Tax Implications of Recent Supreme Court Blockbuster Decisions
In the final week of June, the Supreme Court rolled out a series of highly-anticipated decisions. As these blockbuster rulings also have tax implications, we will address them in separate blog postings.
King vs. Burwell – Obamacare Lives on After Supreme Court Ruling. For the second time, the highest court in the land has upheld a key provision of the Affordable Care Act.
The ruling holds that the Affordable Care Act authorized federal tax credits for eligible Americans living not only in states with their own exchanges but also in the 34 states with federal marketplaces. It staved off a major political showdown and a scramble in states that would have needed to act to prevent millions from losing health care coverage. See details of the ruling below.
The Supreme Court decision upholding Obamacare subsidies creates some stability, but neither the political or fiscal future of the law is definite. Following are details and tax implications of the recent ruling.
King v. Burwell, 2015-1 ustc ¶50,356. After months of waiting, the U.S. Supreme Court announced its decision on the fate of the Code Sec. 36B premium assistance tax credit on June 25. The Court held that enrollees in both federally-facilitated Marketplaces and state-run Marketplaces can claim the credit, which helps offset the cost of health insurance. The decision leaves in place the current IRS regulations on the credit and the process for administering and claiming the credit.
Code Sec. 36B credit
The Affordable Care Act (ACA) created both the Marketplaces (previously called Exchanges) and the Code Sec. 36B credit. The Marketplaces connect eligible individuals with health insurance issuers. Some states have set up their own Marketplaces. In other states, the Marketplaces are operated by the federal government. Qualified enrollees may take advantage of the Code Sec. 36B credit if their incomes are within certain guidelines and they satisfy other requirements. When the IRS issued regulations on the Code Sec. 36B credit, the agency made the credit available to enrollees in state-run Marketplaces and federally-facilitated Marketplaces.
This decision by the IRS sparked controversy. A number of law suits were filed challenging the IRS’s regulations. According to the challengers, the ACA limited the availability of the tax credits to enrollees in state-run Marketplaces. Enrollees in federally-facilitated Marketplaces could not claim the credit. In the King case, both a federal district court and the Fourth Circuit Court of Appeals ruled against the challengers. The Supreme Court agreed to take up the case and heard oral arguments in March of this year.
Note. Not all of the challenges to the Code Sec. 36B regulations were unsuccessful in the lower courts. In a case very similar to King, the Court of Appeals for the District of Columbia Circuit struck down the IRS regulations as contrary to the plain language of the ACA. The split among the circuits left the outcome of the controversy far from certain.
Supreme Court’s decision
Chief Justice John Roberts delivered the Court’s decision in King. “Congress based the Affordable Care Act on three major reforms: first, the guaranteed issue and community rating requirements; second, a requirement that individuals maintain health insurance coverage or make a payment to the IRS; and third, the tax credits for individuals with household incomes between 100 percent and 400 percent of the federal poverty line. In a State that establishes its own Exchange, these three reforms work together to expand insurance coverage. Under petitioners’ reading, however, the Act would operate quite differently in a State with a Federal Exchange. As they see it, one of the Act’s three major re-forms – the tax credits – would not apply,” Roberts wrote. This outcome, the Court found, was not what Congress intended.
“The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral. It is implausible that Congress meant the Act to operate in this manner,” Roberts added.
Three justices dissented in King. They would have found in favor of the challengers. “The Congress that wrote the Affordable Care Act knew how to equate two different types of Exchanges when it wanted to do so,” the dissent wrote. According to the dissent, the government did not show why the Court should have departed from the language of the ACA.
Since enactment of the ACA, the IRS and the U.S. Department of Health and Human Services (HHS) have issued instructions and guidance for enrollees in Marketplace coverage. The Marketplaces make initial determinations of eligibility for the credit. The IRS administers how enrollees claim the credit when they file their federal income tax returns. According to HHS, nearly 80 percent of all enrollees in Marketplace coverage have been eligible and have used the Code Sec. 36B credit to offset the cost of health insurance. The decision by the Supreme Court in King leaves the IRS regulations on Code Sec. 36B undisturbed. Going forward, nothing is expected to change for enrollees.
If you have any questions about the Code Sec. 36B credit and/or the Supreme Court’s decision in King, please contact our Warady & Davis business advisors at 847-267-9600.