Jessica M. Karmasek Oct. 9, 2013, 4:00pm

INDIANAPOLIS (Legal Newsline) -- Indiana Attorney General Greg Zoeller and 15 school districts have filed a lawsuit against the federal Internal Revenue Service, challenging a new IRS regulation that they argue penalizes state employers.

Zoeller and the schools contend the IRS rule imposes costly "employer mandate" requirements of the Patient Protection and Affordable Care Act onto state and local governments.

In particular, they argue that the health care law, as passed by Congress, does not allow financial penalties in states that did not create their own health insurance exchanges; and that the penalties, which are based on the total number of employees, cannot be applied to government employers.

"This case is about the fundamental relationship between the state and federal government. We respect the United States Supreme Court's ruling last year upholding the individual mandate to buy health insurance; but it did not address the recent IRS regulations extending the reach of the ACA's employer mandate," Zoeller said in a statement.

"We contend the ACA improperly regulates sovereign states and does not authorize the IRS to do what it is doing in treating the state as a taxable entity."

Zoeller's filed the lawsuit in the U.S. District Court for the Southern District of Indiana Tuesday.

Joining the state as co-plaintiffs are the following school districts, or corporations:

- Metropolitan School District of Martinsville, Martinsville, Ind.;
- Perry Central Community Schools, Leopold, Ind.;
- Benton Community School Corporation, Fowler, Ind.;
- Community School Corporation of Eastern Hancock County, Charlottesville, Ind.;
- John Glenn School Corporation, Walkerton, Ind.;
- Monroe-Gregg School District, Monrovia, Ind.;
- Mooresville Consolidated School Corporation, Mooresville, Ind.;
- North Lawrence Community Schools, Bedford, Ind.;
- Northwestern Consolidated School District of Shelby County, Fairland, Ind.;
- Shelbyville Central Schools, Shelbyville, Ind.;
- Southwest Parke Community School Corporation, Montezuma, Ind.;
- Vincennes Community School Corporation, Vincennes, Ind.;
- Madison Consolidated Schools, Madison, Ind.;
- South Henry School Corporation, Straughn, Ind.; and
- Southwestern Jefferson County Consolidated School Corporation, Hanover, Ind.

As political subdivisions of the state, the schools are faced with reducing the hours of their part-time employees in order to avoid the financial penalties of the IRS regulation under the employer mandate.

"The costly and burdensome employer mandate the IRS wrongly applies to government employers such as our school corporation interferes with our ability to efficiently manage our workforce," Assistant Superintendent Randy Taylor of MSD of Martinsville said in a statement.

"We always strive to be good stewards of tax dollars in educating our community's students, but our school corporation's efforts are undermined by the IRS overstepping its bounds that Congress set."

The Affordable Care Act, passed by Congress in 2010, permits states to decide whether to operate their own health insurance exchanges or leave that task for the federal government.

Though some states have chosen to create their own state exchanges, seven states chose hybrid federal-state exchanges and 27 states, including Indiana, declined to create exchanges.

Since Indiana declined, the health care law required the federal government to operate an exchange useable by Indiana citizens. It opened Oct. 1.

Zoeller argues it is up to federal policymakers in Congress, not the IRS, to decide whether to extend federal insurance premium subsidies into states that do not have state-run exchanges.

He noted the focus of the lawsuit is not directly about whether private-sector workers should be able to purchase insurance at subsidized rates; that's a decision for Congress.

But state government should not be saddled with potentially huge financial penalties because the IRS promulgated a rule that Congress never approved, the attorney general argues.

"The fact that many citizens lack health insurance is an issue for policymakers, and my office takes no position regarding the congressional debate over funding the ACA," Zoeller said.

"I never complain when private plaintiffs file lawsuits to challenge the state authority that my office defends; but now our role is reversed and Indiana has initiated this lawsuit asking the court whether the IRS has exceeded its federal taxing authority over state governments.

"This respectful challenge is an appropriate role for the office of the attorney general to vigorously assert the ability of the state and its political subdivisions to manage their workforces in our American system of federalism."

The plaintiffs seek declaratory judgments and injunctions that would prevent the IRS from financially penalizing the state and its political subdivisions, including the schools.

Oklahoma Attorney General Scott Pruitt also has challenged the IRS rule.

From Legal Newsline: Reach Jessica Karmasek by email at

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