Affordable Care Act Update: Courts Divided on who is Eligible for Subsidies on the Exchange

[co-author: Leslie Schneider]

On July 22, 2014, within 2 hours of each other, two U.S. Courts of Appeal issued conflicting rulings on whether subsidies may be offered in states that use the federal insurance exchange.

Background.  The Affordable Care Act (ACA) states that individuals will be eligible for a subsidy with respect to coverage they buy on an Exchange established by a state.

A large employer who does not offer minimum essential coverage that provides minimum value and is affordable will only be subject to the tack hammer penalty if an employee buys coverage on an Exchange and receives a subsidy.  Therefore, if an employee is not eligible for a subsidy in a state that has an Exchange set up by the federal government, that employer will not owe a tack hammer penalty with respect to that employee.  In some cases, an employer may be able to avoid all employer mandate penalties.

D.C. Circuit Court of Appeals.  Based on its interpretation of the ACA, a three-judge panel for the D.C. Circuit Court of Appeals ruled that subsidies may not be offered to employees who buy coverage in an Exchange set up by the federal government.  Under this ruling, subsidies would only be available to individuals who obtain insurance through state-established Exchanges.  As described above, because the employer mandate is dependent upon the availability of subsidies on the Exchanges, this ruling may affect employers’ exposure to the employer mandate in those states that use the federally-run Exchanges.

Fourth Circuit Court of Appeals.  Only a couple hours after the D.C. Circuit Court of Appeals ruling was released, the Fourth Circuit Court of Appeals held that subsidies are allowed for policies purchased on federally-run exchanges.  The basis for this ruling was that the IRS has the authority to provide for a subsidy in all Exchanges, even those established by the federal government.

Analysis.  The ultimate impact of these conflicting rulings remains to be seen and will likely depend upon further judicial review at the US Supreme Court level or joint action of the legislative and executive branches.  Election-year politics could play a large role.  While we wanted to apprise you of the above decisions at this time, we will provide additional updates as further analysis is conducted.

Topics:  Affordable Care Act, Healthcare, Healthcare Reform, Subsidies, Tax Credits

Published In: Civil Procedure Updates, Health Updates, Insurance Updates, Labor & Employment Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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