Recently, two federal courts (Court of Appeals for the District of Columbia and Court of Appeals for the Fourth Circuit in Richmond, Virginia) issued conflicting rulings with respect to whether consumers who meet certain income criteria can continue to receive government subsidies for health care coverage bought on the Affordable Care Act’s federal exchange. The main point of debate surrounds a few key sections of the law that define the term “exchanges” and whether consumers are able to buy subsidized healthcare coverage from a federal exchange versus a state-run exchange.
The Affordable Care Act defines an “exchange” as an insurance marketplace where you can shop for insurance coverage. These exchanges were created when the Affordable Care Act was signed into law with the intent to offer subsidies in the form of premium reduction and cost sharing assistance for qualifying individuals and families who buy insurance on these exchanges.
According to one section of the law, the above mentioned exchanges were to be established and operated by the states. This section of the law also states that federal officials were allowed to establish and maintain exchanges in each state if the states refused to create an exchange or were financially unable to do so. However, this description and wording in the law, is contradicted in other sections of the law that explicitly state that tax credits would be offered through exchanges established by the states. The later description only confirms that tax credits would be offered through insurance purchased from exchanges established by the states. It does not confirm that tax credits would be made available to those who purchase insurance from an exchange established by the federal government.
Upon enactment of the law, the Internal Revenue Service (IRS) interpreted it to mean that the subsidies would be available to qualifying individuals who purchased insurance through a state or a federal exchange. This interpretation led to the two conflicting rulings on this topic – the Richmond ruling would allow the tax credits in the 36 states with federally run exchanges and the D.C. ruling would not allow the tax credits in these same states with federally run exchanges. Note: The 14 other states have state-run exchanges. Therefore, the tax credits offered through these exchanges are not under debate and are available under the current law.
The D.C. court has now decided to reconsider its ruling with the full D.C. circuit court hearing the case vs. the three judge panel that heard it the first time. Oral arguments are currently scheduled to be heard in December of this year.
Ultimately, if the D.C. ruling stands, those who live in states with federally run exchanges could potentially face a large healthcare premium increase with the absence of the subsidies created by the Affordable Care Act. Additionally, should the D.C. ruling stand, businesses in the affected states no longer offering subsidized health care, would not be subject to the employer mandate. This mandate, being phased in starting next year, requires firms to pay penalties if they do not offer affordable health insurance to employees, which forces their employees to have to purchase a subsidized health insurance plan on the exchange. With the absence of subsidized health insurance plans in these states, no fines or penalties could be levied upon employers with respect to the employer mandate.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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