Kim Wilcoxon, Thompson Hine LLP
Three years ago, the Supreme Court of the United States announced its decision in NFIB v. Sebelius and upheld the individual mandate under the Patient Protection and Affordable Care Act (ACA). Last week, the Supreme Court announced its decision in King v. Burwell and upheld the Internal Revenue Service’s (IRS) interpretation that tax credits were available under the ACA for taxpayers in all states, whether or not a state’s exchange was established by the state government or the federal.
There are many similarities in how these decisions affect employer-sponsored health plans. It’s déjà vu all over again, so this post revisits questions addressed in this blog three years ago in light of King v. Burwell.
What does the new decision mean in the short term for employer-sponsored group health plans?
While NFIB v. Sebelius upholds the individual mandate, King v. Burwell effectively upholds the employer mandate. Neither changed anything for employer-sponsored group health plans.
Prior to the King decision, employers understood they could be penalized for failure to offer affordable, minimum-value health coverage to all of their full-time employees. Liability for the penalty (and, in some cases, the amount of the penalty) would depend on whether a full-time employee obtained a tax credit to help pay for coverage obtained through an exchange. Relying on IRS regulations, employers understood that full-time employees in any state might be eligible for the tax credit.
Because the IRS regulations were upheld, employers’ understanding of their liability for the penalty continues to be correct. In the short term, they should continue their compliance efforts regarding the employer mandate. Depending on the employer’s circumstances, these efforts may include:
- Ensuring that administrative systems are accurately tracking hours of service.
- Evaluating new hires to determine whether they would be considered variable hour employees.
- Updating summary plan descriptions and participant communications to address changes to the eligibility requirements and circumstances under which employees may lose eligibility for coverage.
- Preparing to report offers of coverage to full-time employees on Form 1095-C.
What does the King decision mean over the long term for employer-sponsored group health plans?
As with NFIB v. Sebelius, the King decision does not have a definitive impact on how employer-sponsored group health plans will be required to comply with the ACA in the future. The decision effectively upholds the employer mandate as described above, but the decision does not expressly affirm it. Therefore, plaintiffs may still bring judicial challenges to the employer mandate provisions.
Employers are still waiting for guidance about how to comply with a number of provisions unrelated to the employer mandate, such as the nondiscrimination rules applicable to insured group health plans, automatic enrollment requirements for large employers and the excise tax on high-cost health coverage (also known as the Cadillac Tax). Had King been decided another way, serious concerns about the continued viability of the ACA would remain. However, the King decision provides enough certainty about the ACA’s future to allow the regulatory agencies to continue to work on guidance on these outstanding issues.
How did the Supreme Court uphold the IRS interpretation?
The majority opinion determined that the ACA was ambiguous. Unlike the Fourth Circuit Court of Appeals decision, which gave deference to the IRS interpretation of the ambiguous statute, the Court’s majority reviewed the issue and interpreted the statute itself.
The majority recognized the statute contained some “inartful drafting,” due in part to the method by which the ACA was drafted and passed. Because Congress did not use the traditional legislative process to create and enact the ACA, the Court’s majority asserted that the statute “does not reflect the type of care and deliberation that one might expect of such significant legislation.” Accordingly, the majority did not accept a plain reading of one clause of the ACA.
The specific clause at issue is in the definition of the term “coverage month” in Internal Revenue Code Section 36B, which created tax credits to help taxpayers pay for health coverage obtained through state exchanges. Code Section 36B provides that the amount of the tax credit available to a taxpayer for a year is equal to the taxpayer’s “premium assistance credit amount” for the year. The “premium assistance credit amount” is determined based on the number of the taxpayer’s “coverage months” occurring during the taxable year. A “coverage month” is a month in which, among other requirements, the taxpayer is enrolled in health insurance coverage “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act. . .”
Section 1311 of the ACA provides that “[e]ach State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an ‘‘Exchange’’) for the State. . . .” Although Section 1311 provides that each state “shall” establish an exchange, federalism prohibits Congress from compelling states to take action. Therefore, the ACA provides in later Section 1321 that, if a state does not establish its own exchange, “the Secretary shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State . . .”
The majority noted, in the context of past health care reform efforts in the U.S, that the larger statutory scheme would compel a reading that the reference to exchanges “established by the State under section 1311” in the definition of “coverage month” should be read to include exchanges established for the State under section 1321. According to the majority, the opposite interpretation would destabilize the individual insurance market.
What does this decision mean for the remaining provisions of the ACA?
The King decision could have long-term implications for other ACA provisions. Certain Supreme Court justices seem empowered to interpret ACA provisions in the context of what the majority believes to be the intent of the law and to correct what might be considered a drafting error. Should other ACA provisions be challenged in the future, we might see the Supreme Court take this approach again and interpret the ACA (or re-write it, depending on your point of view) in a way that appears to be inconsistent with a plain reading of the statute.