What Happened?  Yesterday, two federal appellate courts issued conflicting rulings regarding tax credit subsidies for individuals who purchase health insurance through “exchanges” run by the federal government.

Exchanges. Under the Affordable Care Act (the “ACA”), each state may establish a health insurance exchange where individuals can purchase health insurance policies, known as a “state-run” exchange.  If a state chooses not to establish an exchange, the ACA permits the federal government to facilitate the exchange in that state, known as a “federally-facilitated” exchange.  A majority of states, including Alabama, decided not to establish state-run exchanges, leaving the federal government to establish federally-facilitated exchanges.  At issue in the two rulings is the difference between these two types of exchanges – specifically, whether tax credits authorized under the ACA for state-run exchanges likewise apply to federally-facilitated exchanges.

Credits. The ACA statute includes a provision authorizing tax credits for certain individuals who obtain health insurance plans through a state-run exchange.  If a person is not offered affordable health insurance coverage by their employer, and they meet certain income requirements, they are eligible for tax credits to subsidize insurance purchased on a state-run exchange.  The IRS published a rule in 2012, providing that the ACA tax credits available to individuals through state-run exchanges also apply to individuals in states with federally-facilitated exchanges.  Both of yesterday’s rulings center on the IRS’s interpretation of the ACA.

D.C. Circuit.  The United States Court of Appeals for the District of Columbia Circuit concluded that a federally-facilitated exchange is not an “[e]xchange established by the State” and that the ACA statute does not authorize the IRS to provide tax credits for insurance purchased on federally-facilitated exchanges.

Fourth Circuit.  The United States Court of Appeals for the Fourth Circuit came to a different conclusion.  It found that the IRS’s rules were a permissible exercise of the agency’s discretion and therefore it was permissible for the IRS to allow tax credits for insurance purchased on federally-facilitated exchanges.

Individual Impact - Credits.  Millions of people have signed up for insurance across the country on both types of exchanges and already are receiving credits.  If the D.C. Circuit view ultimately prevails, individuals in a majority of states will not be eligible for tax credit subsidies for health insurance purchased through a federally-facilitated exchange.  However, in the absence of any transition relief, many individuals formally eligible for credits still must comply with the “individual mandate” to have insurance or pay a penalty, held to be a valid exercise of Congress’s taxing authority by the U.S. Supreme Court in a landmark 2012 ruling.

Business Impact – The Employer Mandate.  The employer mandate, requiring that employers offer full-time employees affordable health insurance that meets minimum value requirements or face a penalty, hinges on the tax credits.  The trigger for an employer mandate penalty is where an employee is certified as having enrolled in a health plan “with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.”  If no employees are eligible for a credit through an exchange, the employer mandate may become a toothless tiger – employers who fail to offer affordable health insurance coverage would not be liable for a penalty in the absence of a trigger mechanism.

Next Steps.  Most likely, the next steps for each of these cases will be an “en banc” hearing in each respective circuit.  Right now, neither of these cases impacts Alabama directly.  Alabama sits in the Eleventh Circuit and currently has a federally-facilitated exchange.  The ultimate outcome is unknown at this point.  The apparent “circuit split” does often invite quicker review by the U.S. Supreme Court, which may side with one of these views, or even adopt an entirely different posture.  Also, the “en banc” review may resolve the apparent circuit split before the Supreme Court has their say.  Further, Congress may choose to intervene and change the landscape entirely.