Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

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R43833

Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

Summary

Legal challenges that may have a substantial impact on the implementation and operation of the

Patient Protection and Affordable Care Act (ACA) concern whether premium tax credits are

available for millions of individuals participating in federally administered health insurance

exchanges. These credits, which became available in 2014, are intended to help individuals pay

the premiums for private health plans offered through the insurance exchanges established under

the act. In addressing who may receive this credit, ACA refers to individuals who are “enrolled in

[a plan] through an exchange established by the State” under ACA. Following the issuance of IRS

regulations that allow for these credits to be available in both state and federally run exchanges,

lawsuits were filed claiming that the language of ACA prohibits the credits from being available

to individuals who obtain coverage in federally run exchanges. The Supreme Court is currently

reviewing this issue in King v. Burwell. The Court heard oral arguments in the King case on

March 4, 2015, and a decision is expected by the end of the Court’s term in June 2015 at the

latest.

This report provides background on provisions of ACA relevant to this issue. It then answers

questions concerning the legal challenges and potential implications of the Court’s decision in

King.

Congressional Research Service

Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

Contents

Introduction ............................................................................................................................... 1

I. Background ............................................................................................................................ 1

How does the premium tax credit interact with the individual and

employer mandates? ......................................................................................................... 3

II. Litigation over Premium Tax Credits and Federally Facilitated Exchanges ......................... 4

What are some of the arguments made for and against whether the statutory text

of ACA permits premium tax credits in federally facilitated exchanges? ........................ 4

What lawsuits have been filed on this issue, and what is their current status? ................... 6

How did the plaintiffs have standing to sue?....................................................................... 7

Why were the taxpayers not required to file a tax refund suit? ........................................... 8

Cases addressing the issue have relied on the Chevron test. What is that? ....................... 10

If the King and Halbig courts were both applying Chevron, how did they reach

different results? ............................................................................................................. 10

What can we expect from the Supreme Court in King regarding a

Chevron analysis? .......................................................................................................... 12

Could federalism considerations come into play in King? ................................................ 12

III. Potential Implications of the Court’s Decision in King ..................................................... 14

How many exchanges are considered to be run by the federal government and

could be affected by the Supreme Court’s decision? ..................................................... 14

If the Supreme Court upholds the IRS regulations at issue in King, what happens? ........ 15

If the Supreme Court finds that premium tax credits are unavailable in King, what

happens? ......................................................................................................................... 15

If the Court strikes down the IRS regulations at issue in King, what are some of

the ways in which the operation of ACA could be affected? ......................................... 16

If the Supreme Court in King finds that premium tax credits cannot be offered in

federally facilitated exchanges, what does a state have to do to “establish an

exchange” and continue offering premium tax credits? ................................................. 18

If the Supreme Court rules in favor of the challengers, would taxpayers enrolled

in plans in federal exchanges be forced to pay back any credits they have

claimed? ......................................................................................................................... 19

Could a ruling in the King case have consequences for other tax laws or credits? ........... 20

Contacts

Author Contact Information........................................................................................................... 21

Congressional Research Service

Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

Introduction

In March 2015, the Supreme Court heard oral arguments in King v. Burwell,1 a case addressing an

important issue of implementation of the Patient Protection and Affordable Care Act (ACA).2 The

lawsuit involves the provision of premium tax credits, which became available in 2014 and are

intended to help certain individuals pay their premiums for private health insurance plans offered

through insurance “exchanges” established under ACA.3 At issue in King and other similar legal

challenges is whether the statutory language of ACA allows the IRS to provide these credits to

residents of states that declined to establish health insurance exchanges, where the state’s

exchange is instead facilitated by the federal government. The issue is considered a significant

one, given that the majority of states have a federally facilitated exchange,4 and millions of

individuals receive these credits in order to assist with the purchase of health insurance. This

report provides background on relevant provisions of ACA. It then answers questions concerning

the litigation and potential implications of the Court’s decision in King.

I. Background

As part of ACA’s intended goal of improving accessibility to health coverage, the act provides for

the establishment of “exchanges,” structured marketplaces for the sale and purchase of health

insurance.5 Section 1311 of ACA specifies that each state must establish an American Health

Benefit exchange that is either a state governmental agency or a nonprofit entity, in order to

provide health coverage to qualified individuals and employers.6 However, a separate section of

ACA, Section 1321, generally provides that if a state does not elect to establish an exchange, or if

the Secretary of Health and Human Services (HHS) determines that an electing state will not have

an operational exchange, or has not taken certain specified actions, the Secretary must establish

and operate such exchange within the state.7

In order to assist individuals in purchasing health insurance in an exchange, Section 36B of the

Internal Revenue Code, created by ACA, provides that certain lower and moderate-income

taxpayers may receive a refundable tax credit that is intended to help pay the cost of the health

insurance premium.8 A taxpayer may claim the credit at the end of the year when filing an income

759 F.3d 358, (4th Cir. 2014), cert. granted, 83 U.S.L.W. 3286 (U.S. November 7, 2014) (No. 14-114).

P.L. 111-148 (2010). ACA was amended by the Health Care Education and Reconciliation Act (HCERA) of 2010,

P.L. 111-152 (2010). These acts will be collectively referred to in this report as “ACA.”

26 U.S.C. §36B. Exchanges are also referred to as “marketplaces.” See, e.g., Department of Health and Human

Services, The Center for Consumer Information & Insurance Oversight, Health Insurance Marketplaces, available at

http://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Marketplaces/index.html.

For more information, see footnotes 82-85 and accompanying text.

P.L. 111-148, §1301 et seq. (codified at 42 U.S.C. §18021 et seq.).

42 U.S.C. §18031(b)(1), (d)(1). ACA also provides for the creation of small business health option program (SHOP)

exchanges that are directed at the small group market. These exchanges will not be addressed in this report. For more

information on SHOP, see CRS Report R43771, Small Business Health Options Program (SHOP) Exchange, by (name

redacted).

P.L. 111-148, §1321(c) (codified at 42 U.S.C. §18041(c)).

26 U.S.C. §36B.

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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

tax return or claim an estimated credit during the year in the form of advance payments made

directly to the insurer and applied towards the premium.9

In general, there are two principal factors that affect whether a taxpayer will be eligible for a

premium tax credit: (1) whether the taxpayer meets the income and other requirements for the

credit;10 and (2) whether any months during the taxable year qualify as “coverage months” for the

taxpayer. With respect to this second requirement, in order for a taxpayer to receive a health

insurance premium credit under ACA, at least one month in the year must qualify as a coverage

month for the taxpayer.11 The term “coverage month” in Section 36B means the following:

[W]ith respect to an applicable taxpayer, any month if—

(i) as of the first day of such month the taxpayer, the taxpayer’s spouse, or any dependent of

the taxpayer is covered by a qualified health plan … enrolled in through an exchange

established by the State under section 1311 of the Patient Protection and Affordable Care

Act …12

In addition, the amount of the premium tax credit is equal to the sum of the “premium assistance

credit amount” for each coverage month the taxpayer experiences during the taxable year. The

premium assistance credit amount is defined as the amount equal to the lesser of

(A) the monthly premiums for such month for 1 or more qualified health plans offered in the

individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any

dependent … of the taxpayer and which were enrolled in through an exchange established

by the State under 1311 of the Patient Protection and Affordable Care Act, or

(B) the excess (if any) of—

(i) the adjusted monthly premium for such month for the applicable second lowest cost silver

plan with respect to the taxpayer, over

(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s

household income for the taxable year.13

42 U.S.C. §18082. When filing their income tax returns at the end of the year, taxpayers who claimed an estimated

credit must calculate the amount of credit they are actually due and then reconcile that amount with the amounts

received as advanced payments—this will then affect the size of their refund or tax owed. 26 U.S.C. §36B(f).

In order to be eligible for a premium credit, a taxpayer’s household income must be between 100% and 400% of the

federal poverty line (FPL) for the taxpayer’s family size. 26 U.S.C. §36B(c)(1). Individuals with income below 100%

of the FPL are ineligible for a premium credit, but may qualify for assistance under Medicaid. An exception is made for

lawfully present aliens with income below 100% of the FPL, who are ineligible for Medicaid on account of their alien

status. 26 U.S.C. §36B(e). These taxpayers will be treated as though their income is exactly 100% of FPL for purposes

of the credit.

