In May of 2012, IRS issued regulations (regs) that interpreted IRC § 36B to allow credits for insurance purchased on either a State or federally-established Exchange. Specifically, the regs provide that a taxpayer may receive a tax credit if he is enrolled in one or more qualified health plans through an Exchange, which IRS defined as an Exchange serving the individual market for qualified individuals, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by Health and Human Services (HHS).
By making credits more widely available, the reg gives the individual and employer mandates-key provisions of the ACA-broader effect than they would have if credits were limited to state-established Exchanges. As noted above, the individual mandate requires individuals to maintain “minimum essential coverage,” enforcing that requirement with a penalty. However, the penalty doesn’t apply to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed 8% of their projected household income. Thus, by making tax credits available in the 36 states with federal Exchanges, IRS through its regs significantly increases the number of people who must purchase health insurance or face a penalty.
The challenge and upcoming resolution. Taxpayers brought suit against IRS and HHS (Health and Human Services) arguing that Reg. § 1.36B-1(k) invalidly interpreted IRC § 36B(b)(2)(A) . On Nov. 7, 2014, the Supreme Court agreed to resolve a Circuit split between the Fourth Circuit upholding the reg, and the DC Circuit invalidating the reg, by reviewing King v. Burwell, (CA 4 7/22/2014) 114 AFTR 2d 2014-5259 .
The Supreme Court is scheduled to hold oral arguments on the case on Mar. 4, 2015.
Basically what is going on is that taxpayers brought suit against the IRS and HHS stating that a regulation wrongly interpreted a Code Section, and that the premium tax credit was invalid.
Implications of Court’s upholding the Regulation
If the Court finds that the IRS regs at issue are valid, the CRS report says it may be presumed that IRS would not need to amend the regs 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 IRS from amending the regs at a future date. Assuming that the Court performs a Chevron analysis and finds that the ACA’s statutory language of the ACA is ambiguous and subject to multiple interpretations, IRS would remain free to amend the regs, so long as the amendments are consistent with the Code. Thus, it is possible that if the Supreme Court in King decides to defer to IRS’s interpretation of the ACA, an administration could later amend the regs in a way that affects the provision of premium tax credits in federal and state-run exchanges. The Court’s opinion may address this scenario.
Fallout from invalidation of the Regulation
The Court may find that the IRS reg at issue in King v. Burwell, is invalid, and, as a result, individuals participating in federally run exchanges would no longer be eligible for the credit. According to the CRS Report, IRS would presumably act to address the problematic aspects of the Code Sec. 36B regs. And IRS (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 Code and ACA (discussed below).
IRS, affected taxpayers, and insurance companies might also confront issues due to the timing of the Court’s decision. The decision is likely to be released after Apr. 15, 2015, and, 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 companies. 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.