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Premium Tax Credits Offered Through State Health Insurance Exchanges that are Federally Facilitated

Posted on August 2, 2012 | No Comments

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Key Developments
Implementation Briefs

By Nancy Lopez and Sara Rosenbaum


Previous updates have summarized final IRS regulations implementing provisions of the Affordable Care Act that provide premium tax credits to help low- and moderate-income individuals and families buy affordable health insurance through State health insurance Exchanges. The IRS regulations provide that premium assistance tax credits are available to all eligible state residents, regardless of whether their state Exchange is state-operated or federally facilitated. This Update examines a dispute that that has arisen regarding the availability of premium assistance tax credits in federally facilitated state Exchanges.


Section 1401 of the Patient Protection and Affordable Care Act (ACA) adds § 36B to the Internal Revenue Code, which authorizes the establishment of premium assistance tax credits for eligible people. In describing who is eligible for tax credits, § 36B describes eligible individuals as those “enrolled in a [qualified health plan] through an Exchange established by the state under section 1311” (emphasis added).

In addition to § 1311, which describes state-operated health insurance Exchanges, § 1321 of the ACA gives states the option to utilize the federal government’s assistance in the operation of their Exchange. Specifically, § 1321 provides that if a state elects not to establish an Exchange or will not be ready to operate its Exchange by 2014, “the Secretary shall. . . establish and operate such Exchange within the state. . .” (emphasis added).

States have until November 2012 to determine whether they will operate their own Exchange under § 1311 or opt for federal assistance under § 1321. Several states (Florida, New Hampshire, Wisconsin, South Carolina, Texas, Louisiana, and Kansas) already have indicated that they will not establish and operate their own Exchange, meaning that they have elected to rely on federal administration assistance. But many states also are expected to seek help under § 1321. These states in fact desire to operate their Exchange but need assistance in doing so. Thus, the group of states covered by § 1321 is far broader than only states that do not want to operate their own Exchange; it potentially includes states that desire their own Exchange but need help. To this end, CMS guidance makes clear that states can use the federal government simply as a partner rather than as a facilitator. To this end, states may select a “Partnership” Exchange in which Exchange duties are shared. Alternatively, if a state so chooses, the federal government will administer all state Exchange functions and will coordinate its operations with other state programs and agencies.

Thus, the ACA gives states basic options: they can establish and operate their own Exchange; alternatively, they may choose to have their Exchanges operated on their behalf by the Secretary, either because they elect not to operate its own Exchange or because they are unable to meet the ACA’s deadlines without technical support. This operational choice is similar to the choice available to self-insuring public and private employers: they can administer their own plans or alternatively, use a health benefits company to administer its self-insured plan. Congress provided this choice to states for different reasons. First, under principles of federalism, Congress wanted to assure national availability of health insurance in a state-administered system, while still giving states considerable flexibility regarding how to proceed. Second, Congress wanted to assure that regardless of any particular state’s desire or capabilities, state residents, in a national system, always would have access to affordable coverage through an Exchange.

In addition to the link between § 1311 and § 1321 as they relate to § 1401[1] premium assistance tax credits, another provision of the ACA indicates that Congress expected that premium tax credits will be available to the residents of all 50 states, regardless of whether their state operates its own Exchange or elects to maintain a federal Partnership or a federally facilitated Exchange. Specifically, ACA § 1401, as amended by the Health Care and Education Reconciliation Act (Pub. L. 111-152), requires that Exchanges report premium tax credit information to the IRS, and this reporting requirement extends to both state operated and federally facilitated Exchanges.

IRS regulations implementing § 1401 define the term “Exchange” as the term is defined under HHS regulations (45 C.F.R § 155.20); the IRS definition includes both state operated Exchanges and Exchanges operated on the state’s behalf by the federal government. In adopting this all-inclusive meaning for state Exchanges (i.e., both Exchanges operated by states and those operated by the federal government at the state’s choice) the IRS indicated as follows:

The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credits to State Exchanges. Accordingly the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.[2]

Analyses of Premium Assistance Tax Credits in Federally Facilitated Exchanges.

In recent weeks, several analyses have emerged regarding the availability of tax credits in federally facilitated Exchanges.

