Supreme Court Upholds Tax Subsidies for All

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For the second time in three years, the Supreme Court was challenged with a significant decision related to the Affordable Care Act (“ACA”) and again decided in favor of maintaining the existing structure of the ACA with no changes. In June of 2012 the Supreme Court, in a 5-4 decision, upheld the individual shared responsibility, more commonly referred to as the individual mandate, deeming it constitutional. On June 25, 2015, in a 6-3 majority decision, the Supreme Court upheld Premium Tax Credits, or tax subsidies, determining that Premium Tax Credits are not limited solely to individuals that live in states that established their own health insurance exchange, or marketplace; but should also be available to those that purchase individual insurance on Federally Facilitated Exchanges.

BACKGROUND

Individual Mandate

Generally, under the ACA’s “individual mandate” effective January 1, 2014, all non-exempt United States citizens and legal residents are required to maintain “minimum essential coverage” or face a penalty. Minimum essential coverage includes, but is not limited to, plans purchased on exchanges, eligible employer-sponsored coverage and government-sponsored programs.

Premium Tax Credit

Under Internal Revenue Code (“IRC”) §36B, beginning on January 1, 2014, certain taxpayers became eligible for Premium Tax Credits. Premium Tax Credits are designed to make health insurance affordable for taxpayers that meet certain qualifying requirements and are only available to those taxpayers that purchase health insurance on an exchange. Under IRC §36B, in order for a taxpayer to be eligible for a Premium Tax Credit:

  • They must have purchased insurance through an “Exchange established by the state;”
  • They must not have been otherwise eligible for employer-provided insurance or coverage through a government program such as Medicaid, Medicare, CHIP, or TRICARE;
  • They cannot be claimed as a dependent by another person;
  • Except for very limited circumstances, they cannot file a tax return using the Married Filing Separately filing status; and
  • Their household income must be within 100% and 400% of the federal poverty line.

Health Insurance Exchanges

Under Section 1311 of the ACA, Congress states that “each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange”. However, Congress does not have the power to implement Federal laws. Accordingly, Section 1321 of the ACA provides that States may “elect” to establish an exchange as opposed to being required to do so.

Section 1321(c) of the ACA provides that, if a particular State does not elect to establish an exchange, the Secretary of Health and Human Services would establish and operate an exchange on behalf of that State. These types of exchanges are commonly referred to as “Federally Facilitated Exchanges”. The ACA afforded each State the opportunity to establish its own exchange but provided that the Federal government would establish the exchange on behalf of a State if it chose not to do so. Currently, 16 states plus the District of Columbia have established and are operating their own exchange while the remaining 34 states that are operating as Federally Facilitated Exchanges.

THE ISSUE

At issue is the language contained in IRC §36B when taken into context with language contained in the regulations. The Internal Revenue Service (“IRS”), in May of 2012, issued regulations interpreting IRC §36B to allow Premium Tax Credits for insurance purchased by taxpayers on either an exchange operated by a State or on a Federally Facilitated Exchange. According to the IRS definition, an exchange serves the individual market for qualified individuals, regardless of whether the exchange is established and operated by a State or by the Federal government. Taking the IRS’ interpretation into account along with the fact that only 16 states plus the District of Columbia have opted to establish and operate their own exchange poses the following issue.

IRC §36B provides that a Premium Tax Credit is only available to those taxpayers that purchase insurance on an “Exchange established by the State under Section 1311”. The May 2012 regulations also include Premium Tax Credit eligibility for insurance purchased on a Federally Facilitated Exchange. When following the language of IRC §36B, only those taxpayers that purchased insurance in one of the 16 states (plus D.C.) that established and now operate their own exchange would be eligible for a Premium Tax Credit. However, when following the wording contained in the regulations, Premium Tax Credit eligibility is available to taxpayers that purchased on either a State operated exchange or a Federally Facilitated Exchange.

It is important to note that Premium Tax Credits were given to eligible taxpayers in all 50 states plus the District of Columbia. As a result, two key provisions of the ACA were put at risk; the individual and employer mandates. Both of these provisions have a far more reaching effect now than they would if Premium Tax Credits were only provided to those taxpayers purchasing insurance in one of the 16 state (plus D.C.) established and operated exchanges.

