A group of small business owners and self-employed from six states filed a lawsuit Thursday against ObamaCare, saying the IRS is illegally implementing the legislation– and it’s putting them out of business.

Three U.S. business owners and four entrepreneurs filed the suit against the IRS, the Treasury and the Department of Health and Human Services. The lawsuit is being coordinated by the Competitive Enterprise Institute (CEI), and the plaintiffs are represented by Michael Carvin, who argued against ObamaCare’s individual mandate last year in front of the Supreme Court.

The plaintiffs all work in “refusenik” states, says CEI general counsel Sam Kazman – or states that are refusing to operate state-run exchanges, partly in order to exempt their businesses from the employer mandate, which will require businesses with more than 50 employees to offer insurance to all full-time workers.

The problem, says Kazman, is the IRS is offering subsidies to employees in those “refusenik” states – even though he says the department shouldn’t be allowed to do so. And by offering those subsidies to employees, the IRS is triggering a penalty – to be paid by the business – of $2,000 per worker per year, says Kazman.

The individual plaintiffs are also affected by the IRS’ subsidies, he says.

“With the unaffordability exemption, if you fall under a certain income level, you are exempt from the individual mandate and don’t have to buy a specified insurance plan,” says Kazman. “But the tax credit knocks them out of that exemption, so they have to buy more expensive insurance than what they would otherwise want.”

One plaintiff, Olde England’s Lion and Rose Restaurants, is a franchise based in Texas. Because it’s located in a non-participating state, Kazman says it shouldn’t be penalized under the employer mandate. But as it is, he says the restaurant is being forced to cut back on employee hours.

And another small business in Missouri, Innovare Health Advocates, would have to pay penalties because the plans they set up for their employees did not meet the criteria for employer-offered insurance plans, says Kazman.

“The federal law was structured deliberately to allow states not to engage – the benefits of being a non-participant are being taken away by the IRS,” says Kazman.

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