26 U.S.C. §36B(b)(1). Any month during which an individual is eligible for other minimum essential coverage

would not be counted as a coverage month. Examples of other minimum essential coverage include, but are not limited

to, affordable employer provided coverage, Medicare, and Medicaid.

26 U.S.C. §36B(c)(2) (emphasis added).

26 U.S.C. §36B(b)(2)(A)-(B) (emphasis added). It should be noted that the reference to the “silver plan” in

subsection (B) refers to one that is offered in the “same exchange” as plans described in subsection (A). 26 U.S.C.

§36B(b)(3)(B).

Congressional Research Service

Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

Following passage of ACA, it was argued that, based on this language in Section 36B (i.e., “an

exchange established by the State under section 1311 of [ACA],”) premium tax credits are not

available to taxpayers in exchanges created by the federal government.14 In May 2012, the

Internal Revenue Service (IRS) issued final regulations related to the premium tax credit that

make the credits available to taxpayers who obtain coverage in both state and federally facilitated

exchanges.15 The preamble to the regulations explains the IRS’s position that the statutory

language of Section 36B supports this interpretation, and states that “the relevant legislative

history does not demonstrate that Congress intended to limit the premium tax credit to State

exchanges,” and that this reading of the language of Section 36B “is consistent with the language,

purpose, and structure of section 36B and the Affordable Care Act as a whole.”16 After issuance of

the regulations, at least four lawsuits were filed against the Administration, claiming the IRS

overstepped its authority when it made these credits available to individuals in states that have the

federal government run their exchanges.

How does the premium tax credit interact with the individual and

employer mandates?

In order to understand some key aspects of the King case and other litigation, it is helpful to look

at how ACA’s individual and employer mandates interact with the premium tax credit. Under

ACA, beginning in 2014, certain individuals must have “minimum essential” health coverage or

be subject to a tax penalty.17 This is known as the individual mandate. There is an exemption for

individuals whose contribution to health coverage is more than 8% of their household income.18

ACA specifies that this contribution is calculated for certain individuals as the annual premium

for the lowest cost plan available on an exchange in the state, minus any allowable premium tax

credit.19 Accordingly, if an individual is not allowed the premium credit, coverage becomes more

expensive and the unaffordability exemption may kick in, meaning that the individual does not

have to obtain coverage under the individual mandate. ACA also includes shared responsibility

requirements for employers, commonly referred to as the employer mandate.20 The employer

mandate imposes a tax on “large employers” that do not offer health insurance to their employees

or offer coverage that fails to meet certain affordability and adequacy standards.21 ACA specifies

that liability for the tax is generally triggered when at least one of an employer’s full-time

See generally, New York Times, Lawyer Put Health Act in Peril by Pointing Out 4 Little Words, March 2, 2015,

available at http://www.nytimes.com/2015/03/03/us/politics/in-four-word-phrase-challenger-spied-health-care-lawsvulnerability.html?_r=0; Wall Street Journal, Health Law Opponents Challenge Tax Credit, July 16, 2012, available at

http://online.wsj.com/article/SB10001424052702303933704577531271643114572.html.

Department of the Treasury, Internal Revenue Service, Health Insurance Premium Tax Credit, 77 Federal Register

30377 (May 23, 2012).

Id. at 30378.

26 U.S.C. §5000A. For background on the individual mandate, see CRS Report R41331, Individual Mandate Under

ACA, by (name redacted).

26 U.S.C. §5000A(e)(1).

26 U.S.C. §5000A(e)(1)(B)(ii) (emphasis added).

26 U.S.C. §4980H. For more information on the employer mandate, see CRS Report R41159, Potential Employer

Penalties Under the Patient Protection and Affordable Care Act (ACA), by (name redacted).

Implementation of the employer mandate is being phased in. Beginning in 2015, employers with at least 100 fulltime equivalent (FTEs) workers will be subject to these requirements. In 2016, employers with at least 50 FTEs will

have to comply. To facilitate administration of these requirements, employers will report information (such as number

of employees and health plan information) to the IRS, beginning in 2015.

Congressional Research Service

Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

employees is allowed a premium tax credit through a health insurance exchange.22 Accordingly, if

credits are not available in states with federally run exchanges, large employers may not be

subject to penalties if they fail to offer affordable coverage to employees.23

II. Litigation over Premium Tax Credits and Federally Facilitated

Exchanges

What are some of the arguments made for and against whether the statutory

text of ACA permits premium tax credits in federally facilitated exchanges?

Challengers of the IRS regulations and certain legal commentators primarily argue that the plain

language of ACA is clear: receipt of a premium tax credit under ACA depends upon whether a

taxpayer was enrolled “through an exchange established by the State under section 1311 of the

[ACA].”24 According to the litigants, the federal government is not a “state,” and therefore, the

IRS cannot extend these credits to individuals participating in federally facilitated exchanges.25

Further, it has been asserted that if this phrase is interpreted to encompass both state and federally

facilitated exchanges, the words “established by the state” serve no purpose, and this violates a

basic principle of statutory interpretation that statutes should be construed to give effect “to all its

provisions, so that no part will be inoperative or superfluous, void or insignificant.... ”26

Challengers also assert that the federal government’s authority to establish exchanges comes from

Section 1321 of ACA, not Section 1311.27 Had Congress wanted to provide premium tax credits

to state and federally established exchanges, they argue, it could have clearly said so by

referencing this section of the act.28

Challengers and commentators also contend that it is at least “plausible” that Congress intended

to limit premium tax credits to state-run exchanges.29 It is claimed that in passing ACA, Congress

wanted states to create their own exchanges, but that it could not compel states to do so without

violating federalism principles under the Tenth Amendment. Accordingly, Congress used a carrot

and stick approach: it incentivized the states to take action by conditioning the availability of

credits upon whether a state established an exchange.30

Conversely, the Administration and others have argued that the challengers rely on the phrase, “an

exchange established by the State,” in isolation, and this leads to a flawed interpretation of the

26 U.S.C. §4980H(b).

However, an employer may still potentially be subject to tax if the employer has a place of business in a state with a

federal exchange, but employs individuals who reside in a different state that has a state-run exchange.

See, e.g., Petition for Certiorari, at 24-25, King v. Burwell (No. 14-114).

See, e.g., King, 759 F.3d at 368; Halbig v. Burwell, 758 F.3d 390, 398 (D.C. Cir. 2014). See also 42 U.S.C.

§18024(d) (defining “State” to “mean[] each of the 50 States and the District of Columbia”).

See, e.g., Hibbs v. Winn, 542 U.S. 88, 101 (2004). See also Petition for Certiorari, at 25, King v. Burwell (No. 14114), citing Duncan v. Walker, 533 U.S. 167, 174 (2001).

See, e.g., King, 759 F.3d at 368.

See also Petition for Certiorari, at 25, King v. Burwell (No. 14-114), citing Custis v. United States, 511 U.S. 485, 492

(1994).

Id. at 32.

Id. at 14. See also Brief of Appellants, Halbig v. Burwell, No. 14-5018 (D.C. Cir. October 3, 2014) (en banc) at 2-5.

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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

act. According to the government, the text of ACA as a whole makes clear that premium tax

credits are available on all exchanges.31 For example, the government notes that ACA defines the

term “exchange” to mean “an American Health Benefit exchange under section 1311 of ACA.”32

When this definition is plugged into the text of Section 1321 of ACA, this provision compels the

Secretary of HHS to establish an “American Health Benefit exchange established under [Section

1311 of the ACA] within the State.”33 In other words, it is suggested that when HHS establishes

an exchange, it is one that is “established under 1311,” and therefore, credits may be offered in

the exchange. Additionally, Section 1321 of ACA provides that if a state does not establish an

exchange, the federal government is required to “establish and operate such exchange within the

State.... ”34 The government argues that the word “such” demonstrates that the exchange the

Secretary must establish is the one that the state declined to establish, conveying the idea that

state and federally run exchanges are one and the same, and that when the federal government

steps in to operate a state’s exchange on behalf of the state, “it does so standing in the state’s

shoes.”35 Explained another way, the government contends that the phrase “exchange established

by the State under section 1311 of ACA” is, in essence, “a statutorily created term of art that

includes federally-facilitated exchanges.”36

The government further argues that to limit premium tax credits to state-run exchanges is in stark

contrast to the act’s goal of expanding access to affordable health insurance and maintaining

stable insurance markets.37 It is asserted that if premium tax credits were unavailable in federally

facilitated exchanges, core provisions of ACA would not function properly.38 In addition, it is

claimed that millions of individuals would no longer be able to afford health insurance, and the

loss of these consumers would have an extremely detrimental impact on the insurance markets in

the affected states. This result, it is claimed, would defeat the main purpose of establishing

exchanges and credits in the first place.39 Also, according to the Administration, it is unreasonable

to think that Congress would have designed a statutory scheme that would potentially jeopardize

the effectiveness of the act and threaten insurance market security.40

See Brief of Appellees, Halbig v. Burwell, No. 14-5018 (D.C. Cir. October 3, 2014) (en banc) at 41. See also id. at

46 (“[P]laintiff’s interpretation is wrong for the more basic reason that it is not faithful to the statute’s text. Instead, it

misreads that text in a manner that is divorced from statutory context and creates a statute at war with itself”).

