Two federal appeals courts issued conflicting rulings on July 22 on whether individual premium subsidies under the Patient Protection and Affordable Care Act (PPACA) are available in 36 states that have federally run insurance exchanges. Because employer penalties can be triggered when employees receive subsidies to obtain coverage on an exchange, the courts’ holdings also raise questions on the application of employer penalties in states where premium subsidies are not available.

Both courts addressed how to interpret section 36B of the Internal Revenue Code of 1986, as amended (Code), which provides premium assistance for low-income taxpayers enrolled in a health plan “through an Exchange established by the State under section 1311.” (Emphasis added). A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) ruled in Halbig v. Burwell that the plain language of the statute should prevail; therefore, residents of states that have not established their own exchanges are not eligible for subsidies. No. 14-5018 (D.C. Cir. July 22, 2014). A few hours later, a panel of the U.S. Court of Appeals for the Fourth Circuit (Fourth Circuit) ruled in King v. Burwell that subsidies are available in every state, and the regulations issued by the Internal Revenue Service (IRS or Service) providing that subsidies may be paid to individuals enrolled in coverage through federally run exchanges were a “permissible exercise of the agency’s discretion.” No. 14-5018 (4th Cir. July 22, 2014).

Clearly there will be further federal court action on this issue. If it is raised to the U.S. Supreme Court, the outcome of a Supreme Court review would have far-reaching implications for individuals living in states with federally run exchanges and employers doing business in those states.


The individual mandate of PPACA requires individuals to obtain “minimum essential coverage” or pay a tax penalty. Code section 5000A. However, if the annual cost of coverage available to an individual would be more than 8% of his or her household income, then the individual is exempt from the requirement and does not pay any penalty. The federal tax credits made available to low-income individuals under Code section 36B are taken into account when determining the annual cost of coverage purchased on a state or a federal exchange, thereby lowering the cost of the coverage to the individual. The plaintiffs in both cases are individuals living in states that have federal exchanges who do not wish to buy health insurance. Without the subsidy under Code section 36B, the plaintiffs would neither be required to purchase coverage nor be subject to the tax penalty, because the only coverage available to them on the federal exchanges in their states would cost more than 8% of their household income.

The Cases

The facts in both cases, as well as the arguments made before the courts,were very similar but the end result was not.

Plaintiffs in both cases brought suit under the Administrative Procedure Act, which provides a cause of action to challenge an agency action “for which there is no other adequate remedy in a court.” The plaintiffs’ claims arose from the Service’s regulatory interpretation of Code section 36B, which authorizes tax subsidies for individuals who purchase coverage on an “Exchange established by the State under section 1311” of PPACA. In the regulations, the IRS interpreted Code section 36B as authorizing subsides for individuals enrolled in federal, regional, and subsidiary exchanges, as well as state exchanges. Plaintiffs argued that the Service’s interpretation was not “in accordance with the law,” and that subsidies should be made available only to individuals who purchase coverage on a state exchange.

The D.C. Circuit found the Service’s interpretation to be overly broad in the face of the clear and plain statutory language. The D.C. Circuit rejected the Obama Administration’s arguments that limiting the availability of subsidies to individuals buying coverage on a state exchange led to absurd results and made parts of PPACA unworkable, and that the limitation so clearly ran counter to the purpose and legislative history of PPACA that it would justify the Service’s interpretation.

The Fourth Circuit, on the other hand, accepted a broader view of the statute based on the directive in section 1321(c) of PPACA, requiring the Department of Health and Human Services to establish “such Exchange within the State” (referring to the state exchanges established under section 1311 of PPACA) in any state that does not establish its own exchange. The Fourth Circuit found the statutory language to be sufficiently ambiguous to permit the IRS to interpret the statute in a manner it determined was consistent with the entire regulatory scheme. The Fourth Circuit further found that a strict interpretation would have an absurd result, while, as noted above, the D.C. Circuit was not similarly convinced.

Although the relationship between the federal tax credits and the PPACA large employer mandate was not addressed in detail in either case, employer penalties under Code sections 4980H(a) and (b) are triggered only when a full-time employee purchases exchange-based coverage and obtains a premium tax subsidy. Under the D.C. Circuit’s decision, employees in states without an exchange are unable to obtain subsidies; thus, those employees cannot trigger employer penalties, even if they are not offered employer-sponsored coverage (or if their coverage is unaffordable under PPACA). The decision would also impact a number of other PPACA compliance requirements for employers, from mandatory exchange notices for employees to employer coverage reporting requirements under Code section 6056.

What Now?

The decisions will not have an immediate impact on individuals receiving tax subsidies or for large employers. The Obama Administration has indicated that it will continue to offer subsidies and plans to enforce penalties against employers when they go into effect in 2015.

In the meantime, the Administration is likely to ask the entire D.C. Circuit to review the panel’s decision en banc. The D.C. Circuit has 11 judges, seven of which were appointed by Democrats. If the case is reversed en banc, the U.S. Supreme Court may not review the case even if it is appealed, because there will no longer be a circuit court split.

However, there are still multiple avenues for the issue to reach the Supreme Court. The D.C. Circuit could grant a petition to rehear the decision en banc but decide to uphold it or could decline to grant rehearing en banc. Also, similar cases pending in the district courts in Oklahoma and Indiana could still create new conflicting court decisions. Thus, it may take several years before the issue is fully resolved in the courts, which will determine whether individuals in states with federal exchanges will lose their subsidies and whether employers may need to redesign their plans yet again to adjust to the new landscape.