Do PPACA credits and mandates apply in state with federal exchanges?

• Author: McKenna, Brian J.
• Position: Patient Protection and Affordable Care Act

EXECUTIVE SUMMARY

* Sec. 36B provides for a premium tax credit for qualifying insurance purchased on an exchange "established by the State" under Section 1311 of PPACA. A majority of states did not establish an exchange but allowed the federal government to do so under the fallback provision of PPACA Section 1321.

* In final regulations, the IRS defined an exchange for this purpose as including both state- and federally established exchanges. Four lawsuits have challenged this interpretation.

* The Fourth Circuit held that the regulation was valid; however, the U.S. Supreme Court granted certiorari to the plaintiffs in that case.

Parties in three other cases have agreed to hold them in abeyance while the Supreme Court decides the issue.

* A holding by the Supreme Court invalidating the regulation would effectively disable a key component of the system set up by PPACA, possibly causing the system to collapse.

On March 23, 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act (PPACA). (1) On June 28, 2012, the U.S. Supreme Court ruled in National Federation of Independent Business v. Sebelius that the individual mandate provisions of PPACA are constitutional. (2) Many Americans believed that this Supreme Court decision brought closure to the legal challenges to PPACA.

However, a second round of challenges is now moving through the federal courts that target the IRS's interpretation in the regulations that the premium assistance credit provided in Sec. 36B is available to insurance purchased on both state health insurance exchanges and federal health insurance exchanges. In November 2014, the Supreme Court agreed to hear one of the cases involving this issue.

PPACA includes an "employer mandate", requiring large employers to offer health insurance coverage, (3) an "individual mandate" requiring individuals and their dependents to maintain health insurance coverage, (4) and a refundable credit/subsidy (5) available to individuals to help make a health insurance purchase affordable. Sec. 36B, which provides the premium assistance credit, refers twice to qualifying insurance purchased on "an Exchange established by the State." (6) While the law provided a fallback option that allows the federal government to establish an exchange if a state did not, it did not specify that the system of mandates and refundable credits/subsidies would apply to federal exchanges.

A majority of states decided to allow the federal government to establish the exchange in their state. On May 23, 2012, the IRS promulgated final regulations, including Regs. Sec. 1.36B--1(k)), providing that the system of mandates and refundable credits/subsidies applies to both state exchanges and exchanges established by the federal government. (7) At least four lawsuits were filed against the government, claiming that the IRS exceeded its authority by interpreting the law as applying to both federal and state exchanges. In addition to cases arising in the District of Columbia (8) and Virginia, (9) the states of Indiana and Oklahoma brought challenges. (10) The plaintiffs in these cases all claimed that under the Administrative Procedure Act (APA), (11) the IRS's interpretation of the law in Regs. Sec. 1.36B--1(k)) is arbitrary and capricious and not "in accordance with law." (12)

On July 22, 2014, two of these lawsuits were decided by federal appeals courts. In Halbig, (13) the D.C. Circuit vacated Regs. Sec. 1.36B--1(k)) on the grounds that Sec. 36B "unambiguously forecloses the interpretation embodied" (14) in the regulation. Within hours, the Fourth Circuit in the Virginia case, King, (15) upheld the regulation, ruling that it is a "permissible construction of the statutory language" (16) entitled to deference under the Chevron doctrine (described below). On Sept. 30, 2014, in the case brought by the state of Oklahoma by its attorney general, the District Court for the Eastern District of Oklahoma vacated Regs. Sec. 1.36B--1(k)). (17) The government appealed this decision to the Tenth Circuit. (18) Then, on Nov. 7, 2014, the U.S. Supreme Court granted a petition for certiorari by the losing plaintiffs in King. Appellants in the other cases have agreed to hold their appeals in abeyance pending a Supreme Court determination.

Mandates and Refundable Credits

Employer Mandate

Beginning Jan. 1, 2014, the employer mandate penalties imposed under Sec. 4980H(a) and Sec. 4980H(b) were scheduled to go into effect. However, the IRS announced on July 10, 2013, that it would delay enforcement of the employer mandate penalties until Jan. 1, 2015. (19) Any final decision vacating Regs. Sec. 1.36B--1(k)) would, according to the court in Halbig, effectively make the employer mandate penalties inapplicable in states using federal exchanges. (20)

Sec. 4980H imposes a shared-responsibility assessable payment obligation on large employers, which are defined as employers with an average of at least 50 full-time (at least 30 hours per week) plus full-time-equivalent employees (21) during the preceding calendar year. It creates two separate and alternative penalties: (1) the Sec. 4980H(a) penalty for failing to offer all full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and (2) the Sec. 4980H(b) penalty imposed when the employer offers its full-time employees the opportunity to enroll in an eligible employer-sponsored plan, but the coverage is unaffordable (described below) or does not provide minimum value. (22) Both penalties apply only if at least one full-time employee has been certified under Section 1411 of PPACA as having received subsidized coverage through an exchange, i.e., a premium tax credit under Sec. 36B or coverage for which a cost-sharing reduction under PPACA Section 1402 (described below) is allowed or paid.

The Sec. 4980H(a) penalty is calculated by multiplying the number of full-time employees (not including fulltime equivalents), less a 30-employee reduction (80-employee reduction under transition relief for 2015 only), times the applicable payment amount of $166.67 per month (indexed for inflation after 2014).

Example 1: Company A has 100 fulltime employees during each month of 2016, does not offer employer-sponsored health insurance, and has received a Section 1411 certification for 10 full-time employees. The Sec. 4980H(a) monthly penalty (unadjusted for inflation) would be $11,667 ([100-30] x $166.67), amounting to an annual penalty of $140,000 ([100-30] x $2,000).

The Sec. 4980H(b) penalty is calculated by multiplying the number of full-time employees certified under...