It’s Time for Employers to Focus on Compliance
The passage of the Patient Protection and Affordable Care Act (ACA) ushered in a series of interwoven reforms meant to expand access to and increase the affordability of healthcare coverage for millions of Americans. To achieve that goal, the ACA split the burden of paying for that expanded coverage between employers through the employer shared responsibility provision, individuals through the individual mandate (otherwise known as the individual shared responsibility provision), and the federal government through the provision of tax subsidies to certain qualifying individuals.
The individual mandate, tax subsidy, and employer shared responsibility provisions may be viewed as the three pillars of the ACA. On the assumption that if one of those pillars were to fall, the ACA would be unable to stand, some employers hoped the challenge to the tax subsidy provision in King v. Burwell would lead to the end of the ACA. Accordingly, instead of taking steps toward complying with the ACA employer shared responsibility requirements, those employers decided to wait to see if the ACA would survive past 2015.
At the end of last month, a six-justice majority of the Supreme Court in King v. Burwellrejected a proposed interpretation of the ACA that would have prohibited the provision of tax subsidies to individuals in a majority of states and may have resulted in a death spiral for the ACA. That opinion, authored by Chief Justice Roberts, should signal the ACA is here to stay and the wait to see approach is no longer a viable option. In fact, if employers wait much longer to ensure they are in compliance, they may face steep tax penalties in 2016.
The Link Between the Individual Mandate, Tax Subsidies, and Employer Shared Responsibility
The ACA’s individual mandate and employer shared responsibility provisions are enforced through a series of penalties and incentives to encourage individuals to obtain health insurance and employers to provide health insurance to their employees.
With limited exception, individuals are required to maintain qualifying health insurance for themselves and their dependents, whether obtained through an employer or on the individual insurance marketplace and to report that coverage when filing their federal income tax returns. Individuals who don’t maintain coverage must pay a tax penalty. To address the fact that in many cases people fail to obtain coverage because they cannot afford the premiums, the ACA requires the federal government to provide tax subsidies to certain qualifying individuals — generally those individuals whose household income falls below 400% of the Federal Poverty Line (about $96,000 for a family of four in 2015), who are unable to obtain affordable coverage from an employer and who purchase insurance through a Health Insurance Marketplace (a/k/a the Exchange) — to defray the cost of premiums.
The ACA’s employer shared responsibility provision imposes tax penalties on certain large employers (with at least 50 full-time or full-time equivalent workers) if they do not offer affordable health coverage to employees and at least one of their full-time employees obtains a tax subsidy by applying for healthcare through an Exchange.
In other words, an individual’s ability to qualify for a tax subsidy is at least in part tied to their inability to obtain affordable coverage from their employer and an employer’s liability under the ACA is only triggered if at least one of their employees qualifies for a subsidy.
King v. Burwell
At first blush, King v. Burwell relates mainly to the individual mandate and tax subsidy portions of the ACA. However, because of the inextricable link between those provisions and the employer shared responsibility provision, the case had the potential to dismantle the ACA by rendering its key enforcement mechanisms toothless.
In keeping with the ACA’s goal of expanding access to affordable health care, the Act requires the creation in each state of an Exchange — an insurance marketplace offering individuals the ability to comparison shop for health insurance sold in their state. State governments were given the first crack at establishing those Exchanges, but the Act ensured the Exchanges would be created despite state inaction by requiring the federal government to step in if it appeared the state was unwilling or unable to timely create a workable Exchange. In that case, the federal government is authorized to “establish and operate such Exchange” within the state.
In King v. Burwell, the Supreme Court was asked to decide whether a technical reading of the ACA would allow tax subsidies to be granted only to individuals obtaining health coverage through an Exchange established by the state as opposed to the federal government. The technical argument focused on language in the ACA providing that tax subsidies “shall be allowed” only if the individual has enrolled in an insurance plan through “an Exchange established by the State.” In implementing the tax subsidies provision of the ACA, the IRS issued a regulation stating subsidies will be provided for individuals who enrolled in an insurance plan from their state Exchange, regardless of whether it was established and operated by their state (such as in Kentucky) or the federal government (such as in Ohio and Indiana).
The federal district court and the court of appeals that first considered the case both rejected the petitioners’ argument, albeit for different reasons. The federal district court found the ACA unambiguously made tax subsidies available to qualifying individuals whether they obtained coverage through a state-created or federally-created Exchange. The Court of Appeals for the Fourth Circuit, in contrast, concluded the language in question was ambiguous, but the court deferred to the IRS’s interpretation of the tax subsidy provision based on a long-standing doctrine established in the case of Chevron U.S.A. Inc. v. Natural Resources Defense Counsel, Inc. Under that doctrine, where a statute is ambiguous and a federal agency has interpreted the statute, courts should defer to the agency’s interpretation so long as it is reasonable.
Like the lower courts, the Supreme Court ultimately interpreted the ACA’s tax subsidy provision as making subsidies available in states that have a federally-established Exchange. While the Court agreed with the Fourth Circuit that the phrase “an Exchange established by the State” is ambiguous, the Court declined to apply the Chevron doctrine. In doing so, the Court noted the Chevron doctrine “is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps.” That theory, the Court found, did not apply to the controversy at hand. Instead, due to the significance of the tax subsidy provision to the broader ACA scheme, the Court expressed little doubt that had Congress intended to assign the question of whether such subsidies are available for insurance purchased through federally-created Exchanges, it would have explicitly announced such delegation through the ACA. Accordingly, instead of deferring to the IRS, the Court proceeded to interpret the disputed portion of the Act by placing it in the broader context of the overall statutory scheme.
Writing for the majority, Chief Justice Roberts detailed the goals of the ACA and the means in which the ACA’s structure was designed to achieve those goals. Roberts indicated any reading of the ACA that would limit tax subsidies in the manner suggested by the petitioners would be so inconsistent with the overall purpose of the Act and the required establishment of the Exchanges as to render it “implausible that Congress meant the Act to operate in [that] manner.” He said it was clear Congress didn’t intend for “the viability of the entire Affordable Care Act turn on the ultimate ancillary provision: a sub-sub-sub section of the Tax Code.” This broad statement comes with a broad result. Because the Court didn’t defer to the IRS on the reading of the statute but instead announced the only plausible interpretation of the disputed language is that tax subsidies are available for all qualifying individuals who purchase insurance through an Exchange, regardless of whether the Exchange was established by the state or the federal government, it removed the ability of future Presidential administrations to offer a different interpretation through agency regulation. Therefore, the only means to reverse this decision is by altering the terms of the ACA through Congressional action.
King v. Burwell did not resolve all questions stemming from the passage of the ACA. Indeed, the statute is large and complex and its nuances are legion. However, the Supreme Court’s ruling sends a strong message the ACA is here to stay and individuals and employers should prepare to comply or face steep penalties.
The ACA’s initial transition periods are coming to a close, and there are a number of important deadlines that loom on the horizon. To highlight two of those deadlines, employers must begin, if they have not already, to prepare for the employer shared responsibility reporting requirements that apply to coverage provided to employees in 2015 and that must be included with the employers’ 2016 tax returns. Employers should also consider whether they will be impacted by the ACA’s excise tax on “Cadillac plans.” high-end health plans that provide generous benefits with low deductibles and minimal cost-sharing, which is slated to go into effect in 2018.
Whatever action employers decide to take, the days of doing nothing and hoping the ACA will simply go away are over.