See id. at 16.

See, e.g., Halbig, 759 F.3d at 399-400.

Brief of Appellees, Halbig v. Burwell, No. 14-5018 (D.C. Cir. October 3, 2014) (en banc) at 22, quoting 42 U.S.C.

§18041(c) (emphasis added).

See, e.g., Halbig, 759 F.3d at 399-400 (“In other words, ‘such’ conveys what a federal exchange is: the equivalent of

the exchange a state would have established had it elected to do so.”) See also Nicholas Bagley, Three Words and the

Future of the Affordable Care Act, Journal of Health Politics, Policy and Law, available at

http://jhppl.dukejournals.org/content/early/2014/11/21/03616878-2867881.full.pdf+html.

Brief of Appellees, Halbig v. Burwell, No. 14-5018 (D.C. Cir. October 3, 2014) (en banc) at 16.

Brief for Respondents in Opposition, King v. Burwell, No. 14-114 (U.S. October 3, 2014) at 11-12.

See, e.g., id. at 24-27.

See id. at 24.

Brief for Respondents in Opposition, King v. Burwell, No. 14-114 (U.S. October 3, 2014) at 25-26. (“Petitioners’

reading transforms that “flexibility” into a threat: a State may forgo establishing an exchange for itself only at the price

of crippling its insurance market and depriving its citizens of the tax credits at the heart of the Act ... There is no reason

to believe that Congress wanted to confront States with such a threatening choice, or would have designed an

alternative certain to fail.”).

Congressional Research Service

Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

What lawsuits have been filed on this issue, and what is their current status?

As noted above, following issuance of the IRS regulations, at least four lawsuits were filed

claiming the agency overstepped its authority when it interpreted the statute to allow premium tax

credits to individuals participating in federally facilitated exchanges.

In Halbig v. Burwell, a group of individuals and employers residing in states that did not establish

exchanges filed suit against the Departments of HHS and Treasury, claiming the IRS regulations

violate the plain language of the ACA, which only permits credits to be available in “an exchange

established by the State.”41 In July 2014, the Court of Appeals for the D.C. Circuit reversed the

district court, holding that ACA “unambiguously restricts” the availability of premium tax credits

to health insurance purchased on state-established exchanges. Relying upon the judicial test

articulated by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council,42

the appeals court examined whether Congress had spoken to the issue at hand and found that the

statutory language of ACA clearly distinguishes between the creation of state and federally

created exchanges for purposes of the credit.43 The court also rejected the government’s

contention that such construction of ACA would lead to illogical results under the act.44 Finally,

the court examined the legislative history accompanying ACA and concluded that there was

nothing demonstrating that Congress intended a different result.45 The Halbig opinion was later

vacated pending review by the full appeals court of the D.C. Circuit, but the court subsequently

placed a hold on the case pending the Supreme Court’s decision in King.

Conversely, in King v. Burwell,46 the Court of Appeals for the Fourth Circuit upheld the IRS

regulations as a valid exercise of agency discretion. In King, Virginia residents filed suit

challenging the validity of the IRS rule, claiming that the IRS’s interpretation regarding the

availability of premium tax credits is contrary to the statutory language of ACA.47 On the same

day that the D.C. Circuit issued its decision in Halbig, the Court of Appeals for the Fourth Circuit

held that the relevant statutory language of ACA is ambiguous and subject to multiple

interpretations.48 Similar to Halbig, the court performed a Chevron analysis to determine whether

the IRS’s actions were authorized by ACA. First, the Fourth Circuit examined ACA’s statutory

language and found merit in both the plaintiff and defendant’s arguments.49 But the court

concluded that it could not conclusively determine what Congress intended with respect to this

issue, and that “nothing in the legislative history of the Act provides compelling support for either

side’s position.”50 The appeals court then found the IRS interpretation to be a reasonable exercise

of agency discretion, in concert with the overall goals of the ACA, and it deferred to the rule.51

758 F.3d 390 (D.C. Cir. 2014).

467 U.S. 837 (1984).

Id. at 394.

Id. at 402-04.

Id. at 406-12.

759 F.3d 358 (4th Cir. 2014).

The Commonwealth of Virginia declined to establish a state-run exchange.

King, 759 F.3d at 363.

Id. at 367-72.

Id. at 372.

Id. at 374-75. As the appeals court in King explained:

[I]t is ... clear that widely available tax credits are essential to fulfilling the Act’s primary goals and

that Congress was aware of their importance when drafting the bill. The IRS Rule advances this

(continued...)

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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

The plaintiffs in King appealed their case directly to the Supreme Court. In November 2014, the

High Court agreed to review the case.

In addition to Halbig and King, two other cases addressing this issue are currently pending. In

Oklahoma ex rel. Pruitt v. Burwell,52 a district court in Oklahoma concluded, similar to Halbig,

that the plain text of ACA is clear that premium tax credits are only available in exchanges

established by a state. It noted that “as [ACA] presently stands, ‘vague notions of a statute’s basic

purpose are nonetheless inadequate to overcome the words of its text regarding the specific issue

under consideration.’”53 The district court ordered the IRS rule to be vacated, but stayed the

decision pending an appeal. While the case is currently on hold at the Court of Appeals for the

Tenth Circuit, the State of Oklahoma petitioned the Supreme Court to review its case together

with King.54 In January 2015, the Supreme Court denied Oklahoma’s petition.55

In a fourth case, Indiana v. IRS, the state of Indiana and 39 of the state’s school districts filed suit

challenging the validity of the IRS regulations. The district court found that the state and the

school districts had standing to challenge the IRS regulation, and it denied the Administration’s

motion to dismiss the case.56 The district court in Indiana later stayed the proceedings in this

case, pending the Supreme Court’s decision in King.

How did the plaintiffs have standing to sue?

In all of the court decisions thus far, the taxpayers were found to have standing to sue even

though it is atypical for someone to have standing to challenge a tax credit on the grounds that the

IRS took an overly permissible interpretation of the statute. The government has not raised the

issue of standing before the Supreme Court in King. Standing is an integral part of the “case or

controversy” requirement in Article III of the Constitution,57 and it reflects the idea that the role

of the judiciary is limited under the separation of powers principle upon which the government is

founded.58 The standing requirement is generally understood to require the plaintiff show a

(...continued)

understanding by ensuring that this essential component exists on a sufficiently large scale. The

IRS Rule became all the more important once a significant number of states indicated their intent to

forgo establishing exchanges. With only sixteen state-run exchanges currently in place, the

economic framework supporting the Act would crumble if the credits were unavailable on federal

exchanges. Furthermore, without an exception to the individual mandate, millions more Americans

unable to purchase insurance without the credits would be forced to pay a penalty that Congress

never envisioned imposing on them. The IRS Rule avoids both these unforeseen and undesirable

consequences and thereby advances the true purpose and means of the Act. It is thus entirely

sensible that the IRS would enact the regulations it did, making Chevron deference appropriate.

Confronted with the Act’s ambiguity, the IRS crafted a rule ensuring the credits’ broad availability

and furthering the goals of the law. In the face of this permissible construction, we must defer to the

IRS Rule. Id.

2014 U.S. Dist. LEXIS 139501 (E.D. Okla. 2014).

Id. at 25 (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 261 (1993)).

Petition for a Writ of Certiorari Before Judgment, State of Oklahoma ex rel. Pruitt v. Burwell, No. 14-7080 (U.S.

November 18, 2014).

Okla. ex rel. Pruitt v. Burwell, 2014 U.S. Dist. LEXIS 139501 (E.D. Okla. 2014), cert. denied, 83 U.S.L.W. 3626

(Jan. 26, 2015)(No. 14-586).

