The Next (Big) Affordable Care Act Argument--and How it Impacts Employers and Employer-Sponsored Group Health Plans

In a July 7 article entitled Brawling Over HealthCare Moves to Rules on Exchanges, The New York Times reported on a brewing challenge to tax credit provisions of the Affordable Care Act that will affect both employers and individuals.  According to the Times,

“At issue is whether the subsidies will be available in exchanges set up and run by the federal government in states that fail or refuse to establish their own exchanges. ... The most likely challenger ... is an employer penalized because one or more of its employees receive subsidies through a federal exchange. Employers may be subject to financial penalties if they offer no coverage or inadequate coverage and at least one of their full-time employees receives subsidies.”

Section 1401 of the Affordable Care Act provides that eligible taxpayers may receive income tax credits for purchase of insurance “through an Exchange established by the State under [Act Section 1311]” (emphasis added).  Section 1311 is the provision of the Act that enables the states to establish health insurance exchanges.  That provision does not refer to federally-facilitated exchanges.  Act section 1321 provides that if a state does not elect to create an exchange that meets federal requirements, the federal government will “establish and operate” an exchange.  This invites the question whether, in a state that fails to create an exchanges, there can be any tax credits for insurance bought on a federally run exchange?

If opponents of the law are correct, then individuals in states that fail to establish an exchange will be ineligible for premium tax credits to assist with the purchase of coverage.  For employers, however, there is good news: assessable payments under the Act’s employer shared responsibly are triggered only where one or more employees qualify for a premium tax credit.  If no employee is eligible, then there can be no liability for any assessable payments.

The law’s proponents argue that Congress clearly did not intend this result and that this is a hyper-technical reading of the statute.  At the same time, they rightly concede that these provisions are not a model of good statutory draftsmanship.  Based on the experience with the Supreme Court, it’s hard to say what the courts will do if (when?) presented with this challenge.  But I’ll venture a guess: The Act’s provisions are part of an integrated whole.  Exchanges serve as web-based point-of-sale portals or marketplaces.  Whether the portal is established by a state or the federal government is irrelevant.  Read in context, and as a whole, this appears to be (in the author’s view at least) the marginally better legal result.