Supreme Court Rules in Favor of the Affordable Care Act (Again)
By Aaron P. Borden
On June 25, 2015, the Supreme Court ruled that the Affordable Care Act (“ACA”) individual tax credit, codified in Code § 36B, extends to those who purchase coverage on the Federal exchange as well as those who purchase coverage on a state exchange. The plain language of Code § 36B provides a tax credit to middle- and low- income taxpayers who purchase insurance through “an exchange established by the state.” However, the IRS’ regulations under § 36B extended the tax credit to taxpayers who purchase coverage through a state or Federal exchange.
Thirty-four states do not have state exchanges. The petitioners in King v. Burwell did not want to purchase health insurance. They argued that the Federal exchange operating in Virginia did not entitle them to tax credits. Without a tax credit, the cost of buying insurance exceeded eight percent of their income, and, as a result, they would be exempt from the obligation to purchase health insurance under the ACA.
The Court decided not to follow its own Chevron, U.S.A., Inc. v. NRDC, Inc. framework in this case because it was an extraordinary case. In the Court’s opinion, because the tax credit is central to the ACA statutory scheme, Congress would have expressly delegated this issue to the IRS if it had intended to leave the issue open to regulatory interpretation. Thus, the Court concluded that the tax credit was too important to leave to the IRS. Instead, the Court conducted its own analysis of the Code § 36B tax credit. The Court analyzed other provisions of the ACA addressing the exchanges and concluded that the phrase “an exchange established by the state” was ambiguous. The Court also reviewed the broader structure of the ACA and the structure of Code § 36B to determine Congress’ intent. The Court noted that the dissenting Justices had previously stated that the ACA “would not operate as Congress intended and may not operate at all” without the tax credit. As a result of its analysis, the Court concluded that tax credit must extend to insurance purchased on the Federal as well as state exchanges to accomplish Congress’ intent.
The Court’s decision impacts business as well as individual taxpayers. Code § 4980H employer penalties are only imposed if an employee of the employer purchases coverage through an exchange and receives a Code § 36B credit for the purchase. Had the Court decided in favor of the taxpayers, many employers in states like Texas may have avoided Code § 4980H penalties. The Court’s decision makes clear that noncompliant employers will begin receiving penalty notices in 2016 for the penalties they began accruing on January 1 of 2015. Fortunately, there is still time for employers to implement changes to minimize their potential penalties. Please contact Aaron Borden at (214) 749-2402 or firstname.lastname@example.org for more information.