United States

Supreme Court upholds Affordable Care Act tax credits

Tax credits can continue to be available on the health benefit exchanges

TAX ALERT  | 

On June 25, the Supreme Court issued its anxiously anticipated ruling in the case of King v. Burwell. At issue in this case was the legality of premium tax credits paid through the federally (rather than state) administered health benefit exchanges. The Court in its ruling came down in favor of President Obama's administration and against the petitioners.

With respect to the individual health insurance marketplace, the three key elements of the Affordable Care Act (ACA) are (1) the requirement that insurers must issue insurance policies without regard to any applicant's pre-existing health conditions and that community ratings versus individual underwriting be applied in determining rates, (2) that individuals are generally required to have health insurance or pay a penalty for not doing so, and (3) that the federal government would offer refundable tax credits for certain low and moderate income individuals to assist with the purchase of health insurance.

The mechanism for delivery of the tax credits is the health benefit exchange (exchange) concept. The exchange as envisioned under the ACA would be an online marketplace where consumers could shop for health insurance in a competitive market environment. The ACA provided two ways for a health benefit exchange to be established in each state. First, the state could establish its own health benefit exchange (e.g., California). Second, if a state failed to establish an exchange, the federal government, through the Department of Health and Human Services (HHS), would establish an exchange and operate such exchange within the state. This federal exchange could be established either in partnership with the state (e.g., Illinois) or solely by the federal government.

The majority of the states chose not to establish their own exchanges. Accordingly, the federal government was forced to take the lead in establishing the health benefit marketplace that the ACA contemplated.

With respect to the tax credits that are vital to the existence of the new ACA insurance marketplace, the ACA provides in one part that tax credits shall be allowed for any applicable taxpayer. However, the ACA additionally provided that the amount of the tax credit depends in part on whether the taxpayer has enrolled in an insurance plan through an exchange established by the State [emphasis added].

When the U.S. Treasury drafted regulations for the administration of the tax credits, it very controversially determined that the words "established by the State" when read in context of the ACA in its entirety were ambiguous and contrary to the language that indicated that tax credits should be available to all. Therefore, Treasury took the position that the ACA was meant to benefit taxpayers universally and that it was a reasonable regulatory interpretation to read the ACA as providing for tax credits to individuals irrespective of whether the exchange in a given state was established by the state or by HHS. 

It was that interpretation by the Treasury that led petitioners David King and others to challenge the validity of the tax credit regulations. The petitioners' assertion was that the phrase "established by the State" meant just what it said and that Treasury's decision to ignore the plain meaning of the words was improper, and thus, the regulations and procedures for issuing tax credits to individuals that resided in states where the exchange was administered by the federal government were not entitled to those tax credits.

The Court's opinion 

The Supreme Court, in a 6-3 decision drafted by Chief Justice Roberts, determined, (even though the petitioners plain meaning argument was strong) after a careful analysis of the ACA's tax credit provisions as a whole and what Congress intended with its creation of a national health insurance market, that the Treasury was correct in its interpretation that the ACA allows tax credits for insurance purchased on any exchange created under the ACA.

What the decision means to individuals and businesses

For individuals that are receiving or could receive tax credits to assist with the purchase of health insurance, the decision is good news. Any decision to overturn the availability of tax credits in states with federally run exchanges would have had an immediate impact on individuals living in those states; and the long term effect of such a decision would likely have a negative impact on the health insurance marketplace nationally, thus soon impacting the cost of insurance even in states that operate their own exchanges.

For middle market and larger businesses this means the potential penalty taxes for failing to provide affordable and meaningful health insurance coverage (the ACA's employer shared responsibility provisions) will continue to be in effect.  One of the key elements for such businesses (those with 50 or more full-time employees or equivalents) is compliance with the ACA's information reporting requirements that started in 2015 (reporting due by Jan. 31, 2016). Thus, for businesses that have been waiting for the outcome of this case before committing the time and financial resources necessary to develop reporting systems to meet that requirement, now is the time to act.

For questions or additional information about this alert contact us.

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