Lawsuit accuses IRS of 'flagrantly illegal' actions in rollout of ObamaCare aid

A group of small businesses filed a new legal challenge Thursday to the insurance subsidies in President Obama's healthcare law.

The businesses said they shouldn't have to provide health insurance to their employees — and that their employees also shouldn't be able to get a subsidy from the government to help afford coverage on their own.

It's not the first time critics have accused the IRS of illegally implementing the healthcare law's subsidies, but the latest challenge focuses on small businesses in an effort to advance the issue in the courts.

The businesses have enlisted some high-profile legal help for their ObamaCare challenge — they're represented by Michael Carvin, who argued part of the case against the law's individual mandate at the Supreme Court last year.

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The suit accuses the IRS of illegally implementing subsidies to help people buy private insurance. And because the administration is giving out too many subsidies, the plaintiffs argue, it is also forcing too many employers to provide insurance even in states.

“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," said Sam Kazman, general counsel of the Competitive Enterprise Institute, which is coordinating the lawsuit.

It all starts with the law's insurance exchanges — new marketplaces where individuals and small businesses can buy private insurance. The law sets up an exchange in each state, and authorizes the federal government to build the exchange in any state that doesn't build its own. 

The law also provides subsidies to help low-income people buy insurance through the exchanges. 

And that's the catch — the law specifically refers to subsidies flowing through exchanges "established by the state." The law's critics say subsidies should therefore only be available in state-run exchanges — not in the federal version.

“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," Carvin said.

The IRS says its lawyers interpreted the statute to mean that subsidies were available in the exchanges, period. The Congressional Budget Office also assumed in all of its cost estimates that subsidies would be available in all 50 states.

With the federal government running the exchanges in 26 states, cutting off subsidies in the federal exchange would have a huge impact on the number of people who gain coverage.

The state of Oklahoma is already pursuing a similar lawsuit, but the Justice Department has argued that the state doesn't have standing to sue.

The small businesses that filed the latest suit hope to avoid issues of standing by pulling in the law's employer mandate.

The employer mandate requires businesses to offer insurance if they have more than 50 employees working at least 30 hours a week. If they don't, and their employees end up getting a subsidy from the government, the employer has to pay a fine.

The businesses in Thursday's lawsuit say they can't afford to provide insurance, and they all operate in states that aren't setting up their own exchanges. 

So, they argue, the fact that the IRS is giving out subsidies in those states means their uninsured employees will likely receive a subsidy — and thus the employers will have to pay a fine or start offering health coverage.

The suit was filed in the U.S. District Court for the District of Columbia.