Two Federal Courts Issue Opposite Decisions on IRS Subsidies for Federal Exchange Policies

July 22, 2014

Two federal Court of Appeals issued decisions today on whether the federal tax subsidy applies to individual insurance policies purchased through the federally-facilitated exchange (FFE). The majority of states (currently 34 states including Virginia) are using the FFE rather than implementing their own state-based exchange (or Marketplace) for individual insurance coverage.

The D.C. Circuit invalidated the tax subsidy for FFE policies. The full decision is available here: Halbig v. Burwell.

The 4th Circuit upheld the tax subsidy. The full decision is available here: King v. Burwell.


Included in the Patient Protection and Affordable Care Act of 2010 (ACA), in section 36B, is a provision that provides tax credits/subsidies to low income individuals who purchase insurance through exchanges “established by the State under section 1311” of the ACA. The IRS interpreted this provision to allow for subsidies purchased through any exchange, state-based as well as federally-facilitated.

The ACA also includes a mandate in section 4980H that large employers must offer affordable health insurance to full-time employees or risk being charged a penalty (the Employer Shared Responsibility mandate). The employer penalty is imposed only if at least one of the employer’s full-time employees 1) is not offered affordable health insurance, 2) purchases individual insurance on an exchange, and 3) receives a federal tax subsidy.

Last, the ACA includes a mandate in section 5000A that an individual taxpayer must pay a penalty for each month that they do not have health insurance (the individual mandate). An exemption from the mandate is allowed when the cost of coverage is unaffordable based on the individual’s household income. The aim of the federal tax subsidy is to ensure that health insurance coverage is affordable for low income households. However, low income individuals who qualify for the tax subsidy but do not purchase health insurance would have to pay a tax penalty because the subsidy would make the coverage affordable.

Halbig lawsuit:

The plaintiffs in Halbig are individuals and employers from several states that did not establish exchanges. The lawsuit challenges that the ACA, as enacted by Congress, does not provide the IRS the right to issue tax subsidies for insurance purchased through the FFE, and therefore the IRS does not have the ability to impose tax penalties on individuals and employers in these states that would not be imposed but for the tax subsidies.

In a two to one vote, the D.C. Circuit Court of Appeals decided:

“We conclude that appellants have the better of the argument: a federal Exchange is not an “Exchange established by the State,” and section 36B does not authorize the IRS to provide tax credits for insurance purchased on federal Exchanges.”

Halbig, page 15

“Thus, although our decision has major consequences, our role is quite limited: deciding whether the IRS Rule is a permissible reading of the ACA. Having concluded it is not, we reverse the district court and remand with instructions to grant summary judgment to appellants and vacate the IRS Rule.”

Halbig, page 42

White House Press Secretary Josh Earnest stated via Twitter that the government will ask for a full DC Circuit review of the Halbig decision. Halbig was decided by a three judge panel, but there are 11 D.C. Circuit Court judges. A request for a full review means that the case would be reheard by all 11 judges and a new decision would be issued based on the majority opinion of those 11 judges. If a full review is granted, the majority opinion is likely to uphold the subsidies and rule against the plaintiffs.

King lawsuit:

The plaintiffs in King are individual residents of Virginia, a state that did not establish its own exchange. The lawsuit presents the same challenge as in Halbig, but the decision fell the other way.

In a unanimous vote of the three judge panel, the 4th Circuit Court of Appeals decided:

“we find that the applicable statutory language is ambiguous and subject to multiple interpretations. Applying deference to the IRS’s determination, however, we uphold the rule as a permissible exercise of the agency’s discretion.”

King, page 5

“we are satisfied that the IRS Rule is a permissible construction of the statutory language.”

King, page 37

The King plaintiffs are sure to appeal their decision directly to the Supreme Court. However, Employer Shared Responsibility is set to take effect January 1, 2015 and the Supreme Court is unlikely to hear the case and issue an opinion before then.

What these decisions may mean for employers:

Until there is a Supreme Court decision invalidating the subsidies, the subsidies will continue and nothing changes for employers or individuals. If the Supreme Court agrees to hear the case, and finds the subsidies invalid, employers will not face penalties for failure to offer coverage to employees in states that use the FFE, and individuals in those states would lose access to tax subsidies but would no longer be subject to a penalty for failure to enroll in coverage. Either way, subsidies will continue in states that established their own exchange, such as Maryland and D.C.

Keller will continue to monitor and inform you of developments regarding Employer Shared Responsibility. If you have questions in the meantime, please contact your Keller account team.