The Shaky Future of the ACA Employer Penalty After Halbig

In a previous post, we discussed the murky legal status of insurance subsidies in federally established insurance exchanges. This post will focus on the July 22, 2014 decision in Halbig v. Burwell and the impact this ruling will have if it is upheld.

Yesterday, in a potentially landmark decision, the D.C. Circuit of the U.S. Court of Appeals ruled that federally established health care exchanges are not authorized to provide insurance subsidies. The case centered on language of the Affordable Care Act (“ACA”) which, on its face, limits the availability of insurance subsidies to state-established exchanges. The language in question, found in Section 36B of the Internal Revenue Code, made tax credits available as a subsidy for individuals purchasing health insurance through marketplace which were “established by the State.”

The appellants, a group of individuals and employers residing in states without state-established exchanges, argued that this language prohibited the offering of insurance subsidies on federal exchanges; the government argued that the broad interpretation of this language, as interpreted and promulgated by the IRS in a final regulation on this issue, should be used to allow federal exchanges to offer insurance subsidies. With its ruling in Halbig, the Court sided with the appellants and held that the ACA “unambiguously restricts the . . . subsidy to insurance purchased on Exchanges ‘established by the State’. . .”

The crux of the Court’s ruling relied on the language of the ACA itself. As noted above, the ACA provides that subsidies should be available for plans “enrolled in through an exchange established by the state;” it makes no mention of these subsidies being provided in federal exchanges. The government argued that by allowing the federal government to establish exchanges in the states which failed to do so, the ACA made federal exchanges equivalent to the state exchanges, thus allowing subsidies to be provided within these exchanges. However, the Court rejected this argument. Additionally, the court rejected the government’s arguments that a narrow construction would make other provisions of the ACA unworkable and that a narrow interpretation would be contradictory to the law’s purpose and legislative history.

The federal government intends to appeal the Court’s decision. However, if this decision is ultimately upheld, it would have a material impact on the employer shared responsibility penalty under the ACA. The employer penalty, which will be effective January 1, 2015, will impact applicable large employers that have at least one full-time employee who receives a subsidy through the new insurance exchanges. If the Halbig decision is upheld, employers in the thirty-four states utilizing federally established exchanges would not be subject to this penalty.

As noted in yesterday’s blog, the Fourth Circuit issued a conflicting ruling on the same issue within hours of the Halbig decision. Accordingly, the current status of insurance subsidies and employer penalties in states with federally established exchanges is unclear. The next step is likely an en banc review of the Halbig decision by the D.C. Circuit; however, there is a good chance that this issue will ultimately be decided by the Supreme Court. If the Halbig decision is ultimately upheld, it will provide significant relief to large employers in the thirty-four states without state-established exchanges. It is important to note, however, that while the issue is on appeal, the administration has stated that these subsidies still will be available on all exchanges; therefore, employers must still comply with the mandate until a final ruling is made on this issue

About Jim Hamilton

I am an employee benefits partner with Bose McKinney & Evans LLP. My broad-based practice covers health and welfare arrangements, insurance, executive compensation and federal and state taxation. Among other areas, I have specific experience with PPACA, HIPAA, COBRA, ERISA and numerous other state and federal laws affecting employee benefit plans.
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