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Supreme Court to Review Obamacare Insurance Subsidy Case in Wake of Circuit Split.
(Parker Tax Publishing November 21, 2014)

The Supreme Court has granted review of a Fourth Circuit decision that upheld IRS regulations extending tax-credit subsidies to health insurance purchased through federally run Exchanges, bringing to a head the latest challenge to the Affordable Care Act (ACA). King v. Burwell, No. 14-114 (S. Ct. 11/10/14)

OBSERVATION: If the Supreme Court follows a similar time table to the one that played out in the landmark 2012 Obamacare decision, the court may issue a ruling on King v. Burwell toward the end of its spring term next June.


Earlier this year, two appellate courts reached opposite conclusions on the same day on the legality of health insurance subsidies in states with federally run insurance Exchanges. The issue before the courts was whether the Code Sec. 36B premium assistance credit is available for insurance purchased through federal Exchanges. Code Sec. 36B includes language that could be interpreted as limiting the availability of the premium assistance credit to taxpayers who enroll in qualified health plans on state-established Exchanges. However, the IRS, in final regulations issued in May 2012, interpreted Code Sec. 36B to allow credits for insurance purchased on either a state or a federally established Exchange. The IRS's broader interpretation of "Exchange" has significant implications. By making credits more widely available, the regulations give 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. However, the penalty does not apply to individuals for whom the annual cost of the cheapest available coverage, less any Code Sec. 36B tax credits, would exceed 8 percent of their projected household income. Thus, by making tax credits available in the states with federal Exchanges, the IRS rule significantly increases the number of people who must purchase health insurance or face a penalty.

OBSERVATION: The IRS rule 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 ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees enrolls in a qualified health plan with respect to which a Code Sec. 36B credit is allowed or paid with respect to the employee. As a result, 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 has the opposite effect: by allowing credits in such states, it exposes employers there to penalties and thereby gives the employer mandate broader reach.

The conflicting circuit court decisions involved individuals in states that had not established a state-run Exchange and were facing penalties as a result of failing to buy comprehensive health insurance. In Halbig v. Burwell, 2014 PTC 363 (D.C. Cir. 2014), rev'g 2014 PTC 23 (D. D.C. 2014), the D.C. Circuit held that Code Sec. 36B, by its plain language, does not authorize the IRS to provide tax credits for insurance purchased on federal Exchanges; thus, the court vacated the part of the regulations that allows the credit in such cases. In King v. Burwell, 2014 PTC 364 (4th Cir. 2014), aff'g 2014 PTC 88 (E.D. Va. 2014), the Fourth Circuit reached the opposite conclusion and found that the statute is ambiguous and that the IRS's interpretation is a permissible construction of the statutory language. As such, the court was required to defer to the IRS's interpretation.

Petition to Supreme Court

The losing party in the Fourth Circuit decision, represented by Michael Carvin of Jones Day, petitioned the Supreme Court to hear an expedited appeal. Carvin, who represented David King and others in their challenge to the IRS guidance under Code Sec. 36B, filed a 43-page Petition for a Writ of Certiorari with the Supreme Court. The petition presents the court with the following question: Can the IRS issue regulations to extend tax-credit subsidies to coverage purchased through Exchanges established by the federal government under Section 1321 of the ACA?

According to Carvin, the reasons for granting the petition are simple and compelling. Two federal Circuits have divided over whether the IRS has authority to spend tens of billions of dollars per year to subsidize health coverage in 36 states. According to the petition, if the ACA means what it says, as the D.C. Circuit held, the consequences are profound: It means millions of people are ineligible for subsidies and exempt from the ACA's individual mandate penalty. It means hundreds of thousands of employers are free of the ACA's employer mandate. It means a fundamental change in the health insurance market in two-thirds of the country. And it means that the IRS is illegally spending billions of taxpayer dollars every month without congressional authority. Uncertainty over this issue, the petition states, is simply not tenable.

The Supreme Court has so granted review. In a related development, On November 12, the D.C. Circuit canceled a full-panel December rehearing of Halbig v. Burwell, effectively putting the case on hold pending the Supreme Court's decision on the Fourth Circuit case.

For a discussion of the Code Sec. 36B premium assistance credit, see Parker Tax ¶ 102,601. (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.

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