On June 25th the Supreme Court ruled that premium tax credits provided by the Affordable Care Act (ACA) to help individuals of low or moderate income to buy health insurance either on state- or federally-managed marketplaces are lawful. This means that people in all states, including the 34 states with federally-facilitated marketplaces, will continue to have access to the tax credits. Because of the Court’s 6 to 3 ruling in King v. Burwell, ACA will remain unchanged, and individuals, employers, and health insurers must continue to comply with the law’s individual and employer coverage mandates.
Backdrop
ACA requires most Americans to purchase health insurance. To help facilitate the purchase of insurance, ACA requires the states to set up electronic marketplaces for people to shop for health coverage. If a state declines to implement its own marketplace, the state is required to utilize a marketplace run by the Department of Health and Human Services. After ACA was enacted, only 16 states and the District of Columbia established their own health insurance marketplaces. The remaining states (including Ohio) opted to use marketplaces set up by the federal government.
ACA provides for tax credits that allow qualifying low and moderate income individuals to purchase health insurance at a reduced cost. The IRS issued a tax regulation that provides credits are available to eligible individuals whether they purchase health insurance on a marketplace managed by a state or by the federal government. However, because of language in ACA itself, the plaintiffs in the King case contended that the law only allows credits to those who purchase health insurance on the state-facilitated marketplaces and that the IRS regulation exceeds its Congressional grant of authority by extending credits to those who buy insurance on a federally-facilitated marketplace.
If the credits were not available to those of low and moderate income who acquire health insurance on federally-facilitated marketplaces, they would be required to pay the full cost of insurance. This would make it less likely that those individuals would be able to actually purchase coverage. In Ohio, which uses a federally-managed marketplace, about 160,000 people receive premium tax credits to assist in the purchase of health insurance.
Legal Arguments and Decision
In the King case, the plaintiffs insisted that ACA’s language plainly states that the credits may only be granted for coverage purchased on marketplaces “established by the State” and not for coverage purchased on federally-run marketplaces. According to the plaintiffs, the literal meaning of these four words restricted the availability of tax credits to individuals who purchase insurance on state-run marketplaces thereby excluding those who buy coverage on federally-run marketplaces.
The government argued that this phrase needed to be viewed in context of the entire Act and Congress’s purpose for enacting the legislation. It pointed out that ACA allows states to choose to allow the federal government to establish a marketplace rather than implementing one itself. The government also argued that the IRS acted within its discretion to extend credits to all individuals who acquire insurance on any marketplace whether it is state- or federally-managed.
Finding the phrase “established by the State” to be ambiguous, the Court considered the broad structure of ACA to determine its meaning. The Court held that the overall statutory scheme of the Act compelled it to reject the interpretation that the tax subsidies do not apply to coverage purchased through a federal exchange. According to Chief Justice Roberts, who wrote the Court’s majority opinion, such an interpretation “would destabilize the individual insurance market in any State with a Federal Exchange” and substantially undermine the principles of affordability that are at the very foundation of ACA. The Court believes that “it is implausible that Congress meant the Act to operate in this manner.”
Importance of Continued Compliance with ACA
Despite the favorable ruling in King v. Burwell, it is impossible to conclude that Obamacare is here to stay. After all, there are cases pending in the lower federal courts that challenge other provisions of ACA. However, the ruling in King does means that ACA will most likely survive President Obama’s second term. This underscores the importance of employer compliance with ACA. Large employers (50 or more employees) must implement procedures to properly count employees for purposes of determining Applicable Large Employer status and to track employee work hours. For the 2015 calendar year, large employers and employers with self-funded plans will be subject to ACA’s new informational tax return reporting requirements (Tax Forms 1094 and 1095). Smaller employers must also ensure their compliance with applicable ACA provisions and administrative rules.
For more information on ACA compliance planning, please contact Edie Crump (937/449-5530; [email protected]).
