Court rules IRS illegally implemented tax credits
In a significant decision issued Tuesday, the United States Court of Appeals for the District of Columbia ruled that the IRS’s implementation of a significant portion of the Affordable Care Act (ACA) was illegal. The case is called Halbig v Burwell, No. 14-5018. The DC Court’s opinion was very much in line with the interpretation of the ACA urged by Michigan Attorney General Bill Schuette, who submitted a supporting brief on behalf of the state of Michigan in cooperation with the states of Kansas and Nebraska.
What the DC Court said was that the clear and unambiguous language of the ACA states that certain tax credits are available only to people who receive their health insurance through a “health exchange” created by one of the 50 states. These tax credits serve as a taxpayer-funded subsidy to those who buy insurance through the exchange. Additionally, the existence of these tax credits affects the penalties that the IRS uses to enforce the insurance mandate for both individuals and businesses. For individuals, the tax credit makes it more likely that a person who does not buy a qualified insurance plan will face a financial penalty. For businesses, the penalty kicks in whenever a business that employs more than 50 people has an employee who receives this tax credit. If the tax credit is not available, then there can be no penalty for the employer.
The states made a choice whether or not to create these exchanges, and Michigan’s legislators voted not to create an exchange but rather let the federal government create one for them. As Attorney General Schuette argued, this was a conscious choice because it excused Michigan businesses and some Michigan individuals from incurring the ACA’s insurance mandate penalties. As the attorneys general stated in their brief:
“[Michigan and the other states] seek to protect their decision to opt out of the benefits and burdens associated with establishing state-run marketplaces for selling qualified health insurance plans under the [ACA]. The Act expressly gives States this option. In States that opt out, federally funded premium assistance tax credits are not available to individuals who purchase insurance through the required fallback federal marketplaces. In turn, large employers (including States and their political subdivisions) are not subject to the employer mandate. But the Internal Revenue Service (“IRS”) has undermined the States’ policy choice by extending federal premium assistance subsidies to them anyway. As a result, the regulations expose otherwise-exempt individuals to the individual mandate and trigger the employer mandate in States—including [Michigan]—that properly chose to avoid these additional regulatory burdens.”
The DC Court said that under the plain wording of the statute, the federally created exchange did not qualify its participants to receive tax credits, and that many of the penalties found in the law do not apply to Michigan and the other states that did not create exchanges. The court said that for them to interpret the statute as the IRS and President Obama want them to do would be rewriting the legislation — which is not the job of the courts.
Does that mean that the subsidy tax credits are not available in Michigan, or that Michigan’s business and residents do not need to worry about the insurance mandate penalties? The answer isn’t clear yet.
In striking down the IRS’s interpretation, the DC Court of Appeals sent the matter back to the lower district court to issue an order in accordance with the appellate court ruling. Whether the IRS’s policy of offering credits to states that did not create exchanges will continue at least temporarily, or whether it will be immediately ended, will be determined by the lower court, unless the matter is first heard by the entire DC Court of Appeals. The makeup of the DC Court of Appeals was recently altered drastically by the addition of three of President Obama’s appointees, after the Senate took the extraordinary step of ending the possible use of the filibuster against appellate court appointees.
To further cloud the outlook, another federal circuit, on the same day, ruled that the same IRS interpretation was acceptable because the ACA, as written, was ambiguous. The Fourth Circuit, which covers the Carolinas, Virginia, West Virginia and Maryland, held that the IRS has the ability to clarify matters that Congress left ambiguous.
The entire matter may require a decision by the Supreme Court. However, we may find out before then whether or not the current IRS interpretation of extending the tax credits to states like Michigan will continue or has been ended. This depends on what happens in the DC Circuit either at the district court level, or at a sitting of the entire DC Circuit Court of Appeals.