King Decision on ACA Subsidies

On July 22, 2014, two conflicting decisions on the legality of insurance subsidies provided in federally established health care exchanges were handed down. In the Halbig decision, discussed previously in this blog, the D.C. Circuit of the U.S. Court of Appeals ruled that such subsidies are not allowable on federally established exchanges. The second decision, in King v. Burwell, directly conflicted with the Halbig decision, with the Fourth Circuit of the Court of Appeals ruling that such subsidies are allowable on federally established exchanges. This case is the topic of this post.

The plaintiffs in King v. Burwell, which may be read in full here, were Virginia residents who did not wish to purchase comprehensive health insurance. Due to Virginia’s refusal to establish a state health care exchange, citizens of the state were to use the federally established exchange healthcare.gov. The plaintiffs’ opposition to the availability of insurance subsidies in federally established exchanges is linked to the individual mandate provision of the ACA. The plaintiffs argue that absent these subsidies, they would fall under the ACA’s unaffordability exemption and not be required to purchase health insurance. Due to their low income, the plaintiffs argue that the availability of these subsidies makes them subject to the individual mandate and therefore imposes an undue financial burden on them, as they will be required to either obtain insurance or pay a penalty.

The crux of the plaintiffs’ argument in King is essentially the same as that of the plaintiffs in Halbig; they believe that the language of the ACA which allows for insurance subsidies in exchanges “established by the state” prevents these subsidies from being available on federally established exchanges. However, unlike the court in Halbig, the Court found this argument unpersuasive and ruled in favor of the government’s broader interpretation of the statutory language.

The rationale behind the Fourth Circuit’s ruling is centered on the perceived ambiguity of the statutory language. The King court explains that, taken in context of the entire act, the language in question could have two reasonable interpretations. One of these interpretations is that taken by the plaintiffs, while the other is the broad interpretation presented in the IRS’ final regulation on this matter, which allows for insurance subsidies on all health care exchanges. Due to the fact that the IRS has interpretative authority, the Court explains that they are not authorized to supplant the IRS’ interpretation of the statute unless it is clearly “arbitrary, capricious, or manifestly contrary to the statute.” The Court determined that the IRS’ interpretation did not fall into any of these categories, and therefore upheld the IRS’ ruling and the legality of insurance subsidies in federally established exchanges.

This decision will be appealed, similar to the Halbig decision. Until a final decision on this issue is published (likely by the United States Supreme Court), employers should continue to proceed as if the employer penalties are applicable in states with federally facilitated exchanges.

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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