On July 22, two federal appeals courts roughly 100 miles apart reached very different conclusions about one of the most widely-used provisions of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit. The U.S. Court of Appeals for the District of Columbia Circuit found that the IRS had overreached when it issued regulations providing that individuals who obtain health coverage through a federally-facilitated Affordable Care Act Marketplace are eligible for the tax credit. In contrast, the Fourth Circuit Court of Appeals, sitting in Richmond, Virginia, upheld the IRS regulations as a valid exercise of the agency's authority. The contradictory decisions create a split among the Circuits, which could prompt the U.S. Supreme Court to review the IRS regulations.

Tax Credit

To help offset the cost of health insurance coverage obtained through Marketplaces, the Affordable Care Act created the Code Sec. 36B credit. The credit is linked to an individual's income in relation to the federal poverty line (FPL). Generally, individuals and families whose household income is between 100 percent and 400 percent of the FPL for their family size may be eligible for the credit. The credit is refundable and may be paid in advance to the insurer.

In 2012, the IRS issued regulations about the Code Sec. 36B credit. Opponents of the Affordable Care Act challenged the regulations in a number of cases, including the cases that made their way to the D.C. Circuit (Halbig et al. v. Burwell) and the Fourth Circuit (King et al. v. Burwell). Generally, they argued that the language of the Affordable Care Act only made the Code Sec. 36B credit available to individuals who obtained their coverage through a state-run Marketplace. Individuals who obtained coverage through a federally-facilitated Marketplace were ineligible for the credit. Two federal district courts ruled in favor of the IRS and the D.C. Circuit and the Fourth Circuit agreed to hear appeals.

D.C. Circuit Decision

In a 2-1 decision, a panel of the D.C. Circuit found that the IRS regulations were inconsistent with the Affordable Care Act. The majority looked to the language of the Affordable Care Act and found it was clear. "Applying the statute's plain meaning, we find that Code Sec. 36B unambiguously forecloses the interpretation embodied in the IRS rule and instead limits the availability of premium tax credits to state-established (Marketplaces)," the court found.

The dissent would have upheld the IRS regulations. The dissent argued that the words of the Affordable Care Act had to be read with a view to their place in the overall statute. The tax credits, the dissent explained, are an essential component of the Affordable Care Act, and the IRS regulations were entitled to deference.

Fourth Circuit Decision

The Fourth Circuit decision was also made by a panel of three judges. Unlike the D.C. Circuit, the Fourth Circuit found that the language of the Affordable Care Act was unclear and looked to the policy goals of the Affordable Care Act. "Widely-available tax credits are essential to fulfilling the Affordable Care Act's primary goals. The IRS rule advances this understanding by ensuring that this essential component exists on a sufficiently large scale, the court held. The court concluded that the IRS regulations were a permissible construction of the Affordable Care Act and upheld the regulations.

Appeals Expected

Shortly after the D.C. Circuit announced its decision, a White House spokesperson said that the Obama administration will appeal the ruling to the entire D.C. Circuit. All 11 judges of the D.C. Circuit are expected to hear the appeal (an "en banc" hearing). The full D.C. Circuit could uphold the panel's decision or reverse it. If the full D.C. Circuit agrees with the panel, the Obama administration would very likely appeal the decision to the U.S. Supreme Court. The taxpayers in the King case could also petition the Supreme Court to review the Fourth Circuit's decision. At the same time, two other challenges to the Code Sec. 36B regulations are making their way through the federal district courts: one in Indiana and another in Oklahoma.

Looking Ahead

The conflicting decisions certainly contribute to uncertainty over eligibility for the Code Sec. 36B tax credit. Both individuals and employers need to keep track of developments. The Code Sec. 36B credit is part of the calculation under the Affordable Care Act to determine if an applicable large employer must make an employer shared responsibility payment (the "employer mandate.").

The Obama administration is treating the decision by the D.C. Circuit as having no impact on the availability of the Code Sec. 36B tax credit. The U.S. Justice Department reported that qualified individuals in both state-run Marketplaces and federally-facilitated Marketplaces will continue to be eligible for the credit. IRS Commissioner John Koskinen made the same comments to Congress on July 23.

If you have any questions about these decisions or the Code Sec. 36B premium assistance tax credit, please contact our office.

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