Another seemingly quiet week was punctuated by incursions on the twilight zone between regulations and guidance. The Department of the Treasury’s Internal Revenue Service (IRS) delayed and refined the Obamacare employer mandate by a final rule. On the other hand, the Treasury’s Financial Crimes Enforcement Network (FINCEN) and the Department of Justice (DOJ) attempted to permit banks to do business with marijuana dispensaries with guidance documents. These regulations and “guidance” pose examples of distinct issues for affected parties – issues that will be repeated as the Administration takes executive actions to supports its agenda.
Employer Mandate Delayed and Fragmented: The IRS published a final Shared Responsibility for Employers Regarding Health Coverage rule (effective immediately with delayed compliance dates) setting new means for calculating the application of the Obamacare employer mandate penalties. In short, the regulation differs from the statutory formula that exempts employers of less than 50 employees by delaying application to employers of between 50 and 99 full-time (more than 30 hours / week) employees until January 1, 2016. This critical change differs directly from the requirements of Obamacare (Patient Protection and Affordable Care Act or PPACA) that imposes a tax (or penalty) “apply to months beginning after December 31, 2013.”
Officials have said that employers seeking to use this new phase-in period would be required to certify that they hadn’t decreased their employee numbers in order to qualify. Moreover, controversial calculus changes were made to the full-time equivalency calculus. Specific rules were made or deferred also for the requirements applicable to volunteers (particularly volunteer firefighters), student work-study, religious orders, adjunct faculty, airline layovers, and on-call time.
► The 50 employee threshold exempts 96% of employers; the 100 employee threshold exempts 98% of employers, but that 2% difference (and other changes) may substantially change the demographics of insurance coverage under Obamacare that was not considered at the time Congress enacted the PPACA. The cumulative changes from the statute to the rules and guidance could upset a number of economic assumptions and outcomes.
Whether the rules could be challenged in court is an equally complex calculus. Exemptions from a rule generally do not create constitutional standing in others unless they can show a direct harm from the rule itself – more than just a lack of economic result, such as expected numbers of enrollees. Nonetheless, a challenge could be mounted in light of the additional consideration that insurance risk pool parameters and rates have been upset – unless the government is covering those loses.
Marijuana Dispensary Banking: The FINCEN issued guidance on the same date as a Deputy Attorney General memorandum to the United States Attorneys (which has not yet been “published” by DOJ), following up on previous Department of Justice (DOJ) enforcement priority guidance, and all three must be read together to understand the reality of the situation. The documents have been popularly read to allow banks to service marijuana-related businesses if the bank can verify that the business has a proper state license – even “legitimizing the industry.”
At the investigative level, FINCEN attempted to clarify “how financial institutions can provide services to marijuana-related businesses consistent with their [Bank Secrecy Act (BSA)] obligations, and align[] the information provided by financial institutions in BSA reports with federal and state law enforcement priorities.” From the investigative perspective, FINCEN provided a menu of red flags – not terribly different in style from IRS audit flags – which financial institutions should consider.
The DOJ memo, on the other hand, is less sanguine reminding that “The provisions of the money laundering statutes, the unlicensed money remitter statute, and the Bank Secrecy Act (BSA) remain in effect with respect to marijuana-related conduct.” Yet DOJ also wishes to exercise a lenient discretion: “Conversely, if a financial institution or individual offers services to a marijuana-related business whose activities do not implicate any of the eight priority factors, prosecution for these offenses may not be appropriate.” But at the end of the day, financial institutions remain on the hook: “Neither the guidance herein nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the CSA, the money laundering and unlicensed money transmitter statutes, or the BSA, including the obligation of financial institutions to conduct customer due diligence.”
► All of this guidance has no legal effect and does not ensure banks any “safe harbor” – this rug can be pulled out from under them at any time. Financial institutions may now face added pressure from not only medical dispensaries that are not prohibited by State law, but also the margins of illegal activity, for a small and risky margin. Some of the red flags may not even be within a financial institution’s competence after an account is opened, such as “the marijuana sold by the business was grown on federal property.”
Paperwork Reduction Act (PRA): Both the IRS regulations and the FINCEN / DOJ guidance have PRA implications – both change paperwork requirements already imposed – and those change have not implemented under the procedures required by the PRA. Regulated parties must be cautious about these gift or Trojan horses.
► Challenge & Law: As the Administration undertakes more actions as a matter of its “discretion,” more questions will arise because the Administration’s discretion is often not as broad and deep as it believes. Discretion is often a function delegated by statute and may be restricted by regulation. In some instances, the Administration may be gambling on the complex distinction between regulations that must be promulgated under the Administrative Procedure Act (APA) and guidance that need not, and not being challenged, or effectively challenged, on the legal efficacy of their actions.