If there were no Premium Tax Credits issued in the 34 states with Federally Facilitated Exchanges, coverage would likely become unaffordable to a large number of taxpayers that purchase health insurance in those states, thus exempting them from the individual mandate and associated penalty. For example, under the individual mandate, taxpayers are required to maintain minimum essential coverage or pay a penalty. However, the penalty only applies if the cost of coverage to the individual is deemed to be unaffordable. The cost of the coverage to the taxpayer is the difference between the amount of the premium decreased by the amount of the Premium Tax Credit received.

Additionally, with respect to the employer mandate, the penalty amounts associated with the employer mandate are calculated based on whether or not an employee receives a Premium Tax Credit to purchase insurance on an exchange. Again, if there were no Premium Tax Credits issued in the 34 Federally Facilitated Exchanges, there would be no penalty to assess against employers since the penalty only applies if an employee receives a Premium Tax Credit.

LEGAL CHALLENGES

In July of 2014 there were two significant legal challenges concerning Premium Tax Credits. In the first, the DC Circuit Court of Appeals, in Halbig v. Burwell, 758 F3.d 390, decided that the May 2012 regulations interpreting IRC §36B were invalid and that, in order for a taxpayer to be eligible for a Premium Tax Credit, they must purchase insurance on an exchange established and operated by a State. Following this decision, the Fourth Circuit Court of Appeals, in King v. Burwell, 759 F.3d 358, upheld the regulations stating that taxpayers purchasing insurance on either a State established and operated exchange or a Federally Facilitated Exchange, would be eligible to receive a Premium Tax Credit. On November 7, 2014, the Supreme Court agreed to resolve this split in King v. Burwell, (Sup Ct 06/25/2015) 115 AFTR 2d.

THE DECISION

On June 25, 2015 the Supreme Court, in a 6-3 decision, upheld the May 2012 regulations interpreting IRC §36B and decided that Premium Tax Credits are available to taxpayers in all 50 states plus the District of Columbia; thereby not limiting the Premium Tax Credits to those only purchasing insurance in the 16 State operated exchanges. The majority stated that “Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them”. Accordingly, they upheld the Premium Tax Credits which are a critical part of the ACA as further outlined below.

The majority indicated that there are three primary reforms of the ACA that are “interlocking” and include:

  1. Barring insurers from taking a person’s health into account when deciding whether to sell health insurance or how much to charge;
  2. Requiring individuals to maintain minimum essential coverage or pay a penalty; and
  3. Providing Premium Tax Credits to those that are eligible.

The Supreme Court concluded that the language contained in IRC §36B; “established by the State”, is ambiguous and determined that it could possibly also refer to Federally Facilitated Exchanges as well. What was unexpected about the decision was that the Supreme Court did not look to the IRS interpretation of the law to determine ambiguity. Since the Supreme Court deemed this issue to be “of economic and political significance”, it did not follow precedence under Chevron U.S.A. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Under Chevron, courts generally defer to an administrative agency’s interpretation of an ambiguous statute. In this instance, the Supreme Court determined the ambiguity of the statute due to the significance of the issue at hand; not the IRS. The Supreme Court concluded stating, “This is not a case for the IRS”.

The Supreme Court ultimately felt that the intent of the ACA is to ensure that all individuals have affordable health insurance and that the provision of Premium Tax Credits is vital to this process. Not having the availability of Premium Tax Credits would cause coverage to become unaffordable to many taxpayers and would go against the very grain of the ACA’s intended purpose.

CONCLUSION

As mentioned earlier, this Supreme Court decision is the second in three years that saved the ACA.

Chief Justice John G. Roberts, Jr. acknowledged that its interpretation of the law was not the “most natural reading” of the ACA, however, he stated that “a broader interpretation was necessary to avoid the type of calamitous result that Congress plainly meant to avoid”. Justice Antonin Scalia, one of the voters in the minority said that the Supreme Court’s interpretation was “absurd” and that “This isn’t the first time the court has done ‘somersaults’ to rescue the law”.

The Supreme Court also said “Here, the statutory scheme compels the Court to reject petitioners’ interpretation because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid”. Death spirals refer to what would happen if Premium Tax Credits were taken away from those that purchase insurance on a Federally Facilitated Exchange; coverage would become unaffordable and it would be likely that only those that need coverage (the sick) would maintain coverage.

House and Senate Republicans, in light of the decision, have still said that they will continue their efforts to repeal and replace the ACA. Republican Kevin Brady was quoted stating the ruling “really clarifies our actions to put a full repeal vote, or as full as reconciliation allows, on the President’s desk.”

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Please contact a member of Withum’s Healthcare Services Group at healthcare@withum.com for further questions or assistance.

The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.

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