A group of small business owners and individuals in six states have filed suit against the federal government over an IRS regulation under the Affordable Care Act expanding subsidies for health insurance, which the plaintiffs claim would require them to pay fines or cut back employee hours and severely burden their businesses.

The Affordable Care Act authorizes health insurance subsidies to qualifying individuals in states that created their own health care exchanges. Those subsidies trigger the employer mandate and expose more people to the individual mandate. Last spring, the IRS expanded the subsidies to cover states that refused to set up such exchanges, according to the plaintiffs’ complaint

The lawsuit names as defendants the Department of Health and Human Services and HHS Secretary Kathleen Sebelius, the Treasury Department and Treasury Secretary Jacob Lew, and the IRS and IRS Acting Commissioner Steven T. Miller.

Under the Affordable Care Act, businesses in nonparticipating states should be free of the employer mandate, the lawsuit argues, and the scope of the individual mandate should be reduced as well. But because of the IRS rule, both mandates would be enlarged in scope.

“The IRS rule we are challenging is at war with the Act’s plain language and completely rewrites the deal that Congress made with the states on running these insurance exchanges,” said Michael Carvin, a partner at Jones Day, who helped argue against the Affordable Care Act before the Supreme Court last year and who represents the plaintiffs in the new lawsuit. The Supreme Court ultimately decided to uphold the constitutionality of the Affordable Care Act.

The Competitive Enterprise Institute, a nonprofit public policy organization that calls for advancing the principles of limited government, free enterprise and individual liberty, is coordinating the lawsuit. “Agencies are bound by the laws enacted by Congress,” said CEI general counsel Sam Kazman in a statement. “ObamaCare is already an incredibly massive program.  For the IRS to expand it even more, without congressional authorization and in a manner aimed at undercutting state choice, is flagrantly illegal.”

The plaintiff businesses participating in the lawsuit are filing suit for a number of reasons. One business can only afford to employ some full-time workers without providing health insurance, while another wants to convert its employee health insurance to a completely consumer-driven health plan, and several individual plaintiffs (most of them self-employed) object to paying for costly insurance packages that they neither need nor want.

“Contrary to the clear language in the Affordable Care act, government is directly impeding my ability to design a quality affordable health plan for my employees,” said Chuck Willey, M.D., one of the plaintiffs and head of Innovare Health Advocates in St. Louis, Mo. “The IRS will extra-legislatively extend this onerous benefit requirement (which will increase premiums and costs of care) and impose the employer penalty in states with federally-run exchanges. I maintain the right to choose my own employees' health plan without government intervention into its benefit design and without penalty.”

Thirty-three states have opted not to create a health care insurance exchange, but the lawsuit argues that the IRS regulation would deprive them of this choice.

“The IRS cannot rewrite the law that Congress passed,” said Tom Miller, resident fellow at the American Enterprise Institute. “Its regulation expressly flouts the statutory text of the ACA, the intent of Congress, and the reasoned choices of 33 states.”

The legal complaint seeks to strike the IRS regulation, arguing that the agency has no power to rewrite an essential part of the Affordable Care Act. The suit was filed last Thursday in federal court in the District of Columbia.

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