Indiana v. IRS, 2014 U.S. Dist. LEXIS 111068 (August 12, 2014).

See U.S. CONST. Art. III, §2, cl. 1.

See Allen v. Wright, 468 U.S. 737, 750 (1984).

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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

“personal injury fairly traceable to the defendant’s allegedly unlawful conduct and likely to be

redressed by the requested relief.”59

It is usually the case that a taxpayer who is eligible to receive a tax credit due to an IRS’s

interpretation of a statute would not be injured since the government is interpreting the statutory

language in a way that is favorable to the taxpayer. Furthermore, no one else would generally

have standing either (e.g., taxpayers generally do not have standing solely because of their

taxpayer status to challenge an expenditure of government funds).60

So, how did the taxpayers get standing to challenge the IRS regulation? Courts found standing

based on the relationship between the premium tax credit and the individual and employer

mandates. In King and Halbig, the courts determined that the plaintiffs faced an economic injury

in that they would have to buy insurance or pay the individual mandate’s penalty since their

eligibility for the premium tax credit under the IRS regulation meant they would not qualify for

the mandate’s unaffordability exemption.61 Similarly, the courts in Pruitt and Indiana found that

the states had standing to challenge the regulation because, as employers, they would face

compliance costs and other expenses due to the employer mandate.62 These costs were

attributable to the IRS regulation because the states would only be subject to the employer

mandate if a state employee was allowed the premium tax credit, which, since the states had

federally run exchanges, could only occur due to the IRS’ interpretation of the statute.

While the government did not raise the issue of standing before the Supreme Court in King,

media reports have suggested that at least some King plaintiffs may not have standing—for

example, because they may qualify for veterans benefits that would constitute minimum essential

coverage for purposes of the individual mandate.63 Justice Ginsburg inquired about the issue of

their standing at the beginning of oral arguments, and the plaintiffs’ attorney asserted that at least

one individual does meet the standing requirement.64

Why were the taxpayers not required to file a tax refund suit?

In general, taxpayers who want to challenge the application of a federal tax law must do so

through a tax refund suit.65 This rule reflects a fundamental principle that tax laws can generally

only be challenged after the taxes are paid, at which point the taxpayer may sue for a refund. As

discussed above, the courts in these cases, however, generally found that the taxpayers were not

required to go through the tax refund process in order to challenge the IRS’s Section 36B

regulation.

Id. at 751.

See, e.g., DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 344-45 (2006) (reasoning that such taxpayers’ injuries are

not particularized to those plaintiffs, but rather common to the general taxpaying public, and hypothetical because

whether they will occur or be redressed depends on future actions by a legislative body).

See King, 759 F.3d at 365-66; Halbig, 758 F.3d at 396-97.

See Pruitt, 2013 U.S. Dist. LEXIS 113232 at *29-30; Indiana, 2014 U.S. Dist. LEXIS 111068 at *18-23.

See, e.g., Louise Radnofsky, Questions Linger About Plaintiffs’ Legal Standing in Health-Law Case, WALL ST. J.

(March 4, 2015); Stephanie Mencimer, The Supreme Court Is About to Hear the Case That Could Destroy Obamacare,

Here are the unusual plaintiffs behind it, MOTHER JONES (Feb. 9, 2015).

Transcript of Oral Argument at 3-7, King v. Burwell, No. 14-114 (March 4, 2015) (Justice Ginsburg).

See 26 U.S.C. §7421, 7422; 28 U.S.C. §§1346(a)(1), 2201(a).

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First, the Anti-Injunction Act (AIA) generally prohibits courts from hearing suits for the purpose

of restraining the assessment or collection of any tax.66 If the AIA applied here, it would mean

that the plaintiffs could only bring their cases as a tax refund suit. However, in the 2012 case

NFIB v. Sebelius,67 the Supreme Court, while upholding the individual mandate as a valid

exercise of Congress’s taxing power, also held that the individual mandate is a penalty, not a tax,

for AIA purposes and thus fell outside the act’s scope. Key to the Court’s analysis was that

Congress had labeled the mandate as a “penalty” in the relevant statute and had not otherwise

provided it should be treated as a tax for purposes of the AIA.68 It appears that due to the Court’s

decision in NFIB, the government did not raise the AIA issue in the premium tax credit litigation

when the individual mandate provided the basis for the plaintiffs’ standing.69 However, the

government did argue that the AIA prevented the plaintiffs’ lawsuits when the employer mandate

was the basis for standing. As such, three courts looked at this issue, and they reached different

results. The Pruitt court, using the Court’s analysis in NFIB, found that the statute’s reference to

the employer mandate as an “assessable payment” evidenced congressional intent for it not to be

treated as a tax for AIA purposes.70 The Indiana court determined the AIA did not apply due to

binding precedent in the Seventh Circuit.71 However, the district court in Halbig held that the

employer mandate was a tax for purposes of the AIA and therefore dismissed the claims of the

employers in the suit (the appellate court did not address this issue). The district court reasoned

that Congress used the term “assessable payment” interchangeably with “tax” and intended them

to have the same meaning.72

Distinct from the AIA issue but conceptually related, is the question of whether any of these

plaintiffs were otherwise required to bring their challenges to the Section 36B regulation as a tax

refund suit. Across the four cases, the government argued several different theories as to why

other provisions of law required a tax refund suit. For example, the Administrative Procedure Act

(APA) allows challenges to final agency actions “for which there is no other adequate remedy in a

court,”73 and the government argued that a tax refund suit was an adequate remedy since the

taxpayer could receive any overpayment plus interest. The courts rejected these arguments for

various reasons. For example, courts rejected the APA argument, reasoning that a tax refund suit

was inadequate since it did not provide the same type of prospective relief as that provided under

the APA.74

26 U.S.C. §7421(a).

132 S. Ct. 2566 (2012). For more information, see CRS Report R42698, NFIB v. Sebelius: Constitutionality of the

Individual Mandate, by (name redacted) and (name redacted).

See NFIB, 132 S.Ct. at 2583.

The fact these cases are challenging the premium tax credit, as opposed to the individual mandate, is arguably not

relevant for AIA purposes since the Supreme Court has held that a credit does not involve the assessment or collection

of tax for purposes of a federal law similar to the AIA. See Hibbs v. Winn, 542 U.S. 88, 101 (2004).

Oklahoma, 2013 U.S. Dist. LEXIS 113232 at *36.

Indiana, 2014 U.S. Dist. LEXIS 111068 at *24 (referencing Korte v. Sebelius, 735 F.3d 654 (7th Cir. 2013)).

See Halbig v. Sebelius, 2014 U.S. Dist. LEXIS 4853, *32-34 (D.D.C. January 15, 2014).

5 U.S.C. §704.

See King, 759 F.3d at 366-67; Halbig, 758 F.3d at 397-98. See also Indiana, 2014 U.S. Dist. LEXIS 111068 at *24

(characterizing IRS’ reading of the employer mandate statute as requiring a tax refund suit as “tortured”).

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Cases addressing the issue have relied on the Chevron test. What is that?

Under the APA, a party aggrieved by an agency’s action may bring suit if he believes the agency

has acted beyond its scope of authority.75 A court would review such a challenge by employing

the test established by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense

Council.76

The Chevron test proceeds in two parts to determine whether an agency has acted within its

statutory authority. First, if Congress has spoken clearly on an issue, then the agency and the

courts “must give effect to the unambiguously expressed intent of Congress.”77 However, if the

statute is ambiguous or silent, the court must determine whether the agency’s construction of the

statute is “permissible.”78 The second part of the test is a deferential standard for judicial review.

A reviewing court shall not determine whether the agency’s construction is the most obvious or

the best interpretation of the statute in question, but, instead, must yield to the agency’s

construction if it is merely a “permissible” reading of the statute.

The federal appellate courts—the Fourth Circuit and the D.C. Circuit (prior to the decision being

vacated)—that evaluated the premium tax credit regulation both employed the Chevron test to

determine whether tax credits were available in states that operate under a federal exchange.

If the King and Halbig courts were both applying Chevron, how did they reach

different results?

