On July 22, 2014, two federal circuit courts of appeals issued conflicting rulings (within hours of one another) regarding whether premium tax credits for the Affordable Care Act's (ACA's) health insurance exchanges should be available to individuals who purchase health insurance coverage on the federally-facilitated exchanges.

In one decision, the DC Circuit Court of Appeals rejected IRS regulations that broadly interpreted the premium tax credit statute (Section 36B of the Internal Revenue Code) to authorize tax credits for insurance purchased on exchanges established by the federal government (Halbig v. Burwell, No. 14-5018, (D.C. Cir. 2014)). In contrast, the Fourth Circuit upheld the IRS' regulatory interpretation as a permissible exercise of the agency's discretion (King v. Burwell, No. 14-1158, (4th Cir. 2014)).

Under the ACA, each state was required to establish an exchange, by January 1, 2014, that would operate as a marketplace through which individuals could purchase health insurance. In states that declined to establish an exchange, the federal government set up the exchange.

The ACA included a tax credit for certain low- and middle-income individuals to offset the cost of insurance policies purchased through the exchanges. In final regulations, the IRS took the view that tax credits were available to individuals who purchase insurance on both the state-run or federally-facilitated exchanges (26 C.F.R. § 1.36B-2(a)(1)).

Availability of the tax credit also impacts other ACA provisions, including the employer mandate (see Employer Mandate Toolkit). For example, employer mandate penalties may apply if:

As a result, absent the IRS' interpretation of Section 36B, an employer would not face employer mandate penalties if credits were unavailable in states without a federally-run exchange.

In Halbig, a group of individuals and employers residing in states that did not establish exchanges challenged the IRS' broad interpretation regarding availability of the credits. After a district court ruled in the government's favor, the DC Circuit reversed, holding that:

Analyzing the ACA statute, the court reasoned that the federal government did not step into the state's shoes by establishing an exchange within a state.

The court also rejected the government's argument that absurd results would follow if the court did not adopt the IRS' interpretation of Section 36B. The court disagreed, for example, that certain reporting provisions applicable to the federal exchanges would be superfluous if the IRS' reading of Section 36B was rejected. According to the court, these reporting provisions would still be relevant for enforcing the ACA's individual mandate.

The court therefore reversed the district court and remanded with instructions to vacate the IRS's interpretation of Section 36B.

In King, residents of Virginia who did not wish to purchase health coverage argued that the IRS' regulations' interpreting Section 36B exceeded the agency's authority. (Virginia did not establish a state exchange and is therefore served by a federally-run exchange.) A district court rejected the residents' claims, concluding that the ACA clearly evidenced Congress' intent to make the tax credits available nationwide.

On appeal, the Fourth Circuit applied a test under which it would defer to the IRS' regulatory interpretation of a statute that was reasonably susceptible to multiple interpretations. The court concluded that Section 36B could be subject to more than one interpretation, including a reading under which the federal government acted on a state's behalf in establishing an exchange in a state that did not operate an exchange itself. Also, reviewing the same reporting provisions considered by the DC Circuit, the Fourth Circuit concluded that it was possible to infer from the reporting requirements that Congress intended the tax credits to be available on both state-run and federally facilitated exchanges.

The Fourth Circuit concluded that the IRS' interpretation of Section 36B was a permissible construction of the ACA and that it would therefore defer to the that interpretation. As a result, the Fourth Circuit affirmed the district court.

As both courts acknowledged, this issue could have significant consequences both for individuals receiving tax credits through the federal exchanges and, potentially, for the viability of the ACA exchanges. In the short term, however, one or both of the rulings may be appealed and similar cases in other jurisdictions will make their way through the courts. In a post-Halbig statement, the Justice Department indicated that, for now, premium tax credits will continue to be provided for the federally facilitated exchanges.