District court says premium tax credits are available in federal health care exchanges


In a decision that aids the implementation of a key provision of 2010’s health care reform legislation, the federal district court for the District of Columbia held that the Sec. 36B premium tax credit is available to taxpayers who purchase health insurance through the 34 state health care exchanges that are run by the federal government ( Halbig v. Sebelius, No. 13-0623 (PLF) (D.D.C. 1/16/14)).

In May 2012, the IRS issued final regulations interpreting the Patient Protection and Affordable Care Act, P.L. 111-148, as allowing the IRS to grant tax credits to eligible individuals who purchase health insurance on either a state-run or a federally run health care exchange (Regs. Sec. 1.36B-1(k)). The plaintiffs in the case sued to have this regulation struck down, arguing that the IRS’s interpretation was contrary to the plain language of Sec. 36B(b)(2)(A), which provides a credit to eligible individuals who purchase health insurance through “an Exchange established by the State.” They asserted that the regulation therefore exceeded the IRS’s statutory authority and violated the Administrative Procedure Act.

The court applied an analysis from Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), by asking first whether the statute was ambiguous. After looking at the text of the statute, the statutory structure, and the legislative purpose, the court concluded that Sec. 36B(b)(2)(A) is not ambiguous and that Congress clearly intended to make premium tax credits available on all exchanges, whether or not established by a state. As a result, the court held that Regs. Sec. 1.36B-1(k) is a valid interpretation of the law. 

While conceding that the plain language of the statute appears to support the plaintiffs’ argument, the court explained that the words “an Exchange established by the State” could not be viewed in isolation. The law must be interpreted as a symmetrical and coherent whole, the court said, and it looked specifically at two parts of the law and how they would be interpreted if a narrow definition of state exchanges was applied to them. First, the court found, Sec. 36B(f), which requires reporting of the amount of premium tax credits to exchanges and to taxpayers, applies to all exchanges, not just state-run exchanges. The provision does not limit the reporting requirements to state-run exchanges.

Second, the “qualified individuals” who may purchase health coverage on the exchanges are defined in the health care law (42 U.S.C. §18032) as individuals who reside in the state that established the exchange. If that means only state-run exchanges, then individuals who live in one of the 34 states without a state-run exchange would not be qualified individuals and those 34 exchanges would have no customers. Even the plaintiffs conceded that this was not a correct interpretation, and the court cited this concession as further proof that the terms in the law should not be construed narrowly.   

Finally, the court explained that the purpose of the health care law is to provide “near-universal” health insurance coverage to all Americans, a purpose that would be frustrated by the plaintiffs’ narrow interpretation. The plaintiffs countered by arguing that the law was designed to encourage states to run their own exchanges, by denying credits to people who live in states with federally run exchanges. But the court did not find this argument persuasive and concluded instead that the law was designed to give states maximum flexibility in designing their own exchanges, not to take away tax credits from their residents.
The court denied the plaintiffs’ motion for summary judgment and granted the government’s, determining that the IRS’s regulation was consistent with the “text, structure, and purpose” of the health care law (slip op. at 38). 
Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.


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