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July 23, 2014Client Alert

Circuit Split Creates Uncertainty Over Affordable Care Act Subsidies

Two Federal Circuit Court of Appeals decisions were released on July 22, 2014 regarding the ability of the federal government to provide tax credits to individuals purchasing coverage on a federally run exchange. In Halbig v. Burwell, a panel of D.C. Circuit judges held that the Affordable Care Act only permits premium tax credits to be offered to individuals who obtain coverage under a state-run exchange and that the Internal Revenue Service exceeded its authority when it interpreted the law to permit it to provide such credits to individuals who obtain coverage under a federal exchange. In King v. Burwell, a panel of Fourth Circuit judges found that the IRS’s interpretation was a permissible exercise of the agency’s discretion.

 

The cases are significant for employers because the ultimate resolution of the issue will determine the application of the employer mandate to employers in states where the federal government runs the exchange – currently this is the case in 36 states. If the D.C. Circuit’s decision stands, then most employers in these states will not be subject to the employer mandate for failing to offer coverage or failing to offer affordable coverage. Similarly, the decision is important for individuals in states that have a federally run exchange because penalties for individuals who do not purchase coverage in spite of the “individual mandate” are not enforceable where the individual does not have access to “affordable coverage.” Effectively, the D.C. Circuit’s decision would largely eviscerate the employer and individual mandate in 36 states.

 

As indicated above, there is a Circuit split. These are problems that could be resolved by Congress, but that seems unlikely at this time. Instead, we anticipate that the parties that lost their respective decisions will file a request for en banc review by the applicable Circuit. If granted, the case would be reheard by a panel composed of all judges in that Circuit. Regardless of the outcome of such review, these cases will almost certainly arrive at the Supreme Court at some point.

 

In view of the uncertainty created by the Circuit split, employers should anticipate continuing to assume the employer mandate will remain in effect pending the resolution of the Circuit split.

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