A district court in the District of Columbia recently held that the Internal Revenue Service’s (“IRS”) rule authorizing premium tax credits to individuals who enroll in health-care coverage through federal exchanges was unambiguously consistent with the “text, structure, and purpose” of the Affordable Care Act (“ACA”). Halbig v. Sebelius, No. 13-cv-0623, 2014 U.S. Dist. LEXIS 4853 (D.D.C. Jan. 15, 2014).

The Exchanges, Premium Tax Credits, and Challenged IRS Rule

To facilitate the purchase of “minimum essential” health-insurance coverage (which the ACA requires that most Americans either obtain or pay a tax penalty for failing to do so (the “Individual Mandate”)), the ACA provides for the establishment of American Health Benefit Exchanges (“Exchanges”). As explained by the U.S. Department of Health and Human Services (“HHS”), the Exchanges act as “a mechanism for organizing the health insurance marketplace to help consumers and small businesses shop for coverage . . . .” Currently, sixteen states and the District of Columbia have elected to establish Exchanges (“State-run Exchanges”). Because the remaining thirty-four states have currently declined to do so, HHS has (pursuant to its authority under the ACA) stepped-in and created Exchanges on their behalf (“Federally-facilitated Exchanges”).

In furtherance of the ACA’s goal to provide coverage to low- and middle-income individuals, the ACA authorizes federal tax credits to offset the cost of coverage purchased through an Exchange (“Premium Tax Credit”). Once an individual’s eligibility for a Premium Tax Credit has been approved, the Exchange through which the individual enrolls arranges for payment of the credit to the individual’s insurer. This payment, in turn, lowers the individual’s net cost of coverage. At issue in Halbig was whether Premium Tax Credits could be available in Federally-facilitated Exchanges to the same extent as they are available in State-run Exchanges. The ACA statutory language literally provides that Premium Tax Credits are available only to individuals enrolled “through an Exchange established by the State.”

However, on May 23, 2012, the IRS promulgated a final regulation interpreting the ACA as authorizing Premium Tax Credits for individuals who enroll in coverage through both State-run and Federally-facilitated Exchanges (“IRS Rule”). The IRS explained that other relevant ACA provisions, as well as the legislative history, clarified that the IRS Rule was consistent with congressional intent, notwithstanding the literal statutory terms.

Halbig v. Sebelius

The plaintiffs, individuals and employers residing in states with Federally-facilitated Exchanges, commenced this suit under the Administrative Procedure Act, seeking a declaration that the IRS Rule is arbitrary, capricious, contrary to the ACA and, thus, invalid. The plaintiffs also sought an injunction prohibiting application of the IRS Rule.

The individual plaintiffs argued that, without Premium Tax Credits, the cost of health-care coverage (relative to their income) would be high enough to exempt them from the Individual Mandate, to which they are ideologically opposed. However, if Premium Tax Credits are available to them through Federally-facilitated Exchanges, they must comply with the Individual Mandate or pay a penalty. The employer plaintiffs, on the other hand, argued that without Premium Tax Credits they would be exempt from the “play or pay” penalty under the ACA, which is triggered when a full-time employee receives a Premium Tax Credit through an Exchange. The amount of that tax is based on, and (as the court noted) presumably used to offset, the Premium Tax Credit issued to the employee.

The court dismissed the employer plaintiffs from the suit on the ground that their claims were barred by the Anti-Injunction Act (“AIA”). The AIA provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person . . . .” However, the claims asserted by the individual plaintiffs were not so barred because they sought to enjoin a penalty, not a tax.

The plaintiffs’ central argument was that, because the ACA authorizes Premium Tax Credits for eligible individuals who enroll “through an Exchange established by the State,” Congress intended to limit the availability of Premium Tax Credits to individuals residing in states with State-run Exchanges. Thus, according to the plaintiffs, the Premium Tax Credits should not be available to individuals enrolling for coverage in states with Federally-facilitated Exchanges.

The court disagreed, finding that the plaintiffs’ reading of the ACA was too narrow. The court explained that, after considering other relevant provisions, including cross-referenced provisions providing that each State “shall” establish an Exchange, the ACA makes clear that “where a state does not actually establish an Exchange, the federal government can create an ‘Exchange established by the State . . . ’ on behalf of that state.” The court also relied on numerous other cross-referenced provisions in the ACA to conclude that the ACA required (or, at least, assumed) that Premium Tax Credits would be available on Federally-facilitated Exchanges.

Ultimately, the court found that the language, structure, and purpose of the ACA demonstrated that Congress intended for Premium Tax Credits to be made available on both State-run and Federally-facilitated Exchanges. Because the court found that “Congress has directly spoken to the precise question” at issue, “the court, as well as the [IRS], must give effect to the unambiguously expressed intent of Congress.” The court held that the “IRS has done exactly that by promulgating regulations authorizing the provision of tax credits to individuals who purchase health insurance on [F]ederally-facilitated Exchanges as well as those who purchase insurance on [S]tate-run Exchanges.”

This case and others like it are important for employers to watch. If Halbig is eventually reviewed by the Supreme Court, for example, and if the Supreme Court disagrees with the district court’s position and finds that the IRS exceeded its authority in implementing the IRS Rule, employers operating in the thirty-four states in which the Federally-facilitated Exchanges have been established will be exempt from the play-or-pay penalties under the ACA that are assessed when full-time employees are not offered affordable coverage and receive a Premium Tax Credit on the Federally-facilitated Exchange. For now, at least according to the district court’s decision, this is not the case. But that court likely will not have the final word on this very important ACA issue.