Federal Courts Issue Conflicting Rulings on Affordable Care Act

Written by Eva A. Rasmussen

Last week, two federal Courts issued conflicting rulings as to whether, under the Affordable Care Act ("ACA"), the IRS can authorize tax subsidies for individuals who purchase health insurance on an Exchange established by the federal government. The decisions create additional confusion about the implementation of the ACA. There are lawsuits involving this issue currently pending in other courts and appeals of last week's decisions are expected, with an ultimate decision from the Supreme Court likely. Employers need not take any action now in response to the rulings and can wait and see how the courts resolve this issue in the coming months.


To facilitate the availability of affordable insurance plans, the ACA provides that each state may elect to establish an Exchange, through which its residents could purchase individual insurance policies. To make the insurance affordable, the ACA authorizes the IRS to provide a federal tax credit to low and middle-income earners to offset the cost of insurance purchased through an Exchange.

>However, only 16 states (including New York) and the District of Columbia have established their own Exchange. If a state does not elect to establish its own Exchange, the ACA provides that the Department of Health and Human Services will establish and operate an Exchange in the state. The ACA expressly provides that subsidies are authorized for insurance purchased through an Exchange established by a state, Washington DC, and certain territories, but it is unclear whether the subsidies are authorized for purchases through a federal Exchange when a state has declined to establish an Exchange. Thus, the question that each court has been asked to address is whether individuals are entitled to a subsidy when their state has not established an Exchange and they must purchase their insurance through a federal Exchange.


On July 22, 2014, The Courts of Appeals for the District of Columbia Circuit and the Fourth Circuit issued conflicting rulings as to whether tax subsidies may be provided to individuals who purchase health insurance on an Exchange established by the federal government. The Court of Appeals for the District of Columbia Circuit (Halbig v. Burwell) held that the government could not provide a subsidy to those insured through a federal Exchange. The Court of Appeals for the Fourth Circuit (King v. Burwell) held that the subsidies are an integral part of the ACA and may be provided to individuals who are insured through an Exchange run by the a state or the federal government.

The appeals court for the Fourth Circuit deferred to the IRS interpretation that the ACA authorizes subsidies to individuals purchasing insurance on any Exchange, whether run by a state or the federal government. The IRS interpretation was based on the stated goal of the ACA to increase "the number of Americans covered by health insurance and decrease the cost of health insurance." The Court of Appeals for the District of Columbia held that the statutory language limiting subsidies to coverage purchased through state run Exchanges is unambiguous and not directly contradicted by other provisions in the ACA or legislative history. It rejected the argument that based on Congress's purpose in enacting the ACA, namely to provide near universal coverage, tax subsidies must be available through all Exchanges. The court's decision was by a 2-1 vote, with Judge Edwards writing a strongly worded dissent concluding that tax subsidies should be provided under all Exchanges to further Congressional intent in enacting the ACA.


If as the D.C. Circuit Court concluded, subsidies are limited to state Exchanges, it will have a significant impact on the implementation of the ACA in those states that declined to establish Exchanges. Specifically, it would result in

  • ending subsidies for more than 4.5 million people who are insured through a federal Exchange ;
  • eliminating the penalties for failing to comply with the employer mandate that requires employers with at least 50 employees to offer health insurance to their full time employees, as the penalties only apply if at least one employee receives a subsidy; and
  • greatly reducing the number of individuals that would be subject to a penalty for failing to maintain health insurance (individual mandate), Without a subsidy, the cost of insurance would, in many cases, increase to over 8% of household income and no penalty applies if the cost of individual insurance exceeds such amount.


For now, employers should continue implementing their ACA compliance strategy and wait and see how this develops. It will take some time for the split between the Courts to be resolved. In the interim, the Justice Department has announced that federally facilitated Exchanges will continue to offer premium tax credits. Appeals of this week's decisions are inevitable. The Obama administration has announced that it will ask the full 11-member appeals court to review the D.C. Circuit decision. If overturned, the case is likely to be submitted to the Supreme Court. The plaintiffs in the Fourth Circuit may appeal to the Supreme Court. Additionally, the same issue has been raised in district courts in Oklahoma and Indiana. So far, four courts have ruled on this issue and only the D.C. Circuit Court has held that the subsidies should be limited to those purchasing insurance on an Exchange established by a state. This controversy could be resolved by a technical correction to the ACA, but under the current political climate, it is unlikely such an amendment would be approved by Congress.

If you have any questions about PCORI fees or any aspect of the Affordable Care Act, please contact Eva Rasmussen (earasmussen@cbdm.com) or Richard Muser (rkmuser@cbdm.com), lead attorneys at CB&D's Employee Benefits, Executive Compensation and ERISA Litigation Group.

About the Author
Eva A. Rasmussen
Benefits Counsel
Eva A. Rasmussen concentrates on the design, implementation and communication of qualified plans and deferred compensation arrangements as well as...
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