Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Two federal appeals courts have issued opposing decisions regarding whether the IRS has the authority under the Affordable Care Act (“ACA”) to extend federal tax subsidies to individuals who obtain health insurance coverage through a federal Marketplace (also known as an Exchange).
Pursuant to the requirements of the statute, there is a Marketplace in each state where individuals can purchase healthcare coverage. Under the ACA, the Marketplace can either be established by a state or the federal government. The federal government now runs the insurance Marketplaces in the 36 states that declined to set up their own Marketplaces. Certain individuals whose household income falls below a certain threshold and who purchase insurance from a Marketplace currently qualify for tax subsidies from the IRS to offset the cost. This is true regardless of whether a state’s Marketplace is run by the state or federal government. The problem, argued plaintiffs in both Halbig v. Burwell (D.C. Circuit) and King v. Burwell (Fourth Circuit), is that because the ACA references an “Exchange established by the State” in connection with the provision of the ACA that deals with subsidies, it authorizes the IRS to provide subsidies only for insurance purchased on state-run Exchanges.
The U.S. Court of Appeals for the D.C. Circuit agreed with the plaintiffs in Halbig, stating that “a federal Exchange is not an ‘Exchange established by the State,’ and section 36B does not authorize the IRS to provide tax credits for insurance purchased on federal Exchanges.” Just hours later, however, the Fourth Circuit issued an opposite ruling in King and unanimously found in favor of federal subsidies, interpreting the language in the ACA concerning subsidies to mean that “the federal government acts on behalf of the state when it establishes its own exchange.”
The Justice Department has indicated that it will be asking the D.C. Circuit for an en banc review of Halbig. This means that the full D.C. Circuit Court will review the decision. Should the decision in Halbig be affirmed, the split in circuit court rulings increases the likelihood that the U.S. Supreme Court will hear this issue. If the IRS subsidies under federally-facilitated Exchanges are invalidated, a significant number of individuals may be unable to afford to purchase health insurance, increasing the likelihood of more individuals liable for penalties under the ACA. We will continue to follow this issue and report on further developments.