Conflicting Court Rulings involving ACA Tax Subsidies in Some States

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Two new court decisions reached opposite conclusions about whether individuals in states that do not operate their own health insurance exchanges are eligible for the premium assistance tax credit under the Affordable Care Act (ACA). Here is what you need to know about the controversy.

Premium Assistance Tax Credit Basics

According to the statutory language, the premium assistance credit (which is new for 2014) is available to eligible individuals who obtain health coverage in a qualifying plan by enrolling through a state insurance exchange or an exchange operated in partnership between a state and the federal government. (Internal Revenue Code Section 36B)

This credit is also sometimes described as the federal health insurance subsidy.

In general, you are potentially eligible for the credit if your household income is between 100 percent and 400 percent of the federal poverty line and you do not have access to employer-sponsored affordable coverage. The allowable credit amount can vary widely depending on your specific circumstances.

The credit can be paid by the government directly to the insurance company to lower your monthly premiums or it can be claimed when you file your Form 1040. You may not know the exact amount of your allowable credit until you file your return.

Any differences between what you receive in the form of reduced insurance premiums and the credit you are actually entitled to for the year will be reconciled when you file your tax return. In other words, if you collect too much, you will have to pay back the excess with your return.

The credit is refundable. That means you can collect the full credit amount even if it exceeds your federal income tax liability for the year. More specifically, the credit is first used to reduce your federal income tax bill. After your tax bill for the year has been reduced to zero, any remaining credit can be either refunded to you in cash or used to make estimated tax payments for the following year.

Dueling Court Opinions

In late July, the U.S. Court of Appeals for the District of Columbia Circuit stated that the premium tax credit is not allowed to individuals who obtain coverage through the federal exchange. (Halbig v. Burwell) On the very same day, the U.S. Court of Appeals for the Fourth Circuit reached the exact opposite conclusion. (King v. Burwell)

The D.C. Circuit opinion was a 2-to-1 decision by three judges rather than a decision by the full court. The federal government will now ask for reconsideration by the full court. If the full court reaches the same conclusion, the issue will probably go to the U.S. Supreme Court to resolve the conflict between the D.C. Circuit and Fourth Circuit.

The issue is important because only 14 states currently operate their own health insurance exchanges. The many people in the other 36 states who enrolled for ACA health insurance through the federal exchange were promised — and are relying on — the premium tax credit to help offset the cost.

Observation: Individuals who fail to obtain qualifying health coverage can be subject to a penalty. The threat of the penalty is often called the individual mandate. Wider availability of the premium tax credit presumably means more individuals would obtain qualifying health coverage and thereby avoid being penalized.

Source of the Controversy

The statutory language establishing the premium assistance tax credit refers to monthly premiums for qualified health plans in which individuals enroll through an exchange established by the state or an exchange operated in partnership between the state and the federal government.

However, IRS regulations contain more liberal language. The regulations say the credit can also be claimed by individuals who enroll through the federal exchange, which was created with many well publicized bumps in the road by the U.S. Department of Health and Human Services (HHS) to enroll people in the 36 states that do not operate their own exchanges. (Treasury Regulation 1.36B-1(k))

The federal D.C. Circuit Court found that the liberalized IRS interpretation conflicts with the plain language of the statute, and that the regulation is therefore invalid. So, according to the D.C. Circuit Court, the premium tax credit can only be claimed by individuals who enroll in qualifying health coverage through one of the 14 state-operated exchanges. That could leave people in the other 36 states out of luck.

In contrast, the Fourth Circuit Court opined that the statutory language is ambiguous and subject to multiple interpretations. Therefore, the Fourth Circuit decided that the liberalized interpretation in the IRS regulations was consistent with what Congress intended in passing theAffordable Care Act, and was a permissible exercise of the agency’s rule-making powers.

Stay Tuned

This controversy is not over. As mentioned earlier, the federal D.C. Court of Appeals decision could be reversed upon reconsideration by the full court. If the decision stands, the Supreme Court will probably get involved to resolve the conflict between the D.C. Circuit and the Fourth Circuit. We will keep you posted on developments. Stay tuned!


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