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Will it be IRS to the rescue for Obamacare?

The taxman typically taketh, but he soon could be giving millions of Americans quite a bit—at least temporarily—if the Supreme Court kills a major feature of Obamacare.

A leading tax expert says the Internal Revenue Service can, and likely will, let HealthCare.gov customers keep their Obamacare subsidies through the end of this year if the high court rules in June that those subsidies are illegal.

And that six-month grace period in turn could ratchet up political pressure on Republican opponents of Obamacare to develop a plan to replace the valuable subsidies, which would be expiring right on the eve of the 2016 presidential primary season, instead of this summer.

The Internal Revenue Service building in Washington.
Getty Images
The Internal Revenue Service building in Washington.

About 7.5 million HealthCare.gov customers are at risk of losing those subsidies, which help them pay monthly premiums for health insurance plans purchased through that federally run marketplace that serves 37 states. Experts predict that more than 8 million people would become uninsured next year after finding their plans too expensive without the subsidies, and after plan prices rise to compensate for the loss of customers.

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Plaintiffs in a case known as King v. Burwell argued at the Supreme Court on Wednesday that only customers of state-run Obamacare exchanges are eligible to receive such financial assistance, which comes in the form of federal tax credits.

But the Obama administration argues that an IRS regulation that explicitly authorizes subsidies for HealthCare.gov customers is legal under the Affordable Care Act. The subsides are available to people with low and moderate incomes.

Don Susswein, a principal in the national tax practice of the consulting firm McGladrey, said that the IRS has a long-standing practice of giving grace periods to people affected by court rulings that say an IRS rule or regulation is illegal.

"It is entirely normal practice," said Susswein, while acknowledging the current case "isn't a normal situation."

"Court cases more commonly curb the IRS' power to take things away, and here it would be curbing the IRS' power to give something away," he said.

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"Generally speaking, regulations, rulings or positions are changed and struck down and invalidated all the time," Susswein said. But if taxpayers have benefited from the IRS regulation before it was invalidated by the court, "it's normal practice of theirs to tell the taxpayer that they can rely on [the struck-down regulation], even though it's wrong."

Precedence for IRS help

"Perhaps the most high-profile example is when the U.S government took over GM [General Motors], or infused money into other corporations, tax lawyers would have told you that the tax losses of the 'old GM' could not be used by the 'new GM.' The statute is quite clear," Susswein said. "But, of course, no one writing that law anticipated the dire straits of the Great Recession, or the need for an auto bailout. Accordingly, the IRS unilaterally announced that they would allow the new GM to use the tax losses of the old GM."

In response to a Supreme Court ruling invalidating the Obamacare subsidies, "they could change the regulation to disallow the credits, but provide that the change would only apply to payments pursuant to contracts entered into after a particular date," Susswein said. "I would think they would do that."

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He noted that such a grace period would reflect the fact that most HealthCare.gov customers bought their plans without knowing they might lose the assistance before the end of the year covered by the plan.

Susswein, who previously was a Republican tax counsel for the Senate Finance Committee, said he expects the IRS would give those people only temporary relief. He doesn't expect the Obama administration would try to argue that the subsidies could be continued into 2016 for existing Obamacare customers who renew their current plans next year.

"I don't think there would be a valid basis for doing that," he said.

But Susswein also said he believed it would be extremely difficult, if not impossible, for opponents of the subsidies to thwart the IRS extending the tax credits through the end of 2015. Opponents would first have to show that they have legal standing to make such a challenge, Susswein said, and then get a court to act before the extension expires at the end of 2015.

An IRS spokeswoman declined to say whether the agency plans to keep the tax credits in effect temporarily in the event the Supreme Court rules they are illegal.

A 'Supreme' fix?

But the IRS might not need to do so.

Supreme Court Justice Samuel Alito, during oral arguments in the case on Wednesday, suggested that the subsidies would expire "after the current tax year" if the court ruled against them, and not right after the ruling.

"I think it's almost a given that something of this sort will happen if the Supreme Court sides with the plaintiffs," said Sanjay Singh, CEO of hCentive, a Virginia-based health insurance technology company that builds insurance exchange platforms. "If you're thinking about this ruling being immediately the demise of the ACA, I would not expect that."

If a grace period is granted, by the IRS or the high court, that would give the Obama administration, Congress and individual states time to come up with strategies for the loss of the subsidies.

The states' option

Several leading congressional Republicans, fearful that the GOP will be blamed for the subsidies disappearing and people losing insurance, have floated broad ideas on how to replace, at least partially, the tax credits now received by HealthCare.gov customers. The Obama administration has said it has no contingency plans for replacing the subsidies, but will face political pressure to consider suggestions by Congress to remedy the situation.

A number of states also may set up, or try to set up, their own Obamacare exchanges, whose customers then would be able to get subsidies.

Twenty-three states currently served by HealthCare.gov filed briefs supporting the legality of the subsidies, Singh noted, which could suggest they would be more likely to open their own exchange.

Singh said that if the Supreme Court announced in June that the subsidies were going away for 2016, it would be technologically possible for states to set up their own online insurance marketplaces in time for the next open enrollment season, which begins Nov. 1.

HCentive's own Obamacare exchange technology, which last year was adopted by Massachusetts to replace its own failed exchange, can be used "out of the box" if a state's elected officials move to set up their own exchange, Singh said.

"We can guarantee them open enrollment for 2016," he said.

Another possibility, he noted, is for states to set up the legal apparatus for such an exchange, and then contract with HealthCare.gov to handle the actual enrollment.

"That may be an option," echoed Susswein, the tax expert. "The [Obama] administration could say that for any state that wants, you can hire us out."

2016 fallout fears

But again, that requires political will by a state to do so. Some states, most notably Texas, which has about 1 million HealthCare.gov customers receiving subsidies, are considered much less likely to move to a state-based exchange model because of opposition to Obamacare in those states.

"Most people would say that congressional action would be needed to cover the 2016 season," said Susswein.

Republicans control Congress at the moment, and "obviously they don't want a disaster on their hands, they want to have a solution, they don't want to be blamed, they want to have some fix," he said, suggesting that subsidies could be extended for an additional year through legislation.

"That would be, I imagine, good for the presidential candidate," who would not suffer the fallout from people losing insurance plans in the year that person was seeking office, Susswein said.

"The most conducive solution would be for Congress to kick the ball down at least another year, to 2016, and for none of the people who have their fingers on that decision to be running for president," he said.