Two Federal Court of Appeals' Decisions Inject Further Uncertainty into the ACA
Written By Ed Redder
Introduction On July 22, 2014, two federal Courts of Appeals—including the United States Court of Appeals for the District of Columbia Circuit (the "DC Circuit Court")—issued conflicting decisions on an important issue under the Patient Protection and Affordable Care Act ("ACA"): whether an individual who purchases health coverage on a federally-facilitated Marketplace (aka an Exchange) could qualify for premium tax credits. As discussed below, the final resolution of this issue could have enormous implications for individuals, employers and the ACA. However, for the reasons discussed below, we believe that it would be premature for employers to shift their established ACA compliance strategies at this time.
Key provisions of the ACA make available premium tax credits to certain individuals who purchase health insurance coverage on the Marketplace. According to the statutory language, these credits are conditioned on, among other things, an individual enrolling in coverage "through an Exchange established by the State under section 1311 of the [ACA]." In the event that a state does not establish an Exchange, the federal government must establish an Exchange pursuant to section 1321 of the ACA. Based on the statutory language alone, it appears that credits are only available to an individual who purchases a policy on a state-established (as opposed to a federally established) Marketplace.
In May 2012, the IRS issued final regulations interpreting and applying the relevant statutory sections. There, the IRS provided that individuals could qualify for a credit if, among other requirements, the individual enrolled in coverage through a state or federal Exchange.
In a split decision (2-1), the DC Circuit Court held that the IRS' expanded interpretation was not supported by the plain language of the ACA, and vacated the IRS rule. If this decision stands, only those individuals who enroll in coverage under a state-established Marketplace can qualify for premium tax credits. The DC Circuit Court stayed its decision pending an application by the Administration for review of the decision by the full court.
In contrast, the United States Court of Appeals for the Fourth Circuit unanimously upheld the IRS rule, thus maintaining the status quo: qualifying individuals who enroll in the Marketplace—whether organized by the state or federal government—can qualify for premium tax credits.
The possible implications of the DC Circuit Court's decision—if upheld—are manifold. For individuals in states without a state Exchange, Marketplace coverage without the tax credits may be too
expensive to be a viable option. This will also likely have an impact on insurers in those states. If fewer
healthy individuals enroll in Marketplace coverage, it will exacerbate adverse selection (those individuals that retain Marketplace coverage will do so out of necessity, such as those with chronic illnesses) and may result in even higher premiums.
The decision would also have implications for employers, specifically in relation to the Employer Shared Responsibility (Pay or Play) provisions. Pay or Play provides that, beginning in 2015, certain large employers must offer affordable, minimum value, minimum essential coverage to substantially all of their full-time employees and their children or face penalties if at least one of those full-time employees purchases coverage on the Marketplace and qualifies for a premium tax credit. The DC Circuit Court's decision would mean that only individuals who purchase coverage on a State-run Marketplace (only established by 14 states and the District of Columbia) could qualify for a premium tax credit. Hence, employees who purchase coverage on state Exchanges could trigger penalties, but employees in the other 36 states could not.
Additionally, some employers have considered dropping employer-sponsored group medical coverage, assuming that employees could enroll in Marketplace coverage and potentially receive financial assistance. If the D.C. Circuit's rationale prevails, employers may need to reconsider this option.
Despite the recent developments, we caution employers against changing course on their existing positions for compliance with Pay or Play for several reasons.
• Employers with employees in states with state Exchanges could still face Pay or Play penalties if an employee in one of those states enrolls in Exchange coverage and qualifies for a tax credit.
• The D.C. Circuit Court's decision has been stayed while the government seeks review of the case by the full D.C. Circuit Court; in effect, the decision is not yet final and may not be for a significant period of time.
• Regardless of the decision by the DC Circuit Court, this matter may ultimately be resolved by the United States Supreme Court.
• Congress and/or the regulatory agencies could attempt a fix of the issue, though given the current political landscape, this seems unlikely.
• The Administration is continuing with business as usual; therefore, taking a position that conflicts with the Administration's position before we have clarity is fraught with risk.
Rather, we recommend that employers take a wait-and-see approach until the regulatory landscape becomes clearer. Findley Davies will continue to monitor the situation and advise of any new developments.