Under the Patient Protection and Affordable Care Act (ACA), large employers who do not offer affordable health insurance coverage to their full-time employees are subject to an “assessable payment” or tax under 26 U.S.C. Section 4980H. Imposition of the Section 4980H assessment is triggered when a full-time employee purchases subsidized coverage on an exchange.
A lawsuit filed by a group of individuals and employers residing in states that have declined to establish state-run exchanges—lead plaintiff is Jacqueline Halbig, who was a senior policy adviser to the Department of Health and Human Services under George W. Bush—attempted to invalidate the provision of subsidies in states that chose not to establish a state-run health insurance exchange.
On May 23, 2012, the Internal Revenue Service (IRS) issued a final rule implementing the premium tax credit provision of the ACA. In its final rule, the IRS interpreted the ACA as authorizing the agency to grant tax credits to certain individuals who purchase insurance on either a state-run health insurance exchange or a federally facilitated exchange. The lawsuit plaintiffs contend this interpretation is contrary to the statute, which, they assert, authorizes tax credits only for individuals who purchase insurance on state-run exchanges. They assert that the rule promulgated by the IRS exceeds the agency’s statutory authority and is arbitrary, capricious, and contrary to law, in violation of the Administrative Procedure Act.
Specifically, the IRS rule provides that an applicable taxpayer who meets certain other criteria is allowed a tax credit if he or she, or a member of his or her family, “[i]s enrolled in one or more qualified health plans through an Exchange.” It also provides that the term exchange “has the same meaning as in 45 C.F.R. §155.20,” which in turn defines exchange in the following manner: “Exchange means a governmental agency or non-profit entity that meets the applicable standards of this part and makes [Qualified Health Plans] available to qualified individuals and/or qualified employers. Unless otherwise identified, this term includes an Exchange serving the individual market for qualified individuals and a [Small Business Health Options Program] serving the small group market for qualified employers, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by HHS.”
In describing the rule, the IRS noted that “[c]ommentators disagreed on whether the language in [26 U.S.C. §] 36B(b)(2)(A) limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans on State Exchanges.”
According to an opinion of the U.S. District Court for the District of Columbia, the IRS rejected such a limitation, explaining: “The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the federally facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.”
U.S. District Judge Paul L. Friedman agreed with the IRS, finding that the plaintiffs’ reading of the ACA was too narrow. Friedman pointed out that the ACA provides that a state may “elect” to establish an exchange and implement federal requirements for that exchange. If a state is not an “electing State,” fails to have “a required Exchange operational by January 1, 2014,” or has not taken the actions necessary to establish an operational Exchange consistent with federal requirements, “the Secretary shall . . . establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.” Stated plainly, the federal government can create “an Exchange established by the State under [42 U.S.C. § 18031]” on behalf of that state.
In addition, Friedman said the defendants point to various provisions of the ACA that appear to reflect an intent by Congress to make tax credits available to taxpayers purchasing insurance from the federally facilitated exchanges, and they cite provisions that, if construed consistently with plaintiffs’ proposed definition, would create numerous anomalies within the statute that Congress could not have intended.
The court’s decision in Halbig v. Kathleen Sebelius, U.S. Secretary of Health and Human Services is here.
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