Professional Tax Research Solutions from the Founder of Kleinrock. tax research
Parkers Tax Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
CPA software
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software tax research

Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software



Circuits Split on Legality of Obamacare Insurance Subsidies in States with Federal Exchanges. (Parker Tax Publishing August 5, 2014)

In 2013, the Supreme Court upheld the legality of the Affordable Care Act (ACA), also known as "Obamacare." However, that didn't stop the foes of Obamacare, who have continued challenging the law at every turn. Last week, within hours of each other, two federal courts of appeal arrived and opposite decisions regarding insurance reimbursements for federal run insurance exchanges. Obamacare opponents were elated when the D.C. Circuit Court, in Halbig v. Burwell, 2014 PTC 363 (D.C. Cir. 7/22/14), held that the ACA unambiguously restricts the insurance subsidy to insurance purchased on state Exchanges. Since only 16 states plus the District of Columbia have elected to set up their own Exchanges, with the rest using federal Exchanges, the decision has the potential to severely undermine the effectiveness of the ACA.

The elation of the ACA opponents was tempered, however, by a contradictory decision issued just hours later by the Fourth Circuit. In King v. Burwell, 2014 PTC 364 (4th Cir. 7/22/14), the Fourth Circuit held that, because the statutory language of Code Sec. 36B, the provision under which the health insurance subsidy is calculated, is ambiguous and subject to multiple interpretations, deference should be given to the IRS guidance under Code Sec. 36B as a permissible exercise of the agency's discretion. While not surprising, the decisions came down along party lines. The D.C. Circuit opinion was approved by a 2-1 vote, with the dissenting vote cast by the lone Democrat. The Fourth Circuit opinion was approved 3-0, with all judges having been appointed by a Democratic President. On Thursday July 31, the peittioners in King v. Burwell petitioned the U.S. Supreme Court to review the case.


Congress enacted the Affordable Care Act in 2010 to increase the number of Americans covered by health insurance and decrease the cost of health care. Under the ACA, individuals must maintain minimum essential health care coverage. Those who do not maintain such coverage are subject to a penalty. The penalty does not apply, however, to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed 8 percent of the taxpayer's projected household income.

The ACA provides a complex network of interconnected policies focused primarily on helping individuals who do not receive coverage through an employer or government program to purchase affordable insurance directly. Central to this effort are the health insurance Exchanges. Exchanges are governmental agencies or nonprofit entities that serve as both gatekeepers and gateways to health insurance coverage. Among their many functions as gatekeepers, Exchanges determine which health plans satisfy federal and state standards, and they operate websites that allow individuals and employers to enroll in those that do.

Section 1311 of the ACA delegates primary responsibility for establishing Exchanges to individual states. However, because Congress cannot require states to implement federal laws, if a state refuses or is unable to set up an Exchange, Section 1321 of the ACA provides that the federal government, through the Department of Health and Human Services (HHS), will establish and operate such an Exchange within the state. The majority of states have not set up an Exchange; thus, individuals in those states must purchase insurance through a federal Exchange.

Under Code Sec. 36B, Exchanges also serve as the gateway to the refundable tax credits through which the ACA subsidizes health insurance. Generally speaking, Code Sec. 36B authorizes credits for taxpayers with household incomes between 100 and 400 percent of the federal poverty line. But Code Sec. 36B's formula for calculating the credit also limits who may receive the subsidy. According to the formula in Code Sec. 36B(b)(1), the credit is to equal the sum of the premium assistance amounts for each coverage month. Under Code Sec. 36B(b)(2), the premium assistance amount is based on the cost of a "qualified health plan enrolled in through an Exchange established by the State under [section] 1311 of the [ACA]." Likewise, a "coverage month" is defined in Code Sec. 36B(c)(2)(A)(i) as a month for which, "as of the first day of such month the taxpayer . . . is covered by a qualified health plan . . . that was enrolled in through an Exchange established by the State under section 1311 of the [ACA]."

In 2012, the IRS issued Reg. Sec. 1.36B-2(a)(1) in which it interpreted Code Sec. 36B to allow credits for insurance purchased on either a state- or federally-established Exchange. The regulation applies to "an Exchange serving the individual market for qualified individuals . . . , regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by HHS."

The Main Arguments

While the Obamacare opponents and the government argued that the ACA, read in its totality, evinces clear congressional intent, they disputed what that intent actually is. The opponents argued that taxpayers can receive credits only for plans enrolled in through an Exchange established by a state under Section 1311 of the ACA; thus, the IRS cannot give credits to taxpayers who purchased insurance on an Exchange established by the federal government because the federal government is not a state.

