On July 22, 2014, two conflicting appellate court decisions, Halbig v. Burwell and King v. Burwell, have thrown into doubt the reach of the so-called “employer mandate”, a key element of President Obama’s Patient Protection and Affordable Care Act (ACA). The issue in these two cases is whether individuals who obtain health insurance from a market place exchange established by the Federal government – as opposed to an exchange established by a State – are entitled to receive a subsidy under the ACA.
Every prudent employer has considered how it will comply with the ACA’s requirement to provide medical insurance to its employees (the Employer Mandate). Employers with at least 100 full-time employees must comply with the Employer Mandate beginning in 2015, and employers with between 50 and 99 full-time employees must begin complying in 2016 (employers with fewer than 50 full- time employees are not subject to this rule). Employers who fail to comply with their obligations may incur one of two penalties: (i) a “no offer” penalty, which is equal to $2,000 multiplied by the total number of the employer’s full-time employees in excess of 30 employees1, and which applies if the employer does not provide health insurance to substantially all full-time employees (and their children)2 and at least one full-time employee receives a subsidy to buy health insurance in a market place exchange or (ii) a “not adequate offer” penalty, which is equal to $3,000 multiplied by the number of full-time employees who receive a subsidy and which applies if the employer provides health insurance to its employees that is not affordable or does not provide a minimum level of coverage.
The issue addressed by the two appellate courts is of particular importance in respect of the Employer Mandate because, if employees are not entitled to receive subsidies to buy insurance on a Federally established exchange, then (1) the employer would not be subject to a “no offer” penalty unless at least one of its full-time employees buys insurance on one of the few (expected to be 17 in 2015) State exchanges, and (2) would be subject to potential “not adequate offer” penalties only with respect to employees in a State that has established its own exchange.3 This result would likely lead to the imposition of fewer and lower employer penalties, and may reduce the incentive for employers to provide their employees with affordable health care.
The specific provision at issue is Section 36B of the Internal Revenue Code, which provides that the amount of the subsidy to which a taxpayer is entitled is determined by reference to (i) the monthly premium for health plans offered in the individual market within a State “enrolled through an Exchange established by the State under section 1311” of the ACA and (ii) the number of months the taxpayer “was enrolled through an Exchange established by the State under section 1311” of the ACA. Section 1311 of the ACA provides that each State must establish an exchange. However, Section 1321 of the ACA directs the Federal government to establish an exchange for any State that fails to do so, and the IRS – based on its understanding of the intent and structure of the ACA – issued a regulation interpreting these provisions to mean that the Federal government steps into the shoes of each such State, including for purposes of determining the amount of the subsidy in each such State under Section 36B. Several individuals and businesses challenged the IRS’s interpretation, arguing that Section 36B means what it says when it says “established by the State” – a “State” is a State, and not the Federal government – and sued for an injunction to prevent the government from providing subsidies in States with Federally established exchanges.
While the Court of Appeals for the District of Columbia, in a 2-to-1 decision, decided in favor of the individuals and the businesses who challenged the IRS’s interpretation and issued the injunction, the Court of Appeals for the Fourth Circuit decided that the ACA was sufficiently ambiguous and deferred to the IRS’s interpretation. Particularly given this circuit split and a widely-held view that it is important for the success of the ACA that subsidies be made available in all States, further proceedings are sure to come and it is quite likely that this issue will ultimately come before the Supreme Court. Until then, the application of the Employer Mandate in States with Federally-run exchanges remains up in the air.
But it is no time to rest, because the Employer Mandate is coming, at the very least in States with State-run exchanges. And the courts may ultimately accept the IRS’s interpretation of Section 36B, with the result that the Employer Mandate will also apply in States with Federally-run exchanges. Prudent employers should continue to prepare as though it will apply across the country.