The Supreme Court, in a 6-3 decision, has upheld the tax subsidies under the Patient Protection and Affordable Care Act.

The challenge by opponents of Obamacare grew out of the phrase “established by the state,” which referred to the exchanges, or marketplaces, where people could compare and purchase insurance plans. Each state can establish its own Exchange, but the ACA also provides that the federal government will establish an exchange if the state does not.

Under the ACA, tax credits “shall be allowed” for any applicable taxpayer, but only if the taxpayer has enrolled in an insurance plan through “an Exchange established by the State.” An IRS regulation interprets this as making the credits available on an exchange “regardless of whether the Exchange is established and operated by a State…or by [Health and Human Services].”

According to the petitioners in the case, known as King v. Burwell, Virginia’s federal exchange does not qualify as an exchange “established by the State” so they should not receive any tax credits. That would make the cost of buying insurance more than eight percent of their income, exempting them from the act’s coverage requirement. As a result of the IRS regulation, however, they would receive tax credits, making the cost of buying insurance less than 8 percent of their income, rendering them subject to the coverage requirement.

The specific holding of the court is that Section 36B’s tax credits are available to individuals in states that have a federal exchange.

Chief Justice John Roberts delivered the majority opinion, and was joined by Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan. Justice Antonin Scalia filed a dissenting opinion, in which Justices Clarence Thomas and Samuel Alito joined.

The phrase “an Exchange established by the State under [42 U.S.C. section 18031]” is properly viewed as ambiguous, according to Roberts.

The phrase may be limited in its reach to state exchanges, Roberts noted. “But it is also possible that the Act refers to all Exchanges—both State and Federal – for purposes of the tax credits. If a State chooses not to follow the directive in Section 18031 to establish an Exchange, the Act tells the Secretary of Health and Human Services to establish ‘such Exchange.’ And by using the words ‘such Exchange,’ the Act indicates that State and Federal Exchanges should be the same,” he stated.

“But State and Federal Exchanges would differ in a fundamental way if tax credits were available only on State Exchanges—one type of Exchange would help make insurance more affordable by providing billions of dollars to the States’ citizens, the other type of Exchange would not.”

Roberts pointed out provisions in the ACA that would not make sense unless tax credits were available on both the state and federal exchanges. Looking to the broader structure of the Act, he concluded that “the statutory scheme compels the Court to reject petitioners’ interpretation because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.”

Reactions from Tax Experts
Tax experts weighed in on the Supreme Court’s ruling. “The status quo has been preserved.” said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting US. “The stock market seems to be rewarding the health insurance companies that might have lost out on subsidies. By and large, people can keep doing what they were doing—this is the way the IRS has been interpreting the law, so in that sense, nothing will change.”

Republicans are saying they will continue their attempts to repeal or further curtail Obamacare, Luscombe noted.  “One of the techniques being looked at will be to tie it in to reconciliation, which only needs a majority vote in the Senate,” he said. “This would avoid the necessity of finding 60 votes in the Senate, and it’s how Obamacare got passed in the first place. It was included as part of a reconciliation measure in 2010 and so avoided that issue. Of course, if they tried to overcome a veto then they would need some Democratic support.”

“King V. Burwell upholds the validity of tax credits for individuals living in states that use the federal exchange, HealthCare.gov,” said Bloomberg BNA state tax law editor Annabelle Gibson. “That means individuals who purchase insurance through HealthCare.gov that are eligible for credits will continue to receive them to help pay for their health insurance.” 

“The court focused on determining Congress’ intent when enacting the ACA when determining whether the words ‘Exchange established by the State’ include federal and state run exchanges,” she said.

“The court wrote that allowing credits for insurance purchased on any exchange will avoid the ‘calamitous result that Congress plainly meant to avoid’ when enacting the ACA, as the ACA was meant to increase access to health care throughout the United States,” Gibson remarked.

Applicable large employers who are subject to the employer mandate will continue to be liable for penalties for failing to offer minimum essential insurance coverage to their employees and their dependents, if employees purchase health insurance through any exchange and receive a tax credit, according to Gibson.

“If the tax credits had been struck down, employers in states using the federal exchange would not have been liable for a penalty even if an employee had purchased insurance through a federal exchange, because under the strict wording of the ACA, the penalty only applies if an employee received a tax credit to pay for their insurance,” she said. “Because the subsidies have been upheld, the employer mandate remains in place for all applicable large employers.”

Individuals in all states remain subject the individual mandate under the ACA, she indicated.

“If subsidies had been struck down, then the cost of health care would have gone up for many people and it was possible that the cost of purchasing health care could have been greater than eight percent of those individual’s income, exempting them from the ACA’s coverage requirement,” she said. “That type of situation could have pushed insurance marketplaces into a ‘death spiral.’”

“However, because the subsidies remain intact, people can continue to use them to help pay for their health insurance, likely bringing the cost of their insurance under the 8 percent level,” said Gibson. “That means that the individual mandate would still apply if someone didn’t purchase health insurance.”

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