Federal courts disagree on health care credits for federal exchanges

BY SALLY P. SCHREIBER, J.D.
July 22, 2014

The appellate courts for the D. C. Circuit and the Fourth Circuit issued conflicting decisions on Tuesday regarding the availability of the Sec. 36B premium tax credit for taxpayers who purchase health insurance on exchanges set up by the federal government.

The D.C Circuit held that the regulation permitting taxpayer’s to get premium tax credits under Sec. 36B on health exchanges established by the federal government is invalid ( Halbig v. Burwell, No. 14-5018 (D.C. Cir. 7/22/2004), rev’g Halbig v. Sebelius, No. 1:13-cv-00623 (D.D.C. 1/15/14)).

A few hours later, the Fourth Circuit upheld the same regulation in King v. Burwell, No. 14-1158 (4th Cir. 7/22/2014), aff’g King v. Sebelius, No. 3:13-cv-00630-JRS (D.C. Vir. 2/18/14)).

The DC Circuit, after analyzing Section 36B and the statutory scheme of the PPACA as a whole, concluded that the language of Sec. 36B was not ambiguous and that it does not authorize premium tax credits for insurance purchase on health exchanges established by the federal government. Therefore, under the Supreme Court’s decision in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (S.Ct. 1984), the IRS’s regulation was invalid.  The D.C. Circuit noted that the language in Sec. 36B that credits are available “only for coverage purchased on an ‘Exchange established by the State under section 1311’ ” of the PPACA and found that there was no textual basis “for concluding that a federally established exchange is, in fact or legal fiction, established by a state.” Because the PPACA elsewhere provides that a federal territory that establishes an exchange “shall be treated as a State,” according to the court it was clear that Congress knew how to distinguish between the two (Halbig, slip op. at 22, emphasis in original).

As the D.C. Circuit pointed out, its decision, if it is upheld, will have major ramifications for both employers and individuals. Employers in the 36 states that have declined to establish their own exchanges will not be subject to the Sec. 4980H shared-responsibility penalty because that penalty is based on the number of employees receiving a Sec. 36B premium tax credit. Employers in those states would have no employees who would be eligible. In addition, the credit, by making health care coverage more affordable for individuals, actually increases the number of people who are subject to the penalty for failing to purchase minimum essential coverage. So making the credit inapplicable in states with federal exchanges will decrease the number of people subject to the penalty.   

The Fourth Circuit, in contrast to the D.C. Circuit, found that the statutory language, when viewed in context of the entire statutory scheme of the ACA, was ambiguous. Thus, it applied to the second step of the Chevron analysis, considering whether the regulation is based on a reasonable construction of the statute. The court concluded that it is, primarily because the regulation advances “the broad policy goals of the Act.” Consequently, the court upheld the regulation.

Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.  

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