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U.S. Supreme Court Hears Arguments on Tax Credits in Federal Exchanges

From the March 12, 2015 EBIA Weekly

[King v. Burwell, 2014 WL 3817533 (U.S. 2014) (granting petition in No. 14-114, 2014 WL 3582800)]

Oral argument audio and transcript (March 4, 2015)

Oral arguments have concluded in the latest health care reform challenge to reach the Supreme Court. The case raises different questions than the landmark 2012 case (see our article), but just as much rides on the Court’s decision. At issue is the validity of IRS regulations providing for premium tax credits on both state and federal Exchanges—the Supreme Court agreed to accept review following conflicting decisions in the lower courts (see our article on the 4th and D.C. Circuit decisions). The challengers argue that the IRS regulations are invalid because the statutory language of Code § 36B(b)(2) (which references Exchanges established “by the State”) permits tax credits only on state Exchanges. In contrast, the government argues that, when considered in the context of the statute as a whole, the disputed provision unambiguously provides for tax credits on both state and federal Exchanges. (The government also argues that, if the statutory language is deemed to be ambiguous, the regulations should be upheld as a permissible exercise of agency discretion to interpret the law.)

A decision is not expected until late June or early July, and the outcome is difficult to predict. The tone of questioning revealed an ideological split with the more liberal justices appearing to favor the government and the more conservative justices siding with the challengers. Chief Justice Roberts (who unexpectedly provided the swing vote in the 2012 case) and Justice Kennedy were harder to read, and their votes may well determine the outcome. The Court could uphold the regulations and maintain the status quo. Conversely, it could rule that tax credits are not available in the states (currently a majority) that have federal Exchanges. For many individuals in these states, the resulting inability to receive tax credits would likely make coverage unaffordable and thus prevent assessment of individual mandate penalties. And, with tax credits unavailable to employees in those states, Code § 4980H penalties would not be triggered for their employers. Other results are also possible—for example, in one line of questioning, Justice Alito suggested that the Court might delay the effective date of a ruling invalidating the regulations to give Congress and the states time to take steps to minimize adverse impacts.

EBIA Comment: Whatever the outcome, look to EBIA for employer-focused analysis of the Court’s decision when it is announced. And for those of you planning to attend our Advanced Cafeteria Plans and Benefits Conference in July, look forward to a lively discussion of the impacts for employer-sponsored benefit plans. In the meantime, for more information, see EBIA’s Health Care Reform manual at Sections 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.

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