The government argued that ACA opponents were taking a blinkered view of the ACA and that Sections 1311 and 1321 of the Act establish complete equivalence between state and federal Exchanges, such that when the federal government establishes an Exchange, it does so standing in the state's shoes. Furthermore, the government argument went, whereas opponents' construction of Code Sec. 36B renders other provisions of the ACA absurd, the government's view brings coherence to the statute and better promotes the purpose of the Act.

Thus, the question before the courts was whether an Exchange established by the federal government is an "Exchange established by the State under Section 1311" of the ACA and whether the ACA permits the IRS to provide tax credits for insurance purchased through federal Exchanges.

Halbig v. Burwell Decision

In Halbig v. Burwell, the D.C. Circuit concluded that the ACA opponents had the better argument. As a result, the court held that a federal Exchange is not an "Exchange established by the State under Section 1311," and Code Sec. 36B does not authorize the IRS to provide tax credits for insurance purchased on federal Exchanges.

In reaching this conclusion, the court first examined Code Sec. 36B in light of ACA Sections 1311 and 1321, which authorize the establishment of state and federal Exchanges. The court concluded that Code Sec. 36B plainly distinguishes Exchanges established by states from those established by the federal government. The court agreed that Sections 1311 and 1321 establish some degree of equivalence between state and federal Exchanges. Indeed, the court said that if Code Sec. 36B had authorized credits for insurance purchased on an "Exchange established under section 1311," the IRS regulation would stand. But, the court noted, Code Sec. 36B actually authorizes credits only for coverage purchased on an Exchange established by the state under Section 1311, and the government had offered no textual basis in Sections 1311 and 1321 or elsewhere for concluding that a federally established Exchange is, in fact or legal fiction, established by a state.

The court then rejected the government's arguments that it had to uphold the IRS's regulation to avoid rendering the reporting requirements in Code Sec. 36B(f) superfluous. That provision requires the IRS to reduce a taxpayer's end-of-year credit by the amount of any advance payments made by the government to the taxpayer's insurer to offset the cost of monthly premiums. Code Sec. 36B(f)(3) also requires "each Exchange" (i.e., both state and federal Exchanges) to report certain information to the government. The D.C. Circuit dismissed the government's contention that these reporting requirements assume that credits are available on federal Exchanges, as well as the government's argument that the requirements would be superfluous, even nonsensical, as applied to federal Exchanges if the court were to reject that assumption. Even if credits are unavailable on federal Exchanges, the court said, reporting by those Exchanges still serves the purpose of enforcing the individual mandate.

Finally, turning to the ACA's purpose and legislative history, the court found that the government again came up short in its efforts to overcome the statutory text. According to the court, the government's appeal to the ACA's broad aims did not demonstrate that Congress manifestly meant something other than what Code Sec. 36B says. A broader interpretation of the rule in Code Sec. 36B, the court noted, has major ramifications. By making credits more widely available, the court said, Reg. Sec. 1.36B-2(a)(1) gives the individual and employer mandates broader effect than they would have if credits were limited to state-established Exchanges.

The individual mandate requires individuals to maintain "minimum essential coverage" and, in general, enforces that requirement with a penalty. But the penalty does not apply to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed 8 percent of their projected household income. Thus, the amount of the credit may determine on which side of the 8-percent threshold millions of individuals fall. By making tax credits available in the states with federal Exchanges, the court observed, the IRS regulation significantly increases the number of people who must purchase health insurance or face a penalty.

The IRS regulation, the court said, affects the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers to provide their full-time employees with health insurance. Specifically, the court said, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees "enroll[s] . . . in a qualified health plan with respect to which an applicable tax credit . . . is allowed or paid with respect to the employee." As a result, the court said, even more than with the individual mandate, the employer mandate's penalties hinge on the availability of credits. If credits were unavailable in states with federal Exchanges, employers there would face no penalties for failing to offer coverage. The IRS regulation, the court concluded, has the opposite effect: by allowing credits in such states, it exposes employers there to penalties and thereby gives the employer mandate broader reach.

King v. Burwell

In King v. Burwell, ACA opponents appealed a district court holding that the statute as a whole clearly evinced Congress's intent to make the tax credits available nationwide. The Fourth Circuit upheld the lower court and in doing so, reached a different conclusion than the D.C. Circuit. According to the court, because the case involved a challenge to an agency's construction of a statute, application of the two-step analytic framework set forth in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), was appropriate. At Chevron's first step, a court looks to the "plain meaning" of the statute to determine if Congress's intent is clear in the statute regarding the question presented. If the statute speaks directly to that issue, that is the end of the inquiry and the agency is not afforded deference in its regulation. However, if the statute is susceptible to multiple interpretations, i.e., it is ambiguous or is silent on an issue, then the next step is to defer to the agency's interpretation so long as it is based on a permissible construction of the statute. A statute is ambiguous, the court noted, only if the disputed language is reasonably susceptible of different interpretations.

