Federal Courts Issue Conflicting Rulings on Subsidies in Federal Exchanges

On July 22, 2014, the D.C. Circuit Court struck down the availability of health insurance subsidies in states with federal Exchanges, while the 4th Circuit Court upheld their availability in all states, including those with federal Exchanges.  Both court rulings issued are inconsistent on the availability of subsidies in states with FFEs.

  • In Halbig v. Burwell, the D.C. Circuit Court held that the IRS rule authorizing subsidies in states with FFEs is invalid. In a 2-1 opinion, the court ruled that the text of the ACA clearly restricts the subsidies to individuals in states that established their own Exchanges.
  • In King v. Burwell, the 4th Circuit Court unanimously upheld the availability of the ACA’s subsidies in states with their own Exchanges and in states with FFEs.

Court Decisions

The lawsuits in Halbig v. Burwell and King v. Burwell were filed by individuals and employers in states that have FFEs. They argued that the IRS rule authorizing subsidies in all states conflicts with the text of the ACA. They assert that, according to the law’s plain language, the ACA only authorized subsidies to be provided in states that have established their own Exchanges.

In Halbig v. Burwell, a three-judge panel from the D.C. Circuit Court struck down the IRS’ rule that authorizes subsidies in all states, including those with FFEs. The court concluded that the ACA “unambiguously restricts” the subsidies to insurance purchased on Exchanges established by the states. Thus, the court said that subsidies are only available to individuals who obtain insurance through state-based Exchanges.

In King v. Burwell, the 4th Circuit Court ruled that the text of the ACA is ambiguous and subject to multiple interpretations. The court upheld the IRS’ rule that authorizes subsidies in all states, including those with FFEs, as a permissible exercise of the agency’s discretion. Thus, the court said that the subsidies are available to individuals who obtain insurance through either state-based Exchanges or through FFEs.

The Obama administration disagrees with the D.C. Circuit Court’s ruling and intends to seek further review of the decision. It is anticipated that the Justice Department will ask the entire 11-person D.C. appeals court to review the decision. In the meantime, a Justice Department spokesperson has stated that the subsidies will continue to remain available.

Impact on Employers

Following the appellate court rulings, the Obama administration indicated that federal subsidies will continue to be available to eligible individuals in all states, including those with FFEs.

This availability of subsidies may have significant implications for employers as a result of the ACA’s employer mandate. Under the employer mandate, large employers may face penalties if they do not offer coverage that meets certain requirements to their full-time employees.

However, penalties apply only if an employee receives a subsidy to buy coverage through an Exchange. If the subsidy is available only in state-based Exchanges, employers would not be subject to penalties for employees living in states with an FFE.

Other Lawsuits

Other lawsuits challenging the subsidies in states with FFEs are still pending in federal courts.
In addition, although the U.S. Supreme Court has not yet agreed to consider it, it may decide to take up the issue in the future.

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