Appeals Courts Disagree on Validity of Tax Subsidies for Health Coverage Obtained Through a Federal Exchange
Tuesday, July 22, 2014, proved to be an exciting day as both advocates and adversaries of the Patient Protection and Affordable Care Act (the “ACA”) separately celebrated courtroom victories just a few hours apart on the validity of tax subsidies under the ACA. Two circuit courts of appeal decided whether the Internal Revenue Service (“IRS”) regulation authorizing subsidies in the form of tax credits for those purchasing insurance through a public health insurance marketplace under the ACA (commonly referred to as an “Exchange”) established by the federal government is valid. Whereas the District of Columbia Circuit Court of Appeals invalidated the regulation ruling that the tax credits are only valid where the applicable Exchange is established by a state and not the federal government, the Fourth Circuit Court of Appeals upheld the tax credits regardless of whether the Exchange is established by a state or the federal government.
The subsidies are a significant component of the ACA mandates that individuals purchase health insurance and that applicable large employers offer coverage to their full-time employees or face a penalty. As a practical matter, without subsidies for the over 5 million people who enrolled on the federal Exchanges, the ACA would likely unravel.
What are the relevant provisions of the ACA?
The ACA requires that individuals purchase health insurance that provides “minimal essential coverage” or face a minimum coverage penalty (the “individual mandate”). However, an individual is not subject to a penalty for failure to purchase health insurance if coverage is unaffordable (generally, if the annual cost of the least expensive coverage offered through an Exchange, less any tax credits, would exceed eight percent of his or her projected household income). Individuals in families with incomes between 100% and 400% of the federal poverty line who purchase coverage through the Exchanges are generally eligible for tax credits.
The ACA expressly provides that the tax credit is available to subsidize the purchase of health insurance on an Exchange “established by the state.” The IRS, through final regulations, has interpreted the ACA to authorize subsidies for insurance purchased on Exchanges established by both the federal government and state governments. Currently, only 16 states and the District of Columbia have established an Exchange while the federal government has established Exchanges in the remaining 34 states.
What is the challenge and who brought the case?
Each case was brought by individuals who enrolled in an Exchange established by the federal government since they live in a state (Virginia or West Virginia) that has not established its own Exchange. In the case before the D.C. Circuit, certain large employers also joined claiming they may be affected by the subsidies. The individuals argue that the regulations providing for the subsidy for coverage obtained through a federally-established Exchange are invalid and contrary to the plain language of the statute – which only provides for subsidies for coverage obtained through a state-established Exchange. Accordingly, the individuals argue that they should not be forced to buy insurance under the federal Exchange because, absent the invalid subsidy, the coverage would be unaffordable and they would be exempt from the individual mandate.
In determining whether to uphold the IRS regulations, what level of deference is the IRS afforded?
Generally, when a statute created by Congress charges an administrative agency (such as the IRS) with interpreting the statute’s ambiguous provisions, courts defer to the administrative agency’s interpretation of the ambiguous statute unless the agency’s interpretation is unreasonable.
What did the D.C. Circuit hold?
The D.C. Circuit held that the ACA subsidies are not legally allowed for policies purchased through a federal Exchange, reasoning that the ACA unambiguously authorizes subsidies only where the Exchange is “established by the state.” Moreover, inasmuch as that provision of the ACA is unambiguous, the IRS lacked the authority to “interpret” it, but rather was merely duty-bound to apply it. Accordingly, the extension of subsidies to individuals covered under those policies issued through a federal Exchange is invalid and contrary to the plain reading of the law. However, the D.C. Circuit order will not take effect until seven days after disposition of any timely petition for rehearing or petition for rehearing in front of the entire D.C. Circuit.
What did the Fourth Circuit hold?
By contrast, the Fourth Circuit held that the ACA subsidies are allowed for policies purchased through a federal Exchange since Congress granted the IRS broad interpretive authority to resolve ambiguities in the statute. Because the ACA allows states to “elect” whether to create an Exchange or not and authorizes the federal government to establish an Exchange if the state fails to do so, the court reasoned that the statute was ambiguous. The court also could not find any legislative history that definitively elucidated Congressional intent. Accordingly, the Fourth Circuit granted deference to the interpretation of the IRS that extended the subsidies to coverage purchased through a federal Exchange as reasonable and consistent with its delegated duty to further the goals of the law.
What does this mean for employers?
The ACA requires that employers with over 50 full-time equivalent employees offer their full-time employees a certain level of affordable health insurance or pay a penalty. The penalty only arises when a full-time employee collects a subsidy for coverage purchased through an Exchange (and in some cases, the amount of the penalty depends on the number of employees receiving such a subsidy). If the D.C. Circuit ruling is upheld, some employers could avoid penalties or have a different level of penalties depending on the states in which their employees reside.
Group health plan sponsors should stay tuned as these cases make their way to the U.S. Supreme Court. Your Troutman Sanders employee benefits attorney will be following the developments closely and will continue to keep you informed.
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