Because the second step of the test provides the agency with considerable deference, often cases

involving a Chevron analysis will turn on whether a court determines the statutory text to be

ambiguous. This is precisely what happened in the cases involving the premium tax credits. For

example, in Halbig, the D.C. Circuit stated, “Because we conclude that the ACA unambiguously

restricts the section 36B subsidy to insurance purchased on exchanges ‘established by the State,’

we ... vacate the IRS’s regulation.”79 Since the court found the text to be clear, the court did not

have to proceed to step two, and the D.C. Circuit determined that the IRS regulation could not

stand. As previously discussed, however, the D.C. Circuit vacated the Halbig decision pending an

en banc review.

However, the Fourth Circuit, when reading the same provision of law, stated in King, “[W]e find

that the applicable statutory language is ambiguous and subject to multiple interpretations.

Applying deference to the IRS’s determination, however, we uphold the rule as a permissible

exercise of the agency’s discretion.”80 The Fourth Circuit, because it found the text to be

ambiguous, proceeded to the highly deferential second step of the Chevron test and upheld the

agency action.

5 U.S.C. §§701, 702, 706.

Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984); see also Mayo Found. for Med. Educ. & Research v. United

States, 562 U.S. 44 (2011) (“The principles underlying our decision in Chevron apply with full force in the tax

context.”).

Chevron, 467 U.S. at 842-43.

Id.

Halbig, 758 F.3d at 394.

King, 759 F.3d at 363.

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How do courts determine whether a statutory provision is ambiguous?

The Supreme Court, in a footnote, established that courts should use the “traditional tools of

statutory construction” in order to ascertain whether “Congress had an intention on the precise

question at issue.”81 Courts often will use the structure of a statute to determine whether other

sections of an act inform how the statutory provision in question should be evaluated. In addition,

courts routinely use dictionaries to help ascertain the meaning of statutory language. The purpose

of the legislation can also be helpful in determining whether Congress has spoken clearly on an

issue.82

It is worth noting that the use of legislative history as a means of statutory interpretation has been

a controversial subject.83 The debate over the use of legislative history during Chevron step one

stems from a much broader doctrinal debate between judges who believe legislative intent should

be used to interpret statutes (commonly referred to as “intentionalist” judges) and judges who

believe that the text of a statute is the only reliable means of determining a statute’s meaning

(commonly referred to as “textualist” judges).

Is it common for courts to disagree on whether a statute is ambiguous?

Although the Chevron test has become a foundational principle of administrative law, judicial

disagreement on whether a statute is ambiguous is not uncommon. Even the Justices of the

Supreme Court often find themselves divided on whether Congress has spoken clearly on a

specific issue. In numerous cases, including Chemical Manufacturers Association v. Natural

Resources Defense Council84 and FDA v. Brown & Williamson Tobacco Corp.,85 the Supreme

Court has split 5-4 on the issue of whether Congress has “directly spoken to the precise question

at issue.”86 Many issues at step one of the test appear to arise from a particular judge’s willingness

to look beyond the plain text of the statute to the intent of Congress in order to determine whether

the provision is ambiguous—that is, whether a judge is a “textualist” or an “intentionalist.” A

textualist judge tends to believe that a stricter reading of the text should control when determining

the meaning of a statute, while an intentionalist judge tends to be willing to look at the broader

purpose of the statute and legislative intent when interpreting a law.

Chevron, 467 U.S. at 843 n. 9. According to the American Bar Association’s (ABA) black letter statement of

administrative law: “Step one of Chevron does not dictate that courts use any particular method of statutory

interpretation. However, the court should use “the traditional tools of statutory construction” to determine whether the

meaning of the statute is clear with respect to the precise issue before it. For most judges, these tools include

examination of the text of the statute, dictionary definitions, canons of construction, statutory structure, legislative

purpose, and legislative history.” Section of Administrative Law & Regulatory Practice, American Bar Ass’n, A

Blackletter Statement of Federal Administrative Law, 54 ADMIN L. REV. 1, 44 (2002).

For a detailed review of statutory interpretation, see CRS Report 97-589, Statutory Interpretation: General

Principles and Recent Trends, by (name redacted).

For a discussion of the debate over the permissible tools of statutory interpretation in the Chevron test, see CRS

Report R41260, The Jurisprudence of Justice John Paul Stevens: The Chevron Doctrine, by (name redacted).

470 U.S. 116 (1985).

529 U.S. 120 (2000).

Chevron, 467 U.S. at 842-43.

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What can we expect from the Supreme Court in King regarding a

Chevron analysis?

The Court may perform a Chevron analysis to determine whether IRS’s interpretation of the

statute is permissible. As discussed above, it is not uncommon even for the Justices of the

Supreme Court to disagree on whether a statute is clear or ambiguous. Ultimately, the outcome of

the decision could largely depend on the Court’s analysis under step one of the Chevron test. In

addition to determining whether the premium tax credits are available in states with a federal

exchange, it is also possible that the Supreme Court’s decision could help clarify how the first

step of the Chevron test should be applied.

Could federalism considerations come into play in King?

At oral argument for King, some of the Justices addressed broader federalism considerations that

might inform their statutory interpretation of the availability of premium tax credits. Justices

Sotomayor and Kennedy, for instance, suggested that this case could be influenced by the canon

of constitutional avoidance,87 because the ACA might be read to raise federalism issues under the

Tenth Amendment.88 Under modern Tenth Amendment doctrine, Congress may not directly

compel or “commandeer” state legislatures89 or state executive branch officials90 to implement

federal programs, and in South Dakota v. Dole,91 the Court held that indirect “coercion” of states

by withdrawal of federal grant funds may also violate this amendment.

The suggestion has been made that, if premium tax credits were not available in states with

federally facilitated exchanges, there might not be a viable marketplace for insurance companies

in those states, and affordable insurance would not be available in the individual market. Thus,

according to Justices Sotomayor and Kennedy, if the ACA were interpreted to make tax credits

available to individuals enrolled in exchanges established by states, while denying such credits to

individuals enrolled in federally facilitated exchanges, then states might be indirectly coerced to

establish exchanges. If this reasoning holds, the canon of constitutional avoidance might counsel

preferring a fair interpretation of the ACA that does not implicate possible Tenth Amendment

problems.

The comments by Justices Sotomayor and Kennedy suggest a concern that states might be

indirectly coerced to set up state exchanges by a threat of significant negative economic impact

on individuals and businesses in those states. Neither party to the case, however, had raised the

CRS Report 97-589, Statutory Interpretation: General Principles and Recent Trends, by (name redacted).

See generally

CRS Report R43706, The Doctrine of Constitutional Avoidance: A Legal Overview, by (name redacted).

Transcript of Oral Argument at 14-16, King v. Burwell, No. 14-114 (March 4, 2015) (Justice Sotomayor); id. at 1618 (Justice Kennedy). Justice Sotomayor asked “In those States that don’t—their citizens don't receive subsidies, we’re

going to have the death spiral that this system was created to avoid. . . . Tell me how that is not coercive in an

unconstitutional way?” Id. at 15. Justice Kennedy stated “Let me say that from the standpoint of the dynamics of

Federalism, it does seem to me that there is something very powerful to the point that if your argument is accepted, the

States are being told either create your own Exchange, or we’ll send your insurance market into a death spiral. We'll

have people pay mandated taxes which will not get any credit on—on the subsidies. The cost of insurance will be skyhigh, but this is not coercion. It seems to me that under your argument, perhaps you will prevail in the plain words of

the statute, there’s a serious constitutional problem if we adopt your argument.” Id. at 16.

New York v. United States, 505 U.S. 144 (1992).

Printz v. United States, 521 U.S. 898 (1997).

South Dakota v. Dole, 483 U.S. 203 (1987).

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argument before the Court, and in response to a question from Justice Alito regarding this

argument, Solicitor General Verrilli suggested that this was a “novel” constitutional issue.92 Thus,

the issue raised by the two Justices in King would appear to be whether a state can be

constitutionally persuaded to exercise regulatory authority in order to avoid the application of a

federal regulatory regime that could impose negative economic consequences on its individuals

and businesses.93

The Supreme Court has previously considered situations where a state is given the opportunity to

establish a regulatory program with the understanding that failure to do so will result in the

federal government stepping in to regulate. This legislative regime has been called “cooperative

federalism” by the Court and is used in many different regulatory areas, especially environmental

law.94 It does not appear that the Supreme Court has suggested that placing new burdens on

individuals and businesses under federal regulation effectively coerces states to act in violation of

the Tenth Amendment.

