U.S. Supreme Court Holds for Subsidies; Affordable Care Act Survives

This morning, the U.S. Supreme Court handed down a 6-3 decision in King v. Burwell (U.S. 2015), a critical Affordable Care Act (Act) case, affirming an IRS ruling that subsidies are available in states where consumers rely on a federally facilitated health insurance marketplace (Federal Exchange) and upholding an important aspect of the Act.

At issue was a provision of the Act allowing the federal government to pay subsidies enabling people to afford insurance bought through “an Exchange established by the State.” However, many states have not set up a state-based health-insurance marketplace (State Exchange), and the Act provides for the federal government to establish Federal Exchanges in these states to ensure a marketplace exists. Seizing on the words, “established by the State,” the petitioners in this case argued that Americans not using State Exchanges were technically ineligible for the subsidies.

Acknowledging the ambiguity of the phrase “an Exchange established by the State,” the Court determined the petitioners’ interpretation would render the Act unworkable by making tax credits unavailable and exempting too many individuals from coverage. “Petitioners’ plain-meaning arguments are strong,” Justice Roberts wrote, “but the Act’s context and structure compel the conclusion that [the IRS interpretation] allows tax credits for insurance purchased on any Exchange created under the Act. Those credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid.”

The Act contains tax penalties for employers with 50 or more full-time or full-time-equivalent employees who fail to meet the obligations of the Employer Mandate, which generally requires that they offer “affordable,” minimum-value medical coverage to full-time employees or face penalties. However, these are only triggered when full-time employees purchase coverage through an Exchange and receive a tax credit. Had the Court held that premium subsidies could not be offered through Federal Exchanges, then many employers may not have been at risk for incurring a tax penalty under the Employer Mandate in the 34 states with no State Exchange. The Court’s decision today avoids that outcome.

As a result of today’s decision, employers should continue to prepare for full implementation of the Employer Mandate, which begins in January 2016 (transitional relief delayed the effective date of the employer mandate for applicable large employers with between 50 and 99 employees and provided certain temporary relief for employers with over 100 employees).     

Chief Justice Roberts authored the opinion in which Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan joined. Justice Scalia filed a spirited dissent in which Justices Thomas and Alito Joined.