1, 2014 is the ObamaCare ultimatum, and we have a constitutional method to prevent it.  It doesn’t need to be any more complicated than that.


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