For instance, in New York v. United States, the Court considered a regime where states may either

regulate the disposal of radioactive waste according to federal standards by attaining local or

regional self-sufficiency, or their residents who produce radioactive waste would be subject to

federal regulation authorizing states and regions to deny access to their disposal sites.95 The Court

rejected a Tenth Amendment challenge to this regime, noting that “affected States are not

compelled by Congress to regulate, because any burden caused by a State’s refusal to regulate

will fall on those who generate waste and find no outlet for its disposal, rather than on the State as

a sovereign.”96

As in New York, the King case involves provision to states of the opportunity to establish their

own regulatory regime in order to avoid the establishment of a federal regulatory regime. It is

unclear, however, how the Court might apply the reasoning of New York to the King case. The

implication of New York is that burdens that fall on individuals and businesses are not considered

as part of a coercion analysis, yet Justices Sotomayor and Kennedy’s questions could potentially

suggest that such a burden might be important. It may be arguable that the purposes and structure

of the ACA are sufficiently different from the statute at issue in New York, and the regime of

cooperative federalism sufficiently distinct, for the Court to adopt a different look at whether

adverse economic effects on private entities might raise Tenth Amendment issues in the context of

ACA.

Additional federalism concerns were discussed at oral argument when Justice Alito considered

the government’s argument that, under cases such as Pennhurst State School & Hospital v.

Transcript of Oral Argument at 49, King v. Burwell (Solicitor General Verrilli).

New York v. United States, 505 U.S. at 166-69 (1992). “Our cases have identified a variety of methods, short of

outright coercion, by which Congress may urge a State to adopt a legislative program consistent with federal interests.

Two of these methods are of particular relevance here. First, under Congress’ spending power, ‘Congress may attach

conditions on the receipt of federal funds.’ South Dakota v. Dole, 483 U.S. at 206. . . . Second, where Congress has the

authority to regulate private activity under the Commerce Clause, we have recognized Congress’ power to offer States

the choice of regulating that activity according to federal standards or having state law pre-empted by federal

regulation.”

New York at 167-68.

Id. at 174.

Id.

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Halderman,97 Congress must give clear notice of its intentions before imposing potentially

onerous conditions on states. Justice Alito offered that if the Court found that premium tax credits

were not available to taxpayers in federally facilitated exchanges, states might choose to establish

their own exchanges, thus reducing the potential for economic harm.98 Further, Justice Alito

suggested that the Court could delay the implementation of the plaintiffs’ interpretation till the

end of the tax year, again reducing potentially disruptive economic consequences.99 Finally,

Justice Scalia proposed that Congress might also act to avoid any serious consequences to states

arising from the Court’s decision.100

Although there are other statutory considerations that may ultimately be more important to the

resolution of the King case, the discussion by some of the Justices at oral argument potentially

suggests that federalism may play a role in the resolution of this statutory interpretation case.

III. Potential Implications of the Court’s Decision in King

How many exchanges are considered to be run by the federal government and

could be affected by the Supreme Court’s decision?

Assuming the Supreme Court finds that premium tax credits are unavailable in exchanges that are

not established by a state, the question of which exchanges fall into this category may be

considered. In 2015, there are 27 states in which exchanges are established and run entirely by the

federal government.101 Seven more states maintain “partnership exchanges,” which HHS

considers to be federally facilitated.102 While HHS maintains authority over these partnership

exchanges, a state can administer and operate certain exchange activities. There are also three

states that have “federally supported state-based exchanges.” It appears these three states received

(at least conditional) approval from HHS103 to run their own exchange and perform all exchange

functions, but the states rely on the federally facilitated exchange IT platform (i.e.,

http://www.healthcare.gov).104

In 2014, there appeared to be some disagreement over how many exchanges were run by the

federal government. While the D.C. Circuit in Halbig indicated in dicta that there were 36 federal

451 U.S. 1 (1981).

Transcript of Oral Argument at 52, King v. Burwell (Justice Alito).

Id. at 53. See Legal Sidebar WSLG1191, King v. Burwell: Can the Supreme Court delay the implementation of the

upcoming ACA ruling?, by (name redacted) and (name redacted).

100

Transcript of Oral Argument at 54 (Justice Scalia).

101

See Kaiser Family Foundation, State Health Insurance Marketplace Types, 2015, available at http://kff.org/healthreform/state-indicator/state-health-insurance-marketplace-types/.

102

See Department of Health and Human Services, The Center for Consumer Information & Insurance Oversight, State

Health Insurance Marketplaces, available at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/statemarketplaces.html.

103

See Centers for Medicare and Medicaid Services, Center for Consumer Information & Insurance Oversight, State

Health Insurance Marketplaces, available at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/statemarketplaces.html.

104

See, e.g., Department of Health and Human Services, FY 2016, Centers for Medicare and Medicaid Services,

Justification of Estimates for Appropriations Committees at 64 (“CMS also performs eligibility and enrollment

functions on behalf of State-Based Marketplaces (Oregon, Nevada and New Mexico specifically) on the FFM

platform.”).

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exchanges, the Fourth Circuit in King noted there were 34.105 Presumably, the discrepancy is

based on the two federally supported state-based exchanges operating last year. Nevertheless, it

may be noted that the Supreme Court briefs filed by both petitioners and respondents in the King

case seem to agree that there are 34 federally facilitated exchanges.106 This number would appear

to include the 27 federally facilitated exchanges and the 7 state-partnership exchanges, and

exclude states with a federally supported state-based exchange. The Supreme Court could address

what states must do in order to “establish an exchange” for purposes of the premium tax credits

under ACA. Alternatively, the Court may render a decision without answering this question, and

regulations issued by IRS and HHS could potentially address this issue.

If the Supreme Court upholds the IRS regulations at issue in King,

what happens?

If the Supreme Court finds that the IRS regulations at issue in King are valid, it may be presumed

that the agency would not need to amend the regulations or take any other action, and that

premium tax credits would remain available for individuals participating in state and federally run

exchanges in every state and the District of Columbia. However, such a holding may not preclude

the IRS from amending the regulations at a future date. Assuming that the Court performs a

Chevron analysis and finds that the statutory language of ACA is ambiguous and subject to

multiple interpretations,107 the agency would remain free to amend the regulations, so long as the

amendments are consistent with the statute.108 Thus, it is possible that if the Supreme Court in

King decides to defer to the IRS’s interpretation of ACA, an administration could potentially later

amend the regulations in a manner that affects the provision of premium tax credits in federal and

state-run exchanges. The Court’s opinion in the King case may address this scenario.

If the Supreme Court finds that premium tax credits are unavailable in King,

what happens?

If the Supreme Court finds that the IRS regulation at issue in King is invalid so that individuals

participating in federally run exchanges would no longer be eligible for the credit, then several

things might happen. The IRS would presumably act to address the problematic aspects of the

Section 36B regulations. Additionally, the agency (and HHS) might determine that additional

rulemaking or guidance is appropriate to address possible issues arising from the interaction

between the premium tax credit and other parts of the IRC and ACA (discussed in the next

question).

The IRS, affected taxpayers, and insurance companies might also confront issues due to the

timing of the Court’s decision. It is likely the decision will be released late in the Court’s term,

after April 15, 2015, but before the end of June. By that time, taxpayers claiming the credit for tax

year 2014 will have generally done so. Additionally, some taxpayers will be receiving the credit

for tax year 2015 in the form of advanced payments made directly to their insurance

105

Halbig, 758 F.3d at 395. Cf. King, 759 F.3d at 364.

Brief for Petitioner at 7, King v. Burwell, No. 14-114 (U.S. July 31, 2014); Brief for Respondents in Opposition at 8,

King v. Burwell, No. 14-114 (U.S. Oct. 3, 2014).

107

See footnotes 79-86 supra and accompanying text.

108

Committee for Effective Cellular Rules v. Fed. Communications Comm’n, 53 F.3d 1309, 1317 (D.C. Cir. 1995).

106

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companies.109 Thus, in addition to raising questions about whether taxpayers who received the

credit would be required to pay it back (see below), it seems possible the timing of the Court’s

decision might present issues with respect to the advanced payments being made for 2015

insurance contracts. During the King oral arguments, Justice Alito raised the issue of whether the

Court could stay its decision until the end of the year.110

One point to note is that while the Court’s decision may result in some taxpayers losing their

eligibility for the premium tax credit, it would not impact their ability to claim other tax benefits.

