Federal Judge Permits ACA Premium Tax Credits In States With Federally Facilitated Exchanges

A federal district court judge has ruled in favor of the government on one of the most serious challenges to the Patient Protection and Affordable Care Act of 2010 (ACA). The court rejected a challenge to the availability of premium tax credits under the ACA. The plaintiffs have already appealed, and similar challenges remain pending in three other federal trial courts.

In Halbig v. Sebelius, U.S. District Court Judge Paul L. Friedman rejected a claim that the May 2012 Internal Revenue Service (IRS) rule is inconsistent with the "plain language" of the Patient Protection and Affordable Care Act of 2010 (ACA). The IRS rule provides that the health insurance premium tax credit will be available to all taxpayers, whether they obtain coverage through a state-based exchange or a federally facilitated exchange (FFE). On January 15, 2014, Judge Friedman entered judgment in favor of the government. Immediately after, the plaintiffs appealed to the U.S. Court of Appeals for the District of Columbia and will move to expedite their appeal.

The plaintiffs in Halbig seek to prevent the application of the IRS rule in states that failed to establish a state-based exchange and, thus, defaulted to the FFE. The plaintiffs, individuals and employers residing in states on the FFE, argued that the ACA does not permit premium tax credits to be available to taxpayers obtaining coverage through the FFE. The individual plaintiffs' eligibility for the premium tax credit would subject them to the individual mandate to buy health insurance or face a tax penalty. 26 U.S.C. § 5000A. By contrast, without the tax credit, those individuals would be exempt from the requirement because health insurance would be "unaffordable" to them as a matter of law. See id.

Certain employers who do not offer affordable health insurance coverage to their full-time employees are subject to an "assessable payment" when their employees purchase exchange coverage. 26 U.S.C. § 4980H. The employers in this case argued that making the premium tax credit available to their employees would force the employer to offer coverage or owe the assessable payment. See 26 U.S.C. § 4980H(d).

Judge Friedman found that the Anti-Injunction Act barred the employers' claims because the assessable payment was a tax rather than a penalty. This aspect of the ruling explicitly rejected the U.S. Court of Appeals for the 4th Circuit's prior decision that the assessable payment was a penalty and, thus, the...