Full Replacement For the ACA Offered – Implications for Pending U.S. Supreme Court Case
The U.S. Supreme Court hears oral arguments next month in a case that could ultimately be the death knell for the Affordable Care Act (ACA). The case involves the Premium Assistance Tax Credit (PATC) of I.R.C. §36B, and the question before the Court is whether the credit is available to a taxpayer who acquires health insurance from a federal exchange. If it is not, then the ACA could be doomed because both the individual mandate and the employer mandate would be unraveled. In light of the Supreme Court decision which is expected by the end of June, legislation has emerged in the Congress that would repeal the ACA and replace it with new provisions. That’s important because the lawyers arguing the government’s position in the Supreme Court case were certain to argue that the Court shouldn’t eliminate the PATC for millions of taxpayers because there was no alternative legislation, and the Supreme Court could be inclined to leave the law in place if there is no reasonable alternative on the table
The Legal Issue
During 2014, several different federal courts issued rulings on the availability to taxpayers of the premium assistance tax credit. The ACA establishes the PATC to help offset the cost of health insurance premiums. Basically, the PATC is available (for the 2014 tax year) to an individual that has income between $11,490 and $45,960 during the year. For a family of four, the PATC is available in income ranges from $23,550 to $94,200. The text of the ACA states that that the PATC is available to anyone who buys health insurance from an exchange "established by the State...".
Here’s the statutory language of the pertinent statutory provision of I.R.C. §36B (the key language is highlighted for emphasis):
(2) Premium assistance amount
The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—
(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 1) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act, or
(B) the excess (if any) of—
(i) the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over
(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year.
As it turned out, the vast majority of states didn’t create exchanges which meant many (several million nationwide) people would not be subject to the ACA’s penalty tax for not having the mandated government-approved health insurance. That’s the result because if the credit is not available, health insurance will be more likely to be unaffordable. Unaffordability exempts the taxpayer from the mandate to obtain insurance and, hence, creates an exemption from the penalty tax for not having government-approved insurance. Furthermore, the employer mandate penalty is not triggered unless an employee goes onto the exchange and receives a PATC. If there is no PATC, there is no enforceable employer mandate. Consequently, the Obama Administration instructed the Treasury Department to develop a regulation expanding the availability of the PATC to persons buying health insurance through either a state or federal exchange.
In 2014, the D.C. Circuit Court of Appeals, in Halbig v. Burwell, concluded that the statutory language was clear and invalidated the regulation. The court noted that I.R.C. §36B plainly distinguishes between Exchanges established by states from those established by the federal government and specifies that the PATC is only available for plans "enrolled through an Exchange established by the State under section 1311...". Accordingly, the court determined that the Treasury Regulation was a blatant intrusion into congressional power set forth in Article I of the U.S. Constitution. Later the same day, however, the Fourth Circuit Court of Appeals upheld the regulation. In a lengthy opinion, the court managed to find the statutory language ambiguous, and ruled that the regulation was a permissible exercise of the agency's discretion.
In late September of 2014, another federal court ruled that persons purchasing health insurance through a federal exchange are not entitled to receive a premium tax credit under the ACA. The court said that the IRS regulation illegally expanded the availability of the credit to persons not entitled to it under the ACA’s plain language.
In November, the U.S. Supreme Court agreed to hear the case from the Fourth Circuit.
Oral argument is set for March 4, 2015, and a decision is expected by the end of June. The court’s grant of certiorari in the Fourth Circuit case was a unique move because there was no conflict among the circuit courts. The D.C. Circuit had already vacated its decision and scheduled the case for an en banc (full court) review, but then put that hearing in abeyance pending the Supreme Court’s decision.
The case is a key one, because if the regulation is ultimately struck down, many people will be ineligible for the premium tax credit and won't get hit with a penalty tax for not getting insurance. Furthermore, the employer mandate (which requires employers with more than 50 employees to purchase insurance for their employees or pay a penalty) will be triggered against fewer employers because employers only become liable for the employer mandate penalty when one of their employees receives a premium tax credit through an exchange. The employer mandate/penalty applies to firms with 100 or more full-time employees beginning in 2015, and 50 or more full-time employees beginning in 2016. Politicians of all stripes agree that an invalidation of the PATC would likely kill-off the ACA because it is the linchpin to the entire law.