Thus, for example, affected taxpayers who purchased insurance would be able to deduct their

premiums as an itemized deduction to the extent their total medical expenses exceed 10% of

adjusted gross income.111

If the Court strikes down the IRS regulations at issue in King, what are some

of the ways in which the operation of ACA could be affected?

If premium tax credits cannot be offered in health insurance exchanges run by the federal

government, many believe there could be a profound effect upon the operation and

implementation of ACA as a whole because certain central provisions of the act depend upon the

availability of premium tax credits.112

As noted above, ACA contains certain interconnected provisions that are designed to increase

accessibility to health insurance.113 Among these provisions, ACA contains certain market

reforms that, among other things, require health insurers to accept every individual who applies

for coverage, prevent them from imposing exclusions from coverage based on preexisting

conditions, and restrict insurers from charging higher premiums based on an individual’s health

status.114 Based on these requirements, it is argued that in order to prevent an “adverse selection”

scenario, where individuals wait to purchase health insurance until they need care, ACA compels

individuals to purchase insurance through the individual mandate.115 In order to make this

109

Some affected taxpayers might find themselves in the position of having bought insurance with the expectation they

would be receiving a credit for which they are suddenly no longer eligible. They may argue this is unfair, particularly

since they relied on an unambiguous IRS regulation. From a legal perspective, the fact taxpayers may have concluded a

transaction in reliance on prior tax law is generally not important and would not support a claim against the government

(e.g., for violation of due process or breach of contract). See, e.g., United States v. Carlton, 512 U.S. 26, 34 (1994) (no

due process violation from retroactive change in tax law); Nat’l R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe

Ry. Co., 470 U.S. 451, 465-66 (1985) (statutes do not create a contractual arrangement absent clear evidence of

congressional intent to do so).

110

Transcript of Oral Argument at 53, King v. Burwell, No. 14-114 (March 4, 2015) (Justice Alito). For analysis of the

Court’s ability to stay its decision, see CRS Legal SidebarWSLG1191, King v. Burwell: Can the Supreme Court delay

the implementation of the upcoming ACA ruling?, by (name redacted) and (name redacted).

111

26 U.S.C. §213 (threshold is reduced to 7.5% for taxpayers who are at least 65 years old). These taxpayers would no

longer be limited by the provision that prohibits a deduction for the portion of the premiums that is equal to the amount

of the premium tax credit. 26 U.S.C. §260C(g).

112

See generally David Blumenthal and Sara R. Collins, The Supreme Court Decides to Hear King v. Burwell: What

Are the Implications? The Commonwealth Fund Blog, (November 7, 2014), available at

http://www.commonwealthfund.org/publications/blog/2014/nov/the-supreme-court-decides-to-hear-king. See also

King, 759 F.3d at 374,( “As the defendants ... explain, denying tax credits to individuals shopping on federal Exchanges

would throw a debilitating wrench into the Act’s internal economic machinery ...”).

113

Brief for Respondents in Opposition, King v. Burwell, No. 14-114 (U.S. October 3, 2014) at 3.

114

P.L. 111-148, §1201 (codified at 42 U.S.C. §300gg-1; 42 U.S.C. §300gg-3; 42 U.S.C. §300gg-4).

115

See, e.g., Halbig, 758 F.3d at 409.

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required coverage affordable, ACA provides for premium tax credits and other subsidies.116 It has

been argued that eliminating premium tax credits would be detrimental to this scheme, as these

provisions “work in tandem to achieve the Act’s fundamental goals of expanding health-insurance

coverage and promoting a functioning individual insurance market in each State.”117

Relatedly, it is also expected that if premium tax credits are unavailable to individuals enrolled in

a federally run exchange, fewer individuals will be required to have health insurance under ACA’s

individual mandate . As discussed in the “I. Background” section, there is an exemption from the

individual mandate for individuals whose contribution to health coverage is more than 8% of

household income.118 ACA specifies that this contribution is calculated for certain individuals as

the annual premium for the lowest cost plan available on an exchange in the state, minus any

allowable premium tax credit.119 Accordingly, if an individual is not allowed the premium credit,

coverage becomes more expensive, and the unaffordability exemption may kick in, meaning that

the individual does not have to obtain coverage under the individual mandate. It has been

predicted that eliminating the premium tax credits in states with federally run exchanges would

exempt more individuals from the individual mandate, and would make coverage unaffordable

for many of these individuals.120

Commentators have also noted that if the Supreme Court invalidates the IRS rule, this could have

a debilitating effect on the federally run exchanges.121 The idea is that absent these credits, many

healthy people would not purchase health coverage.122 However, individuals with more serious

health conditions would probably remain in the market. Thus, it is argued that the population in

these plans could become skewed toward sicker, more expensive enrollees, and this may lead to a

rise in premiums in affected exchanges.123

The absence of premium tax credits in states with a federally facilitated exchange could also

affect the application of the employer mandate.124 As discussed in the “I. Background” section,

ACA specifies that liability for the excise tax under the employer mandate is generally triggered

when one or more of an employer’s full-time employees is allowed a premium tax credit through

a health insurance exchange.125 Accordingly, if credits are not available in states with federally

116

See, e.g., id.

Brief for Respondents in Opposition, King v. Burwell, No. 14-114 (U.S. October 3, 2014) at 6.

118

26 U.S.C. §5000A(e)(1).

119

26 U.S.C. §5000A(e)(1)(B)(ii) (emphasis added).

120

See Linda J. Blumberg, John Holahan, and Matthew Buettgens, Halbig v Burwell: Potential Implications for ACA

Coverage and Subsidies, Robert Wood Johnson Foundation, Urban Institute, (July 2014), available at

http://www.urban.org/UploadedPDF/413183-Halbig-v-Burwell-Potential-Implications-for-ACA-Coverage-andSubsidies.pdf.

121

See, e.g., Nicholas Bagley, Three Words and the Future of the Affordable Care Act, Journal of Health Politics,

Policy and Law, available at http://jhppl.dukejournals.org/content/early/2014/11/21/03616878-2867881.full.pdf+html.

122

Id.

123

Id. Additionally, as the dissenting Justices of the Supreme Court noted in NFIB v. Sebelius “[w]ithout the federal

subsidies, individuals would lose the main incentive to purchase insurance inside the exchanges, and some insurers may

be unwilling to offer insurance inside of exchanges. With fewer buyers and even fewer sellers, the exchanges would not

operate as Congress intended and may not operate at all.” 132 S. Ct. 2566, 2674 (2012) (Scalia, Kennedy, Thomas, and

Alito, JJ., dissenting). For more information on the NFIB case, see CRS Report R42698, NFIB v. Sebelius:

Constitutionality of the Individual Mandate, by (name redacted) and (name redacted).

124

Implementation of the employer mandate is being phased in. See discussion supra note 21.

125

26 U.S.C. §4980H(b).

117

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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

run exchanges, large employers may not be subject to penalties if they fail to offer affordable

coverage to employees.126

If the Supreme Court in King finds that premium tax credits cannot be offered

in federally facilitated exchanges, what does a state have to do to “establish an

exchange” and continue offering premium tax credits?

If the Court finds that premium tax credits are not available in federally run exchanges, the

question arises what states would have to do to in order for their exchange to be “established by

the state under section 1311” for purposes of the credit.

Current law and regulations articulate what steps a state must take in order for the federal

government not to set up an exchange within the state. Section 1311 of ACA specifies that a state

“shall” establish an exchange that meets certain specified requirements.127 This section provides

that an exchange must be “a governmental agency or nonprofit entity that is established by a

State.”128 Additionally, under this section, among other things, an exchange must implement

procedures related to the certification of health plans; provide for the operation of a telephone

hotline; maintain a website under which current and prospective plan enrollees may obtain plan

information; assign ratings to qualified health plans in the exchange, in accordance with criteria

developed by the Secretary of HHS; use a standard format for presenting health benefit plan

options in the exchange; and inform individuals of their eligibility for public programs such as

Medicaid and assist with this enrollment.129 Current regulations also set forth numerous

requirements that a state must meet in order for its exchange to be approved by HHS.130 As

described above, if a state does not have this approval (or conditional approval) by a certain

deadline, HHS will establish and operate the state’s exchange.131

While the circumstances under which the federal government will assist with establishing an

exchange within the state are thus well described in current law and regulations, the question of

what it means to have “an exchange established by the state under 1311” could arguably be

somewhat different than whether the federal government has chosen to assist with establishing an

exchange within the state. Questions have been raised, for example, regarding whether states

could qualify as having state-established exchanges while retaining a certain degree of federal

marketplace infrastructure (e.g., certain state-based exchanges utilize healthcare.gov).132 The

Supreme Court may address what states must do in order to “establish an exchange” so that

premium credits are available. Alternatively, the Court may render a decision without answering

126

However, an employer may still potentially be subject to tax if the employer has a place of business in a state with a

federal exchange, but employs individuals who reside in a different state that has a state-run exchange.

