On June 25, 2015, the Supreme Court of the United States upheld one of the main pillars of the Affordable Care Act (ACA): the tax credits that allow millions of Americans to afford health care insurance on the public exchanges. In King v. Burwell, Chief Justice Roberts, writing for a 6–3 majority, held that middle- and low-income individuals who purchase health care insurance through a federally facilitated health care exchange are entitled to the same tax credits that are available to purchasers through state-run health care exchanges. The ruling puts to rest one of the remaining challenges to the general framework of the ACA. Accordingly, employers should continue to plan for compliance with the current and upcoming obligations required under the ACA.

Background

The ACA introduced three key reforms intended to decrease the number of uninsured Americans:

• A pair of insurance market regulations: the guaranteed issue and community rating requirements, which bar insurers from denying coverage to any person because of his or her health, and from charging a person higher premiums for the same reason

• A requirement that individuals maintain health insurance coverage or pay a penalty to the Internal Revenue Service (IRS), unless the cost of purchasing insurance exceeds 8 percent of that individual’s income

• Provision of refundable tax credits to individuals with household incomes between 100 percent and 400 percent of the federal poverty line, to make insurance coverage more affordable

The ACA also requires the creation of an “exchange” in each state, where people can compare and purchase individual health insurance policies. Under the ACA, an exchange is either established and administered by a state or, as a default, by the federal government. The ACA provides that the 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 under [42 U.S.C. §18031].” In 2012, the IRS issued a regulation interpreting this provision, stating that the tax credits are available to individuals regardless of whether the exchange is established and operated by a state or the federal government. 

Large employers have watched King v. Burwell with particular interest because the employer mandate—which became effective in 2015—is intertwined with the issue of available tax credits for individuals purchasing coverage through an exchange. The ACA’s employer mandate requires employers with 50 or more full-time employees (100 or more full-time employees in 2015) to provide adequate coverage to their full-time employees or pay a penalty. If a full-time employee either is not offered coverage or is offered coverage that is not affordable and of minimum value, and that full-time employee purchases coverage through an exchange and qualifies for a premium tax credit, the employer is subject to a penalty. If premium tax credits are only available to individuals who purchase exchange coverage in one of the 16 states, plus the District of Columbia, with a state-run exchange, this effectively means that employees in the remaining 34 states without a state-run exchange cannot trigger penalties under the employer mandate.

The petitioners in King v. Burwell are four individuals who reside in Virginia, a state that did not elect to run its own exchange and relies on the federal exchange. The petitioners challenged the IRS regulation, contending that the federal exchange does not qualify as an “Exchange established by the State,” and therefore they should not receive any tax credits. Petitioners contend that without the tax credits, the cost of buying insurance for them would be greater than 8 percent of their income, exempting them from the ACA’s coverage requirement. The district court rejected the petitioners’ challenges to the IRS regulation, and the U.S. Court of Appeals for the Fourth Circuit affirmed that decision.

Summary of the Supreme Court’s Opinion

In King v. Burwell, the Supreme Court held that the ACA’s tax credits were intended to be available to individuals regardless of whether they purchased insurance under a state exchange or federal exchange. The majority noted that the tax credits are one of the ACA’s key reforms, and whether they are available on federal exchanges is a question of deep “economic and political significance.” The Supreme Court determined that Congress did not intend to delegate to the IRS responsibility for interpreting whether the ACA makes tax credits available on federal exchanges.

First, the Supreme Court determined that the phrase “an Exchange established by the State under [42 U.S.C. §18031],” when read in context with the overall statutory scheme of the ACA, was ambiguous, as it could be interpreted to mean that tax credits applied only to state-established and operated exchanges, but it also could be read to mean all exchanges—both state and federal. Because of this ambiguity, the Supreme Court was required to look to the ACA’s broader structure to determine whether one of the “permissible meanings” of the challenged phrase produces a “substantive effective that is compatible with the rest of the law.”

