Supreme Court Denies Significant Challenge to Affordable Care Act: Employers Should Continue to Follow the Act as Currently Written

by Wilson Sonsini Goodrich & Rosati
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On June 25, 2015, the U.S. Supreme Court held in King v. Burwell that individual taxpayers who enroll in health plans through the federal government's health insurance exchange can be eligible for federal tax credits under the Patient Protection and Affordable Care Act (ACA).1

The Supreme Court's decision means that large employers should continue to comply with the ACA. The Burwell decision also effectively eliminates the hopes of many employers that a large portion of the ACA's provisions affecting employers would be repealed or delayed by the Supreme Court.

Background

As of January 1, 2015, the ACA generally requires large employers2 to offer a minimum level of group health coverage that is affordable to full-time employees. This is often referred to as the "employer shared responsibility mandate." A large employer must self-report compliance with the mandate to the Internal Revenue Service (IRS) after the end of a calendar year. If a large employer does not offer the required level of health coverage, the IRS may impose various tax penalties on the employer if a full-time employee receives a federal tax credit for coverage received through an insurance exchange.3

The Burwell Case

In Burwell, the Supreme Court examined whether the ACA allows federal tax credits to individuals (1) in every state, or (2) only in those states that have established their own health insurance exchange.4 The plaintiffs in Burwell argued that federal tax credits are only available to a health insurance exchange operated by a state government.5

In total, 34 states did not elect to establish state-operated exchanges under the ACA. Many economists predicted a potential collapse of the ACA if the Supreme Court sided with the plaintiffs in Burwell because in the states without state-operated exchanges: (1) tax credits would be denied to low- and moderate-income individuals, which would undermine a major goal of the ACA in a meaningful way, and (2) the IRS may not have been able to impose penalty taxes in all instances on employers for failing to offer health insurance coverage.

In a 6-3 decision written by Chief Justice John Roberts, the Supreme Court found that the state exchange requirement of the ACA, when read in the context of the entire ACA and its purpose, leads to the conclusion that the U.S. Congress did not intend to limit federal tax credits only to individuals in states that established their own health insurance exchanges.6 Thus, individuals who purchase health insurance through a federally facilitated exchange or state-operated health exchange may qualify for federal tax credits under the ACA.

In the end, the Supreme Court's decision means that large employers should continue to comply with the employer shared responsibility mandate and prepare for the administrative burdens of reporting compliance with the mandate to the IRS.

Key Action Items for Employers

  1. Consider the ACA's minimum health coverage rules in the design of group health plan terms regarding eligibility and benefits.
  2. Assess, if not done so already, whether the company qualifies as a large employer under the ACA.
  3. If the company qualifies as a large employer under the ACA, then:
    • Evaluate compliance with the employer shared responsibility mandate, including whether the company offers qualifying coverage to the proper number of full-time employees.
    • Prepare to report (on IRS Forms 1094 and 1095, as applicable) compliance with the employer shared responsibility mandate in early 2016.
2 In 2015, an employer is considered a large employer if it (along with its controlled group affiliates) has 100 full-time employees or a combination of full-time and part-time employees that is equivalent to 100 full-time employees. In 2016 and later, the threshold is 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees.
3 Generally under the ACA, if a large employer does not offer coverage or offers coverage to fewer than 95 percent of its full-time employees (70 percent in 2015), the employer owes a tax equal to the number of full-time employees the employer employed for the year (minus up to 30) multiplied by $2,000, as long as at least one full-time employee receives the federal tax credit. For an employer that offers coverage to at least 95 percent of its full-time employees (70 percent in 2015), but has one or more full-time employees who receive a federal tax credit, a tax is owed for each month on the failure. The amount of the payment for any given month equals the number of full-time employees who receive a federal tax credit for that month multiplied by 1/12 of $3,000. The amount of the payment for any calendar month is capped at the number of the employer's full-time employees for the month (minus up to 30) multiplied by 1/12 of $2,000.
4 The Supreme Court's ruling in King v. Burwell upholds the Fourth Circuit Court of Appeals' decision.
5 Section 1401 of the ACA provides that eligible taxpayers may receive income tax credits for purchase of insurance "through an Exchange established by the State" under 1311 of the ACA. Section 1311 of the ACA enables, but does not require, the states to establish health insurance exchanges. Section 1321 of the ACA provides that if a state does not elect to create an exchange that meets federal requirements, the federal government will establish an exchange. Pursuant to these rules, the IRS finalized regulations (26 C.F.R. 1.36B-2) authorizing the grant of federal tax credits to low- and moderate-income individuals who qualify for and purchase health coverage under the federal exchange.
6 The Supreme Court's holding in Burwell did not rely on the IRS's interpretation of the ACA, which means that the specific federal tax credit issue that was before the Supreme Court in Burwell likely will be considered settled and not subject to potentially differing interpretations by federal agencies in the future.

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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