Circuit Courts Clash Over Tax Subsidies For Health Insurance Purchased On Federally-Run Exchanges

This is the 44th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This article discusses the conflicting decisions issued last week by two circuit courts of appeal on whether federal tax subsidies under the Act are available to eligible individuals who purchase health insurance on an exchange run by the federal government rather than by a state.

Although the Act requires states to establish exchanges, it also provides that if a state does not establish an exchange, the federal government will establish and operate the exchange in that state. The federal government now operates exchanges ("federally-facilitated exchanges") in the 36 states that have not established their own exchanges.

The entitlement to tax subsidies impacts the penalties assessed to enforce the Act's employer mandate and the individual mandate in the states having federally-facilitated exchanges.

Penalties related to the employer mandate to offer health coverage to full-time employees ("play or pay") may be triggered when an employer's employees obtain federal subsidies in connection with purchasing health insurance through an exchange. Therefore, if individuals obtaining coverage in a federally-run exchange in a state are not eligible for subsidies, their employers would not be subject to the Act's penalties for not offering coverage to them. Penalties under the individual mandate to maintain health coverage do not apply if the individual lacks "affordable coverage," meaning that his or her required payment for coverage does not exceed 8 percent of household income. For individuals who are able to purchase coverage only in the individual market in a state, affordability is determined after taking into account any federal tax credit available under Section 36B of the Internal Revenue Code, added by the Act, determined as if the individual were covered under a qualified health plan offered through an exchange. If the tax credit is unavailable to individuals residing in a state that has a federally-run exchange, coverage under an exchange may not be affordable and therefore they may be exempt from penalties. The Court of Appeals for the District of Columbia Circuit, in Halbig v. Burwell, 2014 U.S. App. LEXIS 13880 (D.C. Cir. July 22, 2014), and the Court of Appeals for the Fourth Circuit, in King v. Burwell, 2014...