On July 22, 2014, two federal appellate courts issued opposing decisions on whether the Internal Revenue Service (“IRS”) has authority to provide premium tax credits through Marketplaces established by the federal government. In Halbig v. Burwell, the United States Court of Appeals for the District of Columbia, in a 2-1 ruling, decided that the language of the Patient Protection and Affordable Care Act (“PPACA”) does not give the IRS authority to provide premium tax credits through federally-facilitated Marketplaces. The Fourth Circuit Court of Appeals in King v. Burwell, however, decided unanimously that the IRS does have the ability to provide premium tax credits through federally-facilitated Marketplaces. Both cases have already been appealed. The central issue of these cases, whether the IRS can provide premium tax credits through federally-facilitated Marketplaces, is significant and necessary for the attainment of one of PPACA’s major goals – to assist low income individuals with purchasing health insurance. Without premium tax credits, low income individuals in states with federally-facilitated Marketplaces must pay for health coverage at full cost. This split appears likely to be resolved by the Supreme Court, which is fresh off of another PPACA-related case with the Hobby Lobby decision.
The decisions will not have an immediate effect as the IRS has said that it will continue to provide premium tax credits to individuals who purchase coverage through the federally-facilitated Marketplaces until appeals have been exhausted. The ultimate resolution to this matter appears headed to the Supreme Court. June 2015 may see yet another end to the Supreme Court’s session spent awaiting a PPACA-related Supreme Court decision.
PPACA requires all nonexempt individuals to maintain health insurance. In order to assist certain low income individuals (i.e., those with household incomes between 100% and 400% of the federal poverty line), PPACA empowers the IRS to provide premium assistance in the form of tax credits. Under PPACA, each state is required to run its own Marketplace, although the state may defer establishing and running the Marketplace to the federal government. These federally-run Marketplaces are referred to as federally-facilitated Marketplaces.
Although PPACA establishes that Marketplaces may be setup and run by both the states and the federal government, PPACA does not provide clear guidance regarding the provision of premium tax credits. Specifically, PPACA provides that determining the amount of the premium tax credit depends on the months in which the individual is enrolled in coverage “through [a Marketplace] established by the State.” Plaintiffs argue that a literal reading of PPACA only allows the IRS to provide premium tax credits through state-run Marketplaces, not federally-facilitated Marketplaces. More than half the states have federally-facilitated Marketplaces.
If PPACA were said to have only one goal, it would be to bring health insurance to all Americans, whether through employer-sponsored coverage or individual coverage through the Marketplaces. However, if the IRS were unable to provide premium tax credits through the federally-facilitated Marketplaces, it would undermine the method through which PPACA would achieve its goals in the states that have federally-facilitated Marketplaces.
The premium tax credits are also critical to the administration of the employer mandate that was created by PPACA. The employer mandate requires large employers to offer affordable health insurance that meets minimum value standards to all full-time employees or face a penalty. An employer will face a penalty depending in part on whether an employee purchases coverage through a Marketplace and receives a premium tax credit. If the IRS can no longer provide premium tax credits through federally-facilitated Marketplaces, then employees that purchase coverage through the federally-facilitated Marketplace will not trigger penalties for the employer. The effect of the employer mandate would be undermined. Coupled with the effect this would have on providing access to low income individuals, the effect on PPACA – its goals and the means to achieve those goals – will be critical, particularly in those states that have federally-facilitated Marketplaces. Although this is a serious issue regarding the future of PPACA, the impact is not immediate. The decisions are being appealed and an ultimate resolution from the Supreme Court is not expected for some time.
Halbig v. Burwell
The D.C. Circuit Court majority relied on the statutory language of PPACA in its decision to deny the IRS the authority to provide premium tax credits through the federally-facilitated Marketplaces. The opinion looks to whether a federally-facilitated Marketplace could be construed as a state Marketplace and ultimately decides that the language of the statute restricts the IRS to providing premium tax credits through state-run Marketplaces. The decision notes that no legislative history exists to indicate that Congress intended differently and that it was therefore bound by the plain language of the statute.
The Obama administration has already appealed Halbig to the full D.C. appellate court panel of 11 judges. The recent opinion was decided by a three judge panel. Most federal appellate cases are heard by a three judge panel, but a hearing or rehearing may be heard before the full court if it is ordered by the majority of judges.
King v. Burwell
Issued only hours after the D.C. Circuit released its opinion, the Fourth Circuit opinion came to the opposite conclusion. In its unanimous opinion, the Fourth Circuit examined the definition of a state-run Marketplace. The statutory language in PPACA states that the premium tax credits can be provided to individuals who purchase coverage “through [a Marketplace] established by the State under 1311.” Section 1311 of PPACA defines the Marketplaces that states are required to establish. The Fourth Circuit notes that section 1311 requires each state to establish a Marketplace and if not, the federal government would establish one in their place. Therefore, the Fourth Circuit argues, according to section 1311, Congress intended for a federally-facilitated Marketplace to step into the position of a state-run Marketplace and that this interpretation should extend to the provision of premium tax credits as well. The Fourth Circuit opinion states that nothing in the Congressional record or in the statute points to a different interpretation. The plaintiffs in King have already appealed to the United States Supreme Court to hear the case.
Although the D.C. Circuit opinion poses a potentially critical threat to PPACA, this issue is far from being resolved. Halbig is currently being appealed by the Obama administration to the entire D.C. Appellate Court, and King has been appealed to the United States Supreme Court. This potentially significant split in the courts is likely to be resolved by the Supreme Court. However, if the D.C. Circuit reverses itself, there would be no split, but the Supreme Court could take up the issue on a direct appeal from the losing plaintiffs to provide closure on the matter. Regardless of which direction the cases take, nothing will change in the near term. The IRS has stated its intent of continuing to provide premium tax credits to qualifying individuals who purchase coverage through a Marketplace, whether state or federally run. Please stay tuned to Healthcare Reform Update for any new developments.
Gallagher Benefit Services, through its compliance experts and consultants, will continue to monitor developments on healthcare reform legislation and regulation and will provide you with relevant updated information as it becomes available. In the interim, please contact your Gallagher Benefit Services Representative with any questions that you may have.
The intent of this analysis is to provide general information regarding the provisions of current healthcare reform legislation and regulation. It does not necessarily fully address all your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Your organization’s general counsel or an attorney who specializes in this practice area should address questions regarding specific issues.