127

42 U.S.C. §18021. See also Halbig, 758 F.3d at 399 (“[D]espite its seemingly mandatory language, §1311 of the Act

more cajoles than commands. A state is not literally required to establish an Exchange; the ACA merely encourages it

to do so.”).

128

42 U.S.C. §18021(b).

129

42 U.S.C. §18021.

130

42 C.F.R.§155.10 et seq. These regulations specify, for example, that a state must submit an “exchange blueprint”

that specifies how the state’s exchange meets the requirements set out in the regulations, and the state must demonstrate

readiness to execute this blueprint. 45 C.F.R. §155.105.

131

45 C.F.R. §155.105(f).

132

See generally Blumenthal and Collins, note 112 supra.

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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

this question. In that case, the answer may ultimately require administrative action by IRS and

HHS, or further litigation to be resolved.

If the Supreme Court rules in favor of the challengers, would taxpayers

enrolled in plans in federal exchanges be forced to pay back any credits they

have claimed?

As mentioned, taxpayers are allowed to claim the credit when they file their taxes at the end of

the year or may choose to receive an estimated credit paid in advance to their insurance company.

For both sets of taxpayers, it is not clear that any who claimed the credit might be required to pay

it back if the Court were to strike down the regulation.133 On the one hand, as a general rule,

taxpayers who improperly claim tax credits must pay them back and, in the case of taxpayers

receiving an estimated premium tax credit in advance, pay back any excess. Further, the IRS is

generally able to go back to the previous three tax years in order to reclaim erroneously paid

refunds, even when the agency was at fault for the overpayment.134 And in some situations, courts

have recognized that the IRS occasionally gets the law wrong and it is the taxpayer’s

responsibility to get it right.135 As such, if the Court were to strike the regulation so that taxpayers

who purchased insurance in federally facilitated exchanges were not allowed the credit, it might

be argued that taxpayers could be required to pay back any claimed credit to the IRS.

On the other hand, these taxpayers claimed the credit due to their reliance on an unambiguous

IRS-promulgated regulation. As such, it is arguably unfair to require them to pay back any

claimed credit, perhaps particularly so if they were not party to the litigation resulting in their

denial of the credit. Further, the situations where courts have not reacted sympathetically to

taxpayers who relied on erroneous IRS information can be distinguished since those taxpayers

were relying on guidance less formal than a regulation. In light of all this, even if there might be a

legal basis for concluding that taxpayers might have to pay back the credit, it seems possible the

Court, Congress, or IRS would take mitigating actions. For example, if the Court were to strike

down the regulation, the Court could conceivably limit its holding so that taxpayers who had

received the credit (whether through the advance payment or end-of-year filing) would not be

affected. Similarly, the IRS might have the authority to provide that taxpayers who had already

claimed the credit would not have to pay it back or to take no action to assess and collect the

amounts from them.136 It is also possible that Congress could address the issue by legislation.

CRS is not aware of any example of where a court struck a credit or other tax benefit and the

taxpayers who had already received the benefit were required to pay it back;137 however, it should

133

In no case does it appear that the insurance company who received the advanced payment would be responsible for

paying back the credit since that company merely accepted the credit as payment from the taxpayer for the premiums.

134

26 U.S.C. §6229. See also O’Bryant v. United States, 49 F.3d 340 (7th Cir. 1995).

135

See, e.g., Carpenter v. United States, 495 F.2d 175, 184 (5th Cir. 1975) (dismissing the fact that the taxpayer had

relied on an inaccurate statement of law found in an IRS publication since “it is for the Congress and the courts and not

the Treasury to declare the law applicable to a given situation”); Miller v. Comm’r, 114 T.C. 184, 195 (2000) (“Wellestablished precedent confirms that taxpayers rely on such [IRS] publications at their peril. Administrative guidance

contained in IRS publications is not binding on the Government, nor can it change the plain meaning of tax statutes.”).

136

See 26 U.S.C. §§36B(g), 7805(a)&(b).

137

See, e.g., California Franchise Tax Board, Qualified Small Business Stock (QSBS) Gains – FAQs, October 7, 2013

update on QSBS gains, available at https://www.ftb.ca.gov/law/

Qualified_Small_Business_Stock_and_Cutler_Decision.shtml (after a state tax benefit was struck down as violating the

dormant Commerce Clause, the state tax agency had initially indicated that taxpayers would have to pay back amounts

received during the prior four open tax years plus interest, but the state legislature subsequently amended the law so

(continued...)

Congressional Research Service

Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

be noted that this issue rarely arises because, as discussed above, no one typically has standing to

bring this type of suit.

Could a ruling in the King case have consequences for other tax laws

or credits?

A consideration in assessing whether King may have implications for tax law generally is

recognizing that the situation presented is uncommon. The plaintiffs are challenging an IRS

regulation that interprets a statute so that they are eligible for a credit. Normally, a taxpayer would

not want to sue arguing the IRS had impermissibly broadened a statute to benefit them, and in any

case, would not have standing to do so. Here, the plaintiffs’ concerns and standing are based on

the interaction between the premium tax credit and the individual mandate. This type of

interaction between a tax benefit and obligation is rare. Thus, due to the atypical facts present

here, it is not clear whether King, regardless of how the Court rules, will have broad implications

for impact tax law generally.

King and the other cases nonetheless might provide two procedural issues in which Congress

might be interested—the applicability of the AIA and the relationship between the APA and tax

refund suits (note that neither issue has been appealed to the Court). This is not to suggest that the

lower courts necessarily got these issues wrong. Rather, these cases might be of interest because,

as discussed above, it is generally the rule that taxpayers challenging a federal tax law must do so

through a tax refund suit, and while the government argued these taxpayers needed to do the

same, the courts rejected this. Regardless of which side it agrees with, Congress might be

interested in looking at these decisions to see if statutory clarification is needed. First, as

discussed above, the AIA generally prohibits suits that restrain the collection and assessment of

federal taxes. While the Supreme Court in NFIB found that the individual mandate was not a tax

for purposes of the AIA because Congress labeled it as a penalty, Congress’s motivation in using

the term “penalty” appears open to debate. In light of the Court’s holding and its application to

the cases here, as well as potential extension to other excise taxes,138 it might be of interest to

Congress to look at these cases to ensure their reasoning is consistent with the congressional

intent behind the AIA and, if so, how other excise taxes might be affected.139 Similarly, the issue

of whether a tax refund suit is an “adequate remedy” under the APA does not frequently arise, and

it might be of interest to Congress to look at how the courts in these cases interpreted the

interaction between the two acts.

(...continued)

that taxpayers were not required to pay back the benefits); Minn. Laws 1974, ch. 556, §20 (after a state tax credit was

struck down as violating the First Amendment, a law was passed prohibiting the state tax commissioner from

“requir[ing] reimbursement or restitution of any such credits or refunds previously granted, where such recipients were

legally entitled thereto under laws in effect at the time such claim was filed by the applicant, or to seek recovery of any

amounts by legal action”).

138

See, e.g., Korte v. Sebelius, 735 F.3d 654 (7th Cir. 2013) (finding that the excise tax in Section 4980D on the failure

to meet certain group health plan requirements was a penalty for purposes of the AIA, reasoning that, while Congress

clearly labeled it as a tax, it functions as a penalty).

139

In March 2015, the Supreme Court released another decision that might have consequences for the AIA. In Direct

Marketing Association v. Brohl, 135 S. Ct. 1124 (2015), the Court took an arguably narrow interpretation of the Tax

Injunction Act (TIA), which limits the ability of federal courts to hear cases restraining the collection of state taxes.

Due to the similar language and purpose of the AIA and TIA, it has been suggested that Brohl could lead courts to

interpret the AIA in a similar narrow fashion and thus further limit the act’s applicability. See, e.g., Marie Sapirie, The

Effect of Direct Marketing Association, STATE TAX TODAY, 2015 STT 60-1 (March 24, 2015).

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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers

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