On Friday, the U.S. Supreme Court announced that it would review the U.S. Court of Appeals for the Fourth Circuit’s decision in King v. Burwell. In that case, the Fourth Circuit held that tax credits for health insurance coverage can be made available to individuals through both federal and state health insurance exchanges (not just state exchanges, as King had argued). The outcome of the Supreme Court’s review may have far-reaching implications for individuals living in states which rely on a federally run exchange and employers doing business in those states.
In July, the Fourth Circuit and the U.S. Court of Appeals for the D.C. Circuit each issued rulings on whether individual premium subsidies under the Patient Protection and Affordable Care Act (PPACA) are available in 36 states with federally run exchanges. Because employers are liable for penalties for failing to provide qualifying health coverage only when employees receive subsidies to obtain coverage on an exchange, the ultimate outcome of these cases raises questions regarding the application of employer penalties to employees who reside in states where premium subsidies are not available.
In Halbig v. Burwell, a three-judge panel of the D.C. Circuit invalidated an Internal Revenue Service (IRS) rule offering subsidies to residents of states who purchased coverage through the federal exchange. The Halbig court held that the plain language of PPACA, which offers subsidies to those taxpayers enrolled in a health plan “through an Exchange established by the State under section 1311” (emphasis added), should control. In a conflicting ruling issued later the same day, the Fourth Circuit panel in King held that the same IRS rule was a “permissible exercise of the agency’s discretion”, and that subsidies could be made available to purchase coverage on both the federal and the state exchanges.
Although the decisions originally created a circuit court split, on September 4 the full D.C. Circuit agreed to reconsider the Halbig decision and vacated the panel’s earlier ruling, thus eliminating the conflict. However, despite the absence of an existing circuit split, the Supreme Court has agreed to consider the Fourth Circuit’s King decision, even with the D.C. Circuit’s final opinion in Halbig still pending.
Although the relationship between federal tax credits and the PPACA employer mandate was not addressed in detail in either case, large employer penalties under Internal Revenue Code (Code) sections 4980H(a) and (b) are triggered only when a full-time employee purchases exchange-based coverage and obtains a premium tax subsidy. If the Court overturns the Fourth Circuit’s King holding, employees in states without an exchange may be unable to obtain subsidies; if so, those employees would not trigger employer section 4980H penalties, even if they are not offered employer-sponsored coverage (or, e.g., if their coverage is unaffordable under PPACA). Such a decision could also impact a number of other PPACA compliance requirements for employers, such as reporting on individuals offered qualifying PPACA coverage under Code section 6056.
