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DC Circuit delays rehearing of premium tax credit case pending Supreme Court’s decision

Halbig, et al. v. Burwell, (CA DC 7/22/2014) 114 AFTR 2d 2014-5225, rehearing granted 9/4/2014, motion to hold in abeyance granted 11/12/2014

In an order dated Nov. 12, 2014, the Court of Appeals for the District of Columbia Circuit granted the taxpayers’ request to hold in abeyance the Court’s scheduled en banc rehearing of its July, 2014 decision in which it invalidated regs under Code Sec. 36B, the Affordable Care Act’s (ACA’s) premium tax credit provision. The Court of Appeals for the Fourth Circuit upheld the same regs, which provide that the credit is available to persons enrolled in federally-facilitated as well as state-operated exchanges, and the Supreme Court has recently agreed to settle the Circuit split.

Background on ACA provisions. The Code Sec. 36B credit is designed to make health insurance affordable for taxpayers who meet certain qualifying requirements. It is available for individuals who purchase affordable coverage through Exchanges.

States may establish and operate Exchanges pursuant to 42 U.S.C. § 18031 (ACA “section 1311”), or the federal government may establish and operate an Exchange in place of the state where a state has chosen not to do so consistent with federal standards pursuant to 42 U.S.C. § 18041 (ACA “section 1321”).

Exchanges make premium assistance payments (also called “subsidy” or “advance” payments) on the individual’s behalf to health plans, based on information available at the time of enrollment; then, at return time, the individual reconciles the actual credit that he is due with the amount of the subsidy payments that were made. (Code Sec. 36B(b)) (See Weekly Alert ¶  18  05/24/2012 for more details on Code Sec. 36B and its regs.)

In describing the premium assistance amount, Code Sec. 36B(b)(2)(A) refers to “the monthly premiums for…qualified health plans offered in the individual market…which were enrolled in through an Exchange established by the State ” (emphasis added) under §1311. However, the regs issued under Code Sec. 36B provide that the premium tax credit isn’t just limited to State Exchanges, but also includes federally-facilitated Exchanges. (Reg. § 1.36B-1(k))

Code Sec. 5000A requires non-exempt U.S. citizens and legal residents for tax years ending after Dec. 31, 2013 to maintain minimum essential health insurance coverage (e.g., government-sponsored programs such as Medicare, Medicaid, Children’s Health Insurance Program; eligible employer-sponsored plans; plans purchased in the Exchange) or pay a penalty. This requirement is referred to as the “individual mandate.”

There are a number of situations in which individuals are exempt from the penalty imposed by Code Sec. 5000A, including where individuals do not have an affordable health insurance coverage option available (i.e., whose required contribution for minimum essential coverage exceeds a percentage of the taxpayer’s household income—8% for 2014, 8.05% for 2015). (Code Sec. 5000A(e)(1))

The issue. In May of 2012, IRS issued regs that interpreted Code Sec. 36B to allow credits for insurance purchased on either a State or federally-established Exchange. Specifically, the regs provide that a taxpayer may receive a tax credit if he is enrolled in one or more qualified health plans through an Exchange, which IRS defined as an Exchange serving the individual market for qualified individuals, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by Health and Human Services (HHS).

By making credits more widely available, the reg gives the individual and employer mandates—key provisions of the ACA—broader effect than they would have if credits were limited to state-established Exchanges. As noted above, the individual mandate requires individuals to maintain “minimum essential coverage,” enforcing that requirement with a penalty. However, the penalty doesn’t apply to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed 8% of their projected household income. Thus, by making tax credits available in the 36 states with federal Exchanges, IRS through its regs significantly increases the number of people who must purchase health insurance or face a penalty.

Taxpayers brought suit against IRS and HHS (together, “the Government”), arguing that Reg. § 1.36B-1(k) invalidly interpreted Code Sec. 36B(b)(2)(A).

DC Circuit’s earlier decision. The DC Circuit’s majority opinion, when a three-judge panel heard the case on July 22, 2014, reversed a district court and concluded that a federal Exchange is not an “Exchange established by the State” and that, therefore, Code Sec. 36B does not authorize IRS to provide tax credits for insurance purchased on federal Exchanges. (Halbig, et al. v. Burwell, (CA DC 7/22/2014) 114 AFTR 2d 2014-5225) Thus, if found that the regs in question, which interpret Code Sec. 36B broadly to allow the subsidy also for insurance purchased on an Exchange established by the federal government, were invalid. (For more details on the decision, see Weekly Alert ¶  29  07/24/2014.)

Contrary Fourth Circuit decision. Also on July 22, 2014, the Fourth Circuit, affirming a district court, upheld the same reg. (King v. Burwell, (CA 4 7/22/2014) 114 AFTR 2d 2014-5259) Examining the plain language and context of the most relevant statutory sections, the context and structure of related provisions, and the ACA’s legislative history, the Court was unable to say definitively that Congress limited the premium tax credits to State Exchanges. The Court concluded that the statutory language was ambiguous and subject to multiple interpretations, and so gave deference to IRS’s determination as a permissible exercise of the agency’s discretion. (For more details on the decision, as well as on the deference afforded to regs, see Weekly Alert ¶  29  07/24/2014.)

DC Circuit announced that it would rehear the case. On Sept. 4, 2014, the DC Circuit announced that the entire court would rehear Halbig, et al. v. Burwell and scheduled new arguments for Dec. 17, 2014.

Supreme Court grants cert. On Nov. 7, 2014, the Supreme Court agreed to resolve the Circuit split by reviewing King v. Burwell.

DC Circuit holds case in abeyance. On Nov. 12, 2014, the DC Circuit granted the taxpayers’ motion to delay its rehearing of Halbig, et al. v. Burwell and removed the case from the oral argument calendar. Accordingly, the case will be held in abeyance pending disposition by the Supreme Court of King v. Burwell, and the parties were directed to “file motions to govern future proceedings within 30 days of the date” of the Supreme Court’s decision.

RIA observation: Because the outcome of the Supreme Court case affects residents in 36 states, a ruling against the validity of the regs could undermine the actuarial integrity of the ACA, since the penalty for failing to maintain minimum essential coverage would no longer apply to many residents of those states and many such residents would choose not to buy coverage. It would also mean that coverage would no longer be affordable to many such residents.

References: For the premium tax credit, see FTC 2d/FIN ¶  A-4241  ; United States Tax Reporter ¶  36B4  ; TaxDesk ¶  138,700  ; TG ¶  1381  .