The court considered the ACA opponents argument that the plain language of Code Sec. 36(b)(2)(A) and Code Sec. 36B(1) was determinative and that by defining the terms "coverage months" and "premium assistance amount" by reference to Exchanges "established by the State under [ Sec. ] 1311," Congress limited the availability of tax credits to individuals purchasing insurance on state Exchanges. Under this construction, the court observed, the premium credit amount for individuals purchasing insurance through a federal Exchange would always be zero.

The court said the ACA opponents' position was sensible and, if Congress did in fact intend to make the tax credits available to consumers on both state and federal Exchanges, it would have been easy to write in broader language, as it did in other places in the statute. However, the court noted, when conducting statutory analysis, a court cannot confine itself to examining a particular statutory provision in isolation. Rather, the meaning or ambiguity of certain words or phrases may only become evident when placed in context. In this case, the court held that the statutory language in Code Sec. 36B was ambiguous and subject to multiple interpretations. As a result, the court concluded that deference should be given to the IRS's regulations as a permissible exercise of the agency's discretion.

In upholding the regulation, the Fourth Circuit cited the Supreme Court's statement in National Federation of Indep. Bus. v. Sebelius, 2012 PTC 167 (2012), where the Court noted that Congress passed the ACA to "increase the number of Americans covered by health insurance and decrease the cost of health care." Thus, the Fourth Circuit noted Congress' intent of the law to cover as many Americans as possible supporting the government's argument that the ACA was drafted to incorporate both state run and federally run exchanges.

What's Next?

The Justice Department has asked for an "en banc" review by the D.C. Circuit Court's decision. An en banc review involves a review of the decision by all judges on the D.C. Circuit. Most commentators feel that the decision will not be upheld by the full D.C. Circuit Court since a majority of the judges on the circuit are Democratic appointees (as opposed to the Republican majority on the panel that released the opinion). If the D.C. Circuit overturns the panel, then the Supreme Court is less likely to take the case, as the circuit split will have been resolved. However, if the entire circuit upholds the decision, then the case would likely end up in the Supreme Court to resolve the split.

On July 31, the Plaintiffs from the Fourth Circuit case filed a petition with the Supreme Court seeking appeal of the lower court's decision. In their Writ of Certiorari, the Plaintiffs urged the Court to hear the appeal because of the circuit split, overwhelming national effect, and because of how essential Code Sec. 36B is to operation of the ACA. Further, the petition notes how the statute is unambiguous and so the IRS rule should be invalidated because it expands the healthcare law, which has the plain meaning of only applying to state established exchanges. However, the Supreme Court may or may not grant the cert. petition, depending on if the D.C. Circuit reverses and holds for the government. Some commentators have noted that the Supreme Court is wary of getting into another ACA battle and thus may only address the questions if forced to do so. On the other hand, given the great uncertainty and sizable impacts on millions of individuals and hundreds of thousands of employers, the Court might be inclined to take swift action.

OBSERVATION: There are two other pending federal district court cases on the same subsidy issue, one in Indiana (Indiana v. IRS) and one in Oklahoma (Pruitt v. Sebelius). The Indiana lawsuit filed in 2013 and the Oklahoma lawsuit first filed in 2011 (amended in 2012 to add the IRS rule challenge) are nearly identical to each other. The cases could ultimately be appealed to the Seventh and Tenth Circuits respectively. Thus, even if the Supreme Court declines to hear appeals of the D.C. Circuit and Fourth Circuit cases, the Court will likely have another opportunity to review the healthcare subsidy issue in the not-to-distant future.

Notwithstanding the cases, scholars and commentators have posed other ways to resolve the issue outside of the judicial process. At the federal level, Congress could amend the healthcare law to remedy the reimbursements issue statutorily to support or incorporate the IRS rule. Alternatively, states currently without exchanges could decide to run their own exchanges or partner with the federal government or other states in a manner that allows them to be deemed to have their own exchange. Both avenues would avoid the legal concerns currently debated in the federal cases.

With the split decision and until the issues are settled in court or by Congress (not expected until sometime next year at the earliest), the administration and the IRS confirm that the subsidies will not halt and Americans in all states enrolled in plans purchased through exchanges and expecting the credit will receive the payments under Code Sec. 36B as the law stands. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker's Tax Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker's Tax Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker's Tax Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker's Tax Library - An Affordable Professional Tax Research Solution.

    ®2012-2018 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance