Yesterday, the U.S. Court of Appeals for the District of Columbia Circuit, in a 2-1 ruling by a three judge panel, invalidated an Internal Revenue Service regulation that interpreted section 36B of the Affordable Care Act (“ACA”) as authorizing premium tax credits for insurance purchased on either a state or federally-facilitated Exchange. In striking down the IRS regulation, the majority found that the language in the ACA “unambiguously restricts the section 36B subsidy to insurance purchased on Exchanges ‘established by the State’.” The D.C. Circuit court’s decision could have far reaching implications given the fact that currently 36 states have chosen not to establish state Exchanges and instead rely on federally-facilitated Exchanges. If the court’s decision is upheld, it could result in significant premium increases for many individuals who purchased their coverage through a federally-facilitated Exchange, but who would qualify for a premium tax credit based on their household income if they had purchased coverage through a state-run Exchange.

Possible Impact on Individual Mandate: The individual mandate generally requires that individuals maintain “minimum essential coverage”. Failure to maintain such coverage can result in a penalty.  However, the penalty would not apply to individuals for whom the annual cost of the cheapest coverage (reduced by any applicable tax credits) would exceed 8% of their projected household income. Since the premium tax credits would no longer be available in the 36 states with federally-facilitated Exchanges, the court’s decision, if upheld, may considerably decrease the number of people who could be subject to a penalty for failing to maintain coverage.

Possible Impact on Employer Mandate: The employer mandate under Code section 4980H imposes penalties on certain large employers who fail to provide their full-time employees with health insurance that meet certain minimum value and affordability requirements. Specifically, the penalties under Code section 4980H apply to any large employer who fails to offer its full-time employees appropriate coverage if one or more of the employees enroll in an Exchange and qualify for a premium tax credit. If the court’s ruling is upheld, since premium tax credits would be unavailable in states with federally-facilitated Exchanges, large employers would not be subject to penalties for failing to offer coverage to employees who are residents in those 36 states. However, a large employer who employs individuals who reside in a state with a state Exchange could still be subject to penalties under Code section 4980H.

Opposite Ruling by the Fourth Circuit: Also yesterday, the U.S. Court of Appeals for the Fourth Circuit issued a ruling that reached the opposite conclusion. The Fourth Circuit found that the language in section 36B was “ambiguous and subject to multiple interpretations”. The court upheld the IRS regulation “as a permissible exercise of the agency’s discretion.”

What’s Next? The Department of Justice has already stated that it will appeal the D.C. Circuit court’s decision by seeking an en banc review, which would put the case before the entire appeals court. Given that the D.C. and Fourth circuits are now split on whether federal subsidies are available for coverage purchased through federally-facilitated Exchanges, the likelihood that the issue will ultimately be reviewed by the U.S. Supreme Court increases. In the meantime, we will continue to monitor this issue and provide updates.