In a 6-3 holding released today the United States Supreme Court upheld the availability of subsidies in exchanges maintained by the Federal Government.  Six members of the Court—Chief Justice Roberts, Justices Kennedy, Ginsburg, Breyer, Sotomayor and Kagan)  agreed with the Obama Administration and voted to validate the Internal Revenue Service’s interpretation of the Affordable Care Act (“ACA”) that permits premium tax credits in both state- and federally-operated exchanges.  This means two things:  (i) some 7.5 million Americans will not lose their subsidies that help them to pay for health insurance and (ii) it is back to “business as normal” for the ACA—meaning all employers must continue to attend to their compliance efforts.

Background of King v. Burwell

Seven words lay at the heart of this case:  “through an Exchange established by the State.” That is how the ACA describes where premium tax credits are available.  Early in the roll out of the ACA, the federal government itself realized that the law prevented premium tax credits from being offered on federally-run exchanges.  The normal route to “fix” a hole in a federal statute, of course, is to have Congress pass a corrective amendment and for the President to sign that corrective amendment into law.  However, because Congress was gun-shy over most any legislation about the ACA—and adding to that the Republican takeover of the House—there was no chance that a legislative fix could occur.  Enter the Internal Revenue Service (“IRS”).  The IRS addressed the issue by releasing guidance in which they clarified that the phrase “established by the State” was to be read as “established by the State and/or Federal government.” 

The Case & Decision

The arguments of the two sides in King are fairly straightforward.  On the one hand, the plaintiffs argued that the plain language of the ACA permits premium tax credits only in states that have state-run exchanges.

The government disagreed and maintained that the IRS was well within its regulatory mandate to interpret the ACA to allow premium tax credits in federally-run exchanges. The government argued that read as a whole, the context of the ACA clearly anticipated that subsidies are to be available to all Americans, regardless of whether the state they lived in had a state or federal exchange.  In other words, the context of the statute must be taken into account to interpret this particular phrase. 

 The government pointed to many examples in the ACA to support its position.  For example, the law provides that the tax credits are available to any “applicable taxpayer” (which is based on income level and not state of residence).  The government also argued that the “broader purpose” of the ACA would be seriously impaired if the plaintiffs’ reading of the law was upheld.  The broader purpose includes providing affordable care to all Americans; limiting affordable care to just those living in certain states would defeat that broader purpose.

The government also argued that under the so-called Chevron Test for assessing whether a regulatory body has exceeded its authority, the IRS was well within its rights.  Among other things, the Chevron Test requires a court to assess whether the agency’s view is based on a “permissible construction” of the law in question.  In the context of the broader purpose of the ACA, the government argued, the Chevron Test was met and the IRS was within its regulatory authority.  Lastly, the government argued that the IRS rule was directly authorized by the statute itself, which directed the IRS to “prescribe such regulations as may be necessary to carry out the provisions of [the section of the law providing for premium tax credits].”

Ultimately, the Court rejected the Administration’s Chevron Test argument, holding that Chevron does not provide the appropriate framework in this case.  The premium 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 Court held that had Congress wished to assign that question to a particular agency, such as the IRS, it would have done so expressly.  Moreover, it is unlikely that Congress would have delegated that decision to the IRS, which has no expertise in crafting health insurance policy of this sort.

Instead, the Court focused on determining the correct reading of the provision of the ACA allowing for premium tax credits.  The Court found that the phrase “through an Exchange established by the State” is properly viewed as ambiguous, meaning that it could refer only to state exchanges; however, it could also refer to all exchanges for purposes of the premium tax credits.  The Court reaches this conclusion by reading the provision in context with other provisions of the ACA.  For example, if a state chooses not to establish an exchange, the ACA instructs the Secretary of Health and Human Services (“HHS”) to establish “such exchange.”  By using the words “such exchange,” the ACA indicates that state and federal exchanges should be the same as it relates to premium tax credits. 

 The Court also noted that there are other provisions in the ACA that would be rendered nonsensical if the premium tax credits were not available on a federal exchange – for example, the part of the ACA requiring all exchanges to create outreach programs to inform individuals of the availability of premium tax credits would make little sense if the tax credits were not available on a federal exchange.

