Federal Judge Permits ACA Premium Tax Credits in States with Federally Facilitated Exchanges



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A federal district court judge has ruled in favor of the government on one of the most serious challenges to the Patient Protection and Affordable Care Act of 2010 (ACA). The court rejected a challenge to the availability of premium tax credits under the ACA. The plaintiffs have already appealed, and similar challenges remain pending in three other federal trial courts.

In Halbig v. Sebelius, U.S. District Court Judge Paul L. Friedman rejected a claim that the May 2012 Internal Revenue Service (IRS) rule is inconsistent with the “plain language” of the Patient Protection and Affordable Care Act of 2010 (ACA). The IRS rule provides that the health insurance premium tax credit will be available to all taxpayers, whether they obtain coverage through a state-based exchange or a federally facilitated exchange (FFE). On January 15, 2014, Judge Friedman entered judgment in favor of the government. Immediately after, the plaintiffs appealed to the U.S. Court of Appeals for the District of Columbia and will move to expedite their appeal.

The plaintiffs in Halbig seek to prevent the application of the IRS rule in states that failed to establish a state-based exchange and, thus, defaulted to the FFE. The plaintiffs, individuals and employers residing in states on the FFE, argued that the ACA does not permit premium tax credits to be available to taxpayers obtaining coverage through the FFE. The individual plaintiffs’ eligibility for the premium tax credit would subject them to the individual mandate to buy health insurance or face a tax penalty. 26 U.S.C. § 5000A. By contrast, without the tax credit, those individuals would be exempt from the requirement because health insurance would be “unaffordable” to them as a matter of law. See id.

Certain employers who do not offer affordable health insurance coverage to their full-time employees are subject to an “assessable payment” when their employees purchase exchange coverage. 26 U.S.C. § 4980H. The employers in this case argued that making the premium tax credit available to their employees would force the employer to offer coverage or owe the assessable payment. See 26 U.S.C. § 4980H(d).

Judge Friedman found that the Anti-Injunction Act barred the employers’ claims because the assessable payment was a tax rather than a penalty. This aspect of the ruling explicitly rejected the U.S. Court of Appeals for the 4th Circuit’s prior decision that the assessable payment was a penalty and, thus, the Anti-Injunction Act did not prohibit a pre-enforcement challenge. See Liberty Univ., Inc. v. Lew, 733 F.3d 72, 86–89 (4th Cir. 2013). However, the court determined that the individual plaintiffs had standing to sue. Although the amount of their economic injury was rather small (about $20 per year), the court found that the individual plaintiffs showed the IRS rule would injure them and that a tax refund suit after the fact would not be a complete and appropriate alternative remedy to stopping enforcement of the IRS rule.

Reaching the merit of the individual plaintiffs’ claims, the court acknowledged that, viewed in isolation, the plain language of section 1401(a) of the ACA (which enacted Internal Revenue Code section 36B(b)) may support plaintiffs’ interpretation. Nevertheless, the court concluded that this provision must be construed in conjunction with the structure, purpose and legislative history of the ACA to create a coherent regulatory scheme, and it found that the government presented the more credible interpretation. Reading the provision in context with the whole statute, the court held that the ACA provides that when a state does not actually establish an exchange, the federal government can create an exchange on behalf of that state. The court also noted that accepting the plaintiffs’ narrow reading of the statute would create inconsistencies with other parts of the ACA. The court ruled that the plaintiffs’ proposed interpretation—that tax credits are available only for those purchasing insurance from state-based exchanges—-contradicted the central purpose of the ACA: to offer near-universal health coverage. The court rejected the plaintiffs’ counterargument that Congress deliberately intended to compel states to run their own exchanges (by causing residents of states that defaulted to the FEE to lose the premium tax credit) because of the lack of support in the legislative history. Instead, the court found that the ACA’s scant legislative history tended to show that Congress intended to offer states the flexibility to setup their own exchanges or opt to let the federal government step in on their behalf. Thus, the court ruled that the ACA clearly permitted the IRS to provide premium tax credits to taxpayers purchasing coverage through the FFE.

This federal district court decision is significant because it was considered to be one of the most serious threats to the ACA. The plaintiffs and their supporters criticized the decision, asserting that it delivers a major blow to most states’ choice not to run their own exchanges. On the other hand, the defendants and their proponents argue the ruling upholds the ACA’s goal to provide affordable coverage to all by refusing to limit the availability of tax credits to the residents of the 14 states (plus the District of Columbia) that do run their own exchanges. The availability of tax premium credits to consumers purchasing coverage through the FFE affects a large number of enrollees. According to the U.S. Department of Health and Human Services Enrollment Report for October 1, 2013 through December 28, 2013, about 1.2 million people have selected a Health Insurance Marketplace plan through the FFE, and more than three-quarters (79%) of those enrollees will be receiving federal financial assistance in paying their premiums.

Further, this ruling may affect the pending decisions in three other federal cases also challenging this IRS rule. Judge James R. Spencer of the U.S. District Court for the Eastern District of Virginia is expected to render his decision in King v. Sebelius (brought by the same attorneys as Halbig) soon. Regardless how Judge Spencer rules, it is almost certain that his decision will be appealed to the 4th Circuit immediately. If the D.C. and 4th Circuits rule differently on these cases, this may propel the final decision to the Supreme Court of the United States sooner. It would be unsurprising if the courts continue to accept the government’s reasoning to allow premium tax credits to be available nationwide to avoid undermining the ACA.

McDermott Will & Emery will continue to monitor developments in these cases and to assess how the decisions reached by the federal courts may affect our clients.