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Circuit Courts Split on Provision of Premium Tax Credits in Federal Exchanges

Halbig v. Burwell, 2014 WL 3579745 (D.C. Cir. 2014); King v. Burwell, 2014 WL 3582800 (4th Cir. 2014)



Visit the Health Care Reform Community on Checkpoint to join the discussion on this development (for Checkpoint subscribers to EBIA’s Health Care Reform manual).

Creating a split in the federal circuit courts, the D.C. Circuit has ruled that the IRS regulation authorizing premium tax credits on federal Exchanges violates clear statutory language, while the Fourth Circuit has ruled that ambiguity in the statute makes the regulation a permissible exercise of agency discretion. The dispute involves Code § 36B(b)(2) , under which the amount of premium tax credits is based on the cost of coverage obtained through an Exchange established “by the State.” The disputed IRS regulation interprets this provision to authorize tax credits regardless of whether the Exchange is established and operated by a state or by the federal government.

While the Halbig court (in a 2-1 decision) agreed that state and federal Exchanges are equivalent for certain health care reform purposes, it concluded that federal Exchanges are not literally established “by the State,” which precludes tax credits in these Exchanges. The court rejected the administration’s argument that other provisions of the statute contemplate tax credits on federal Exchanges and that they are a critical part of broader insurance market reforms, like guaranteed issue and community rating. In direct contrast, the unanimous three-judge panel in King held that the statutory language—arguably clear when considered in isolation—becomes ambiguous in light of the statute’s goals, structure, and related provisions (like those that clearly require both state and federal Exchanges to report information to the IRS about tax credits they provide). The King court then upheld the authority of the IRS to resolve this ambiguity in favor of providing tax credits in all Exchanges, especially given the potential for a “death spiral” in insurance markets if enough individuals failed to purchase coverage because they could not afford it.

EBIA Comment: Here we go again—different courts interpreting critical health care reform provisions in vastly different ways. For now, the IRS regulation remains in effect, and the administration has announced that tax credits will continue. Yet the dispute will almost certainly remain unresolved until 2015, given the time needed for further appeals (including expected rehearing by the full appellate court in Halbig and possible review by the U.S. Supreme Court). Insurers applying to offer coverage on federal Exchanges in 2015 now face significant uncertainties. Insecurity about tax credits will also make the next Exchange open enrollment very difficult for millions of consumers. (Plus, there is a potential for retroactive invalidation of the regulation, calling into question all tax credits provided in 2014 through the federal Exchanges.) Code § 4980H planning by employers for 2015 is also affected, given that invalidation of the regulation would mean that employees residing in states with federal Exchanges could not trigger penalties for employers (because the employees would be ineligible for tax credits on those Exchanges). Which states are affected? Notably, Halbig and King could not even agree on the number of state versus federal Exchanges, with one mentioning 16 state Exchanges and the other only 14. (Indeed, even the proper characterization of some Exchanges—for example, the Oregon state Exchange, which is seeking federal assistance for 2015—may become a point of future contention.) Notwithstanding the continued ups and downs of health care reform, all that cautious employers can do is continue planning while staying flexible for future developments. For more information, see EBIA’s Health Care Reform manual at Sections XXI.A (“Establishment of Exchanges”), XXI.B (“Individuals and Employers Eligible for the Exchange”), XXVIII (“Shared Responsibility for Employers (Play or Pay Penalty Tax)”), and XXIX (“Shared Responsibility for Individuals (Individual Mandate)”).

Contributing Editors: EBIA Staff.