Federal courts disagree on premium tax credits through federal exchanges

The IRS will continue processing credit claims despite one circuit’s decision overruling a key Affordable Care Act provision.

The appellate courts for the D.C. Circuit and the Fourth Circuit issued conflicting decisions on July 22 regarding the availability of the Sec. 36B premium tax credit for taxpayers who purchase health insurance on exchanges set up by the federal government.

Two judges of a three-judge panel of the D.C. Circuit held that the Treasury regulation permitting taxpayers to get premium tax credits under Sec. 36B for health insurance purchased on health insurance exchanges established by the federal government is invalid (Halbig v. Burwell, No. 14-5018 (D.C. Cir. 7/22/04)). A few hours later, the Fourth Circuit unanimously upheld the same regulation in King v. Burwell, No. 14-1158 (4th Cir. 7/22/14).

Facts: In both cases, plaintiffs were individuals or employers in a state or states that did not establish health care insurance exchanges under the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. They claimed the IRS violated the Administrative Procedure Act (5 U.S.C. §§551–706) by promulgating regulations allowing premium tax credits for insurance purchased on federal exchanges.

In Halbig, the District Court for the District of Columbia held in January that the PPACA’s text, structure, purpose, and legislative history made clear Congress’s intent to make the credits available through both state-operated and federally operated exchanges, and that even if the statute was ambiguous, the IRS’s interpretation was a valid interpretation of the statute entitled to deference under the second step of the Chevron analysis (Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984)). The plaintiffs appealed to the D.C. Circuit.

In King, residents of Virginia, which did not establish an exchange, argued that they would incur some financial cost because they would be forced to purchase insurance or incur the “individual mandate” penalty under Sec. 5000A for failing to do so. The District Court for the Eastern District of Virginia, like the trial court in Halbig, held the regulation to be consistent with Congress’s intent and granted the government’s motion to dismiss. The plaintiffs appealed to the Fourth Circuit.

Issues: Sec. 36B(b)(2) allows the premium tax credit for coverage of a taxpayer and spouse and dependents enrolled through an exchange “established by the state.” Regs. Sec. 1.36B-2(a)(1) allows the credit for applicable taxpayers enrolled in a qualified health plan “through an exchange.” “Exchange” is defined under Regs. Sec. 1.36B-1(k) by reference to U.S. Department of Health and Human Services (HHS) regulation 45 C.F.R. Section 155.20, which in turn defines it as including an exchange established and operated by the federal government through HHS. Both courts, as had the district courts, used a Chevron analysis to determine whether the regulation was valid.

Holdings: The D.C. Circuit, after analyzing Sec. 36B and the statutory scheme of the PPACA as a whole, held that the regulation was invalid, finding that the language of Sec. 36B was an unambiguous expression of Congress’s intent and that it does not authorize premium tax credits for insurance purchased on health exchanges established by the federal government. The court noted that Sec. 36B(b)(2)(A) states 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, Congress clearly knew how to distinguish between the two (Halbig, slip op. at 22). The court further found that none of the government’s arguments regarding statutory construction, absurd results, or the PPACA’s legislative history or purpose were sufficient to prove that Congress meant something other than what the plain language of Sec. 36B says.

The Fourth Circuit, in contrast, found that the statutory language, when viewed in the context of the entire statutory scheme of the PPACA, was ambiguous regarding Congress’s intent. Thus, it applied the second step under Chevron, considering whether the regulation is based on a reasonable interpretation of the statute. The court concluded that it is, primarily because the regulation advances “the broad policy goals of the Act.” Consequently, that court upheld the regulation.

As the D.C. Circuit pointed out, its decision, if 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 eligible employees. In addition, the D.C. Circuit noted that the credit, by making health care coverage more affordable for individuals, actually increases the number of people subject to the Sec. 5000A “individual mandate” penalty for failing to purchase minimum essential coverage.

The D.C. Circuit granted the government’s motion for an en banc review, and the plaintiffs in the King Fourth Circuit decision petitioned the Supreme Court for certiorari. Meanwhile, IRS Commissioner John Koskinen told members of Congress in a July 23 hearing that, until the courts settle the matter, the Service would continue to follow the regulation and process premium tax credits and advance credits through the federal exchanges. 

• Halbig v. Burwell, No. 14-5018 (D.C. Cir. 7/22/14), rev’g Halbig v. Sebelius, No. 1:13-cv-00623 (D.D.C. 1/15/14)
• King v. Burwell, No. 14-1158 (4th Cir. 7/22/14), aff’g King v. Sebelius, No. 3:13-cv-00630-JRS (E.D. Va. 2/18/14)

By Sally P. Schreiber, J.D., a JofA senior editor.