Patient Choice, Affordability, Responsibility and Empowerment (CARE) Act
In 2014, the CARE Act was offered as legislation designed to repeal and replace the ACA. In early 2015, a revised version of the legislation was introduced by Senators Burr (R-NC), Hatch(R-UT) and Representative Upton (R-MI). Representative Upton is the Chair of the House Energy and Commerce Committee which is a committee that deals with health care matters. Senator Hatch chairs the Senate Finance Committee, a key committee on health care issues due to the tax provisions involved.
The legislation still in the formation stages and hasn’t been formulated into a bill yet, but some details are available. The CARE Act (or whatever is becomes) is likely to become a focal point of the 2016 Presidential Campaigns and, if the Republicans hold the House and Senate and win the Presidency, it is very likely that the CARE Act (or substantial provisions thereof) will become law.
The CARE Act repeals the ACA in its entirety (and the associated $1.2 billion of tax increases that fall, disproportionately, on the middle class), except for the ACA’s Medicare provisions, and replaces it.
The following is a basic summary of the primary tax provisions of the Care Act:
- Included is a means-tested tax credit that could be used to buy insurance or be deposited in a health savings account;
- Means-tested tax credits for persons on Medicaid which can be used to buy private health coverage. Basically, the tax credit is maximized for persons with income less than twice the poverty level at $3,190 and is phased out by the time a person has income at three times the poverty level.
- The tax credits would be funded by a reform to the tax exclusion for employer-sponsored health insurance (caps the value of the employer tax exclusion at $12,000 for an individual and $30,000 for a family, and adjusts the amounts for inflation).
- Eliminates the ACA’s “Cadillac tax” which, beginning in 2018, imposes a 40 percent tax on insurance plans having a value exceeding $10,200 for an individual and $27,500 for a family;
- A provision that assures that all persons could obtain health coverage even with a pre-existing condition if at least catastrophic health insurance coverage is maintained (after a transition period);
- Repeal of the individual mandate;
- A provision allowing the PATC to be used to acquire private health insurance;
- Repeal of the expansion of Medicaid under the ACA and allow the use of tax credits comparable to a Clinton-era proposal;
- Tort reform with respect to medical liability cases;
- A provision requiring hospitals that accept Medicare to provide information about the payment rates by both uninsured and insured patients; and
- A provision allowing insurance companies to compete across state lines
The U.S. Supreme Court opinion on the I.R.C. §36B issue will be decided by late June. The outcome of that case will weigh heavily on the future of the ACA. If the Court’s opinion goes against the government, at least a plan is in place to make sure that taxpayers that have used the PATC can continue to use it, but in a different manner. Whether the President would sign such legislation remains to be seen. But, at least a plan is in place if the U.S. Supreme Court upholds the language of the ACA and invalidates the Treasury Regulation allowing the PATC for taxpayers that acquired insurance from a federal exchange. That could have an impact on the Court’s analysis of the issue. But, if the Court were to uphold the Treasury Regulation by holding the “an Exchange established by the state” can reasonably be interpreted to mean “an Exchange established by the state or federal government” that would allow the IRS carte blanche authority to rewrite any tax statutory provision. That would be very problematic for practitioners and taxpayers.
 While President Obama stated that the law would result in an annual decrease in health insurance premiums of $2,500, that turned out not to be true. Thus, the PATC is critical to making health insurance more affordable.
 758 F.3d 390 (D.C. Cir. 2014).
 King v. Burwell, 759 F.3d 358 (4th Cir. 2014).
 State of Oklahoma v. Burwell, No. CIV-11-30-RAW (E.D. Okla. Sept. 30, 2014).
 King v. Burwell, 190 L. Ed. 2d 355 (U.S., Nov. 7, 2014)
 Halbig v. Burwell, No. 14-5018, 2014 U.S. App. LEXIS 23434 (D.C. Cir. Nov. 12, 2014).
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.