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ACA and Healthcare Reform

4th Circuit Finds ACA Tax Credit Proper Under IRS Interpretation

RICHMOND, Va. — (Mealey’s) Patient Protection and Affordable Care Act (ACA) language governing whether individuals who enroll through the federal exchange are entitled to tax credits is ambiguous enough to defer to the Internal Revenue Service’s interpretation, a Fourth Circuit U.S. Court of Appeals panel held July 22 (David King, et al. v. Sylvia Matthews Burwell, et al., No. 14-1158, 4th Cir. [enhanced opinion available to subscribers]). 

(This story is an excerpt from Mealey's Affordable Care Act Report.  For information on how to subscribe to this new monthly report, please contact your LexisNexis account representative or call 800-223-1940.) 

Virginia residents David King, Douglas Hurst, Brenda Levy and Rose Luck sued Kathleen Sebelius, former secretary of Health and Human Services; the Department of Health and Human Services (DHHS); Jacob Lew, secretary of the Treasury; the Department of Treasury; Daniel Werfrel, acting commissioner of the IRS; and the IRS in the U.S. District Court for the Eastern District of Virginia, saying the IRS rule squarely contravenes the express intent of the ACA, ignoring the clear limitations that Congress imposed on the availability of the federal subsidies.  Further, the IRS promulgated the regulation without any reasoned effort to reconcile it with the contrary provisions of the statute, the plaintiffs say. 

Sebelius resigned and was replaced by Sylvia Matthews Burwell. 

The plaintiffs allege that the ACA includes provisions for the creation of state health insurance exchanges, which are mechanisms "for organizing the health insurance marketplace to help consumers and small businesses shop for coverage in a way that permits easy comparison of available plan options based on price, benefits and services, and quality."  The ACA required each state to establish an exchange by Jan. 1, 2014, but also provided that if a state opts out of the exchange, the federal government would establish and operate an exchange within the state. 


The ACA encourages states to establish exchanges with a variety of incentives, chiefly the premium-assistance subsidy for state residents purchasing individual health insurance through state-established exchanges.  Thirty-four states declined to establish exchanges, making the federal government responsible for establishing exchanges in those states. 

To address this issue, the IRS promulgated regulations expanding the availability of subsidies.  The IRS rule states that subsidies shall be available to anyone “enrolled in one or more qualified health plans through an Exchange” and defines “exchange” to mean “a State Exchange, a regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.”  The rule means that premium-assistance subsidies are available in all states, including those states that declined to establish their own exchanges. 

Virginia opted not to establish its own insurance exchange.  The plaintiffs are not eligible for employer- or government-sponsored health coverage that satisfies the individual mandate.  Absent the IRS ruling, the plaintiffs would be entitled to a certificate of exemption from the individual mandate penalty for 2014 because the cheapest bronze plan approved for sale to them on the federal exchange in Virginia would cost more than 8 percent of their individual household incomes.  But because the IRS rule makes them eligible for a subsidy that would reduce their out-of-pocket cost to below that figure, they will be disqualified from that otherwise-applicable exemption and subject to the individual mandate penalty.  As a result, they say, they will be forced to pay a penalty or purchase more insurance than they want.  The plaintiffs say they are injured by the IRS rule because it has the effect of subjecting them to monetary sanctions or requiring them to alter their behavior to avoid those sanctions.  Either way, the plaintiffs say, their financial strength and fiscal planning are immediately and directly affected by the exposure and/or liabilities. 


Judge James R. Spencer held that the plaintiffs have standing because their economic injury is real and traceable to the IRS rule.  However, Judge Spencer rejected their claims, saying courts have a duty to construe statutes as a whole.  Under this standard, the plaintiffs’ reading of ACA Section 36B grows weak when other sections of the ACA are taken into account, Judge Spencer said.  Under the plaintiffs’ interpretation, Section 36B(f) would be superfluous with respect to federally facilitated exchanges under Section 1321 because such exchanges would not be authorized to deliver tax credits, Judge Spencer said. 

The plaintiffs appealed. 


A Fourth Circuit panel first found that the plaintiffs had suffered economic injury sufficiently traceable to the IRS rule. 

Turning to the merits, the panel said that while there is “a certain sense to the plaintiffs’ position,” the government has “the stronger position, although only slightly.” 

“Given that Congress defined ‘Exchange’ as an Exchange established by the state, it makes sense to read § 1321(c)’s directive that HHS establish ‘such Exchange’ to mean that the federal government acts on behalf of the state when it establishes its own Exchange,” the panel said.

But the ambiguity in the statute, as well as its history, makes reaching a convincing conclusion impossible, the panel said.  The plain language of the statute and its context are open to two interpretations and make reading Congress’ intent impossible, the panel said. 


Given the ambiguity, one must accept the IRS’s interpretation of the statute, the goal of the legislation and its related mission, the panel said. 

The IRS interpretation making tax credits widely available advances the ACA’s goal of making affordable insurance coverage available while avoiding adverse selection issues and the destruction of the ACA, the panel said. 

“The IRS Rule avoids both these unforeseen and undesirable consequences and thereby advances the true purpose and means of the Act,” the panel said.  Deference to that reading is appropriate, the panel said. 

The panel rejected the plaintiff’s argument that the IRS rule was coercive and that HHS and the IRS should resolve any ambiguity.  The ACA clearly gives the IRS such powers, the panel said. 

Judge Roger L. Gregory wrote for the court, joined by Judges Stephanie D. Thacker and Andre M. Davis.  


In concurrence, Judge Davis said he believed the ACA mandated credits for all individuals, regardless of which exchange they used to obtain that insurance. 

Early in the day, a panel of the District of Columbia U.S. Circuit Court of Appeals struck down the tax credits in Halbig v. Burwell (D.C. Cir., No. 14-5018) [an enhanced version of this opinion is available to subscribers]. 

Jonathan Berry, Michael A. Carvin, Walter D. Kelley Jr. and Jacob M. Roth of Jones Day in Washington, D.C., represent the plaintiffs.  Joel McElvain of the U.S. Department of Justice in Washington and Elizabeth Catherine Wu of the U.S. Attorney’s Office in Richmond represent the government. 

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