Pending Supreme Court Ruling on Tax Credits

Posted on February 24, 2015


Business & Tax Law

The Background

Section 36B of the Internal Revenue Code, which was enacted as part of the Patient Protection and Affordable Care Act (ACA), authorizes federal tax credit subsidies for health insurance coverage that is purchased through an “exchange established by the State under Section 1311” of the ACA.  In May 2012, the Internal Revenue Service (IRS) issued regulations that interpreted Code Section 36B to allow credits for insurance purchased on either a State _or_ Federally-established exchange.  

The Issue

The question presented to the Supreme Court in King v. Burwell (U.S. Supreme Court No. 14-114) is whether the IRS may permissibly promulgate regulations to extend tax-credit subsidies to coverage purchased through exchanges established by the *federal government* under the ACA.  

Since the passage of the ACA, the Federal “exchange” has come to be known as the “marketplace” but to follow the statutory reference, this article will refer to “exchange.”

The Impacts

Impact on Individuals

Thirteen (13) States and the District of Columbia have State-run exchanges.  Three (3) States have State-run exchanges using the federal website.  Nineteen (19) States use the federal exchange, and the remaining States use the federal exchange with some combination of State-federal plan management.  Pennsylvania uses the federally facilitated exchange.

If the challenge to the IRS’ regulations is successful, only those persons enrolled via a State-run exchange will be eligible for the tax credits, which may be paid by the U.S. Treasury directly to a taxpayer’s insurer, to offset premiums owed.  This premium subsidy was intended to work hand-in-hand with the individual mandate by making insurance affordable for everyone.  However, if premium tax credits are unavailable to individuals enrolled in a federally run exchange, more people will qualify for an exemption from the individual mandate.  Individuals whose contribution to health coverage is more than eight percent (8%) of household income are exempt from the individual mandate.  The ACA calculates this contribution as the annual premium for the lowest cost plan available on an exchange in the State, minus any allowable premium tax credit.  If an individual is not eligible for the premium credit, coverage becomes more expensive, and the exemption may apply.

Impact on Employers

The ACA specifies that liability for the excise tax under the employer mandate for applicable large employers [employers with fifty (50) or more full-time or full-time equivalent employees] is generally triggered when one or more of an applicable large employer’s full-time employees is allowed a premium tax credit through a health insurance exchange.  If premium subsidies are not available in a State because that State has not established an exchange, employers in that State face no liability for failing to offer affordable coverage to employees.

Unknown Consequences

If the Supreme Court strikes down the IRS’ regulation, what will happen to those taxpayers who bought insurance on the federal exchange using a disallowed premium tax credit?  Would these taxpayers be required to re-pay the subsidy to the Treasury?  Although this is possible, it is unlikely, and it is reasonable to believe that either Congress or perhaps the IRS will intercede to avoid this undesirable consequence that could otherwise apply to people who acted in reliance on IRS regulations.

There is some thought that without the premium tax credits, a large population of healthy people will not purchase coverage and the insured pool on the federal exchange may have a disproportionate population of people with more serious health challenges.  This could result in increased premiums on the federal exchange.

What Should You Do?

The Supreme Court ruling deserves attention for both individuals and employers.  Although a ruling striking down the regulation will not likely impact coverage that is currently in place, it will certainly impact future individual enrollees and may enable employers in federal-run exchange States to seek lower cost group health policies that may not be as expansive as those required to avoid the employer mandate penalty.


For additional information, please contact David M. Mosier by phone at (814) 459-2800 or via email at dmosier@kmgslaw.com.

David M. Mosier is a Shareholder at Knox McLaughlin Gornall & Sennett, P.C.’s Erie office. 

Business & Tax Department Attorneys


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