In the end, the Court, looked to the broader structure of the ACA to determine whether one of the permissible interpretations of the tax credit provision “produces a substantive effect that is compatible with the rest of the law.”  Under this analysis, the plain text of the law compelled the Court to reject the petitioners’ claims that the law was intended to preclude individuals from obtaining tax credits on federal exchanges because it would destabilize the individual insurance market in any state with a federal exchange and likely create the “death spirals” that Congress designed the ACA to avoid.  Under the petitioners’ reading of the law, the ACA would not work as intended in a state with a federal exchange because many individuals would be exempt from the individual mandate due to affordability issues if there were no subsidies.  The Court noted that it stood to reason that Congress meant for the tax credits to be available in every state when they made the ACA’s guaranteed issue and community rating requirements applicable in every state, as those two provisions only work when combined with the individual mandate and tax credits. 

The Court acquiesced that the petitioners’ plain-meaning arguments were strong; however, the Court felt compelled to reach its conclusion in order to avoid the type of calamitous result that Congress plainly meant to avoid. 

The dissenting opinion was authored by Justice Scalia, and is worth reading if only to learn some new words.  Justice Scalia accuses the Court of engaging in “interpretive jiggery-pokery” by reading other provisions of the ACA to presuppose the availability of tax credits on both states and federal exchanges.  To Justice Scalia, it would not be inconsistent with other provisions of the law for a federal exchange tell an individual that he is eligible for a tax credit; however, the tax credit is zero dollars because the individual lives in a state with a federal exchange.  This is just one of the endless rationalizations, evasions, and circumventions that must be adopted to read the ACA as prohibiting premium tax credits in federal exchanges. 

Impact of the Decision

The ACA is now 2-2 at the Supreme Court.  It remains the law of the land.  For individuals living in federal exchange states who are receiving subsidies to purchase insurance, the decision means they will be able to continue to maintain that coverage at a cost they can afford.

For employers, it means business as usual under the ACA.  While this case was pending, many employers—and particularly those doing business in the federal exchange states—appear to have put their compliance efforts on hold, as they awaited the Court’s decision.  Now that one of the last major legal challenges to the ACA has been decided, it is time for all employers to focus on the ACA.  We suggest focusing on:

1.Hours Determinations.  Many employers have not devoted sufficient attention to determining who qualifies as a full-time employee.  For some, this determination is easy because all or substantially all of their employees work 30 or more hours per week.  For others, particularly those in business sectors and industries where hours are not typically tracked or where variable hour employees are used, the full-time hour determination process has not been appropriately addressed and is now long overdue.

2.Recordkeeping/Reporting.  In six short months all employers—and particularly those with over 50 full-time equivalents—will be required to meet the Internal Revenue Code Section 6055/6056 reporting requirements.  This reporting is complex and establishing the data systems to accurately record and report is time consuming.  Employers who wait until the last quarter of this year will find that their vendors do not have the capacity to assist them.  Time is well past due to focus on recordkeeping and reporting.

3.Independent Contractor Review.  Penalties under the ACA may be assessed if any full-time employee of an applicable large employer obtains subsidized coverage on an exchange.  The Internal Revenue Service has indicated that it will use a “common law employee” approach to determine employee status.  Employers who use significant numbers of “independent contractors” may be shocked when they are assessed pay-or-play penalties because they did not offer these individuals insurance coverage.  These employers should be assessing employment status today and make a realistic assessment about an independent contractor’s employment status.

1.Cadillac Tax.  2018 is just 2½ years away.  In 2018 employers will pay a nondeductible excise tax of 40% on the value of insurance coverage over specified threshold amounts.  The amounts are $10,200 for individual coverage and $27,500 for family coverage.  Employers that have not as of yet assessed whether they are on trend to pay this excise tax and/or who have not implemented steps to curve their premium trend should do so now.  At the very least, human resource and benefits professionals should be alerting their chief financial officer that they may have a substantially increased tax burden starting in 2018.

2.Documentation.  ERISA requires that plan documents and summary plan descriptions (SPDs) set forth the terms of a plan.  Employers need to review their plan documents—including SPDs—to make sure they have been updated for the ACA and to also ensure that they accurately capture any eligibility requirements, including any process by which full-time status is determined.

This alert was prepared for BCI Group by Peter Marathas. Mr. Marathas is an ERISA and Executive Compensation lawyer with over 20 years’ eperience assisting clients nationally with benefits and compensation matters. He is a partner at Marathas Barrow & Weatherhead LLP, a premier employee benefits and executive compensation and employment law firm. He can be reached at