The Supreme Court’s majority found that that the ACA’s overall statutory scheme compelled the Supreme Court to reject the petitioner’s limited interpretation of the challenged provision 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.” If petitioners’ interpretation of the provision was followed, then one of the three key reforms under the ACA (the tax credits) would not be available to any individual who purchased insurance from a federal exchange. In that event, a second key reform—the coverage requirement—would also not apply in a meaningful way, as many individuals would be exempt from the coverage mandate without the tax credits. Under petitioners’ interpretation, only one of the three key pillars of the ACA would apply in states utilizing the federal exchange, and the Supreme Court determined that it was implausible that Congress intended the ACA to operate in such a manner. Because Congress made the guaranteed issue and community rating requirements applicable in every state, and because those requirements only work when combined with the coverage requirement and tax credits, the majority found that it “stands to reason that Congress meant for those provisions to apply in every State,” regardless of whether the state or federal government runs the exchange.

The Supreme Court’s majority noted that the petitioners’ arguments about the “plain meaning” of the challenged provision were strong, but determined that while the meaning of the challenged phrase may seem plain “when viewed in isolation,” such a reading turns out to be “untenable in light of the [ACA] as a whole.” The majority concluded that because Congress passed the ACA to improve health insurance markets, not destroy them, the tax credit provisions must be interpreted in a way that “is consistent with the former, and avoids the latter.”

Employers’ Obligations Under the ACA Going Forward

The Supreme Court’s rejection of this latest challenge to the ACA means that the ACA’s requirements for individuals and employers will be fully effective going forward. Employers should take this opportunity to review their plans for compliance with ACA requirements, including the following:

• Employer Mandate: Under Code Section 4980H, applicable large employers may be subject to a penalty if at least one full-time employee receives a cost-sharing reduction or premium tax credit for coverage purchased under a state or federally facilitated health insurance exchange because that full time-employee is not offered affordable, minimum value employer group health coverage. The ACA defines a full-time employee as an employee who is employed on average at least 30 hours of service per week. The IRS will calculate any penalty due on an annual basis through a combination of employer and individual information reporting, and will notify the employer of any assessed tax penalty. 

• Information Reporting: Large employers, plan sponsors of group health plans providing minimum essential coverage, and health insurance carriers must submit annual reports about employer-provided health insurance to covered individuals and to the IRS. The first reports for the 2015 calendar year are due in early 2016. Employers should track and collect employee, dependent and plan coverage data necessary for this reporting. The IRS will use the information reported by employers and insurance carriers to determine compliance with the individual shared responsibility requirements, eligibility for premium tax credits, and any penalty that an employer may owe under the employer mandate.

• Cost-Sharing Limits: The annual out-of-pocket maximum under a group health plan is capped under the ACA ($6,600 for 2015 and $6,850 for 2016 for self-only coverage). Starting in 2016, the self-only annual maximum must apply to all individuals covered under a group health plan, regardless of whether the individual has self-only or family coverage. 

• Cadillac Tax: Employers should continue to assess how they will prepare for the 40 percent nondeductible excise tax on high-cost health plans. In order to avoid triggering the tax, employers should evaluate plan design decisions such as adoption of high deductible health plans (which will likely not trigger the high-cost dollar threshold for the tax), elimination or modification of health flexible savings accounts, pre-tax and employer contributions to health savings accounts, and onsite clinics (all of which appear to count towards calculating the tax), as well as adoption of more robust wellness and prevention programs to address the overall cost of claims.

• Plan Design Decisions: Employers’ health care plan design strategy will continue to evolve now that the exchanges and premium subsidies are here to stay. Key decision points include the following:

  • Should employers continue to offer coverage to spouses, which is not required under the ACA, but which adds additional costs to the employers’ bottom line (e.g., reinsurance and PCORI fees)?

  • How will employers manage their employees’ work force hours (i.e., ensuring employees who are not offered health care work less than 30 hours per week)?

  • Will employers offer medical coverage to pre-65 retirees or send those retirees to the exchanges, where they may qualify for premium subsidies without triggering penalties for employers?

As a backdrop to all of these compliance obligations, employers should document all of their plan design decisions in order to be able to
demonstrate on audit that their benefit plans comply with the market reforms already in effect under the ACA, such as the elimination of pre-existing condition exclusions, elimination of lifetime and annual caps on essential health benefits, and coverage of children up to the age of 26. Employers will also need to demonstrate that their plan’s eligibility language is consistent with the employer’s reporting of coverage to the IRS and its compliance with employer shared responsibility requirements.