Adler and Cannon. An analysis authored by Jonathan Adler and Michael Cannon argues that the language of the Act, specifically § 1401, limits premium tax credit availability to Exchanges that are “established by the State under Section 1311.” They further argue that a state’s option to use federal administration assistance is found in an entirely separate section of the law, § 1321. Because Section 1401 does not refer to both §1321 and 1311, they argue, the plain meaning of the Act is that premium tax credits are not available in federally facilitated Exchanges operating under § 1321 rather than § 1311. The result of their argument is that no assistance would be available to state residents living in states that not only do not desire to operate a state Exchange but that affirmatively want to operate a state Exchange but cannot meet the deadlines and seek federal assistance. This is because § 1321 encompasses both types of situations.

The authors argue that this limited reading regarding the availability of premium tax credits is the correct one, because despite the availability of federal assistance under § 1321, Congress nonetheless used this type of restriction as a means of incentivizing states to establish and operate their own Exchanges without federal assistance. The authors further argue that the IRS definition of which types of Exchanges qualify for premium tax credits is inconsistent with the text of the ACA and furthermore, that normal principles of administrative law that normally would require courts to defer to the IRS interpretation do not apply because Congress did not expressly authorize the IRS to interpret the law.

Solomon. A separate analysis by Judith Solomon of the Center on Budget and Policy Priorities argues that the text of the law actually is clear. She points out that § 1321, in referencing the availability of federal assistance, enables states to seek this help for “such” Exchange (that is, the state’s Exchange) that the state otherwise might have established and operated on its own under § 1311. She also argues that in requiring all Exchanges to report on the premium assistance they furnish, the law is clear that premium assistance tax credits are available in all Exchanges, whether federally or state operated. In her view, federal administration is simply a “substitute” for a state Exchange and is designed to perform all state Exchange functions, including determining eligibility for, and the amount of, federal premium tax credits. This view is compatible, she argues, with the fundamental purpose of the ACA, namely, to make affordable insurance available to nearly all Americans, not only those in states that elect to operate their own Exchanges without federal assistance.

Jost. In a recent Health Affairs blog, as well as in earlier posts, Professor Timothy Jost argues that the legislative history makes clear that Congress assumed that premium tax credits would be available in state Exchanges, whether state operated or federally facilitated. He also notes that the IRS has congressional authority to interpret the meaning of the law, including the relevant ACA provisions. He further points out that financial estimates of the ACA’s costs, which are prepared contemporaneously by the Congressional Budget Office — and which thus are guided by the legislative drafters themselves — assume that premium tax credits will be available in all state Exchanges, regardless of whether state Exchanges are state-operated or federally facilitated. Professor Jost also points out that HCERA, enacted immediately following passage of the ACA, revises and clarifies the availability of premium assistance tax subsidies in all state Exchanges, whether state operated or federally facilitated.

Next Steps in the Debate Over the Availability of Premium Tax Credits in Federally Facilitated Exchanges

Various outcomes are possible:

Congress could remain silent and allow the matter proceed to the courts. Congress could remain silent, which would leave the IRS interpretation in place until it is formally challenged in court. Where court challenges are concerned, however, the principles that guide the courts mean that the challenge can be brought only by someone who is actually affected by the IRS ruling. Since individuals have the option to apply or not apply for credits, the IRS interpretation does not harm them; the IRS decision means simply that if they desire to do so, residents of states with federally facilitated Exchanges will be able to apply for and receive premium tax credits if eligible. Another group, however, is employers with 50 employees or greater in states with federally facilitated Exchanges that face a payment obligation if their employees do not have access to affordable employer health insurance and instead seek coverage through the state Exchange and qualify for premium tax credits. This group would experience the type of impact that would be necessary to give them the right to proceed in court and the courts, the power to hear their claim. The earliest that this might happen would be 2015, when the first employer payments would be assessed. This is because, according to Professor Jost, as well as Professor Adler and Michael Cannon, the Tax Anti-Injunction Act (whose meaning was discussed at length by the United States Supreme Court in NFIB v Sebelius) presumably would bar a challenge to the law until the employer actually had to pay the tax.

Congress could clarify the availability of tax credits in federally facilitated Exchanges. Congress could take additional steps to clarify its intent that premium tax credits will be available to all state residents, regardless of whether a state Exchange is state-operated or federally facilitated. Congress might pass a resolution to this effect or add a clarifying provision to another piece of legislation. Congress might do this given the large number of states that affirmatively want to operate their own state Exchanges but must seek at least short-term help under §1321 and yet risk the loss of premium assistance tax credits if litigation to stop payment of such credits is successfully mounted in the state.

Congress could clarify that tax credits are not available in federally facilitated Exchanges. Congress could clarify that tax credits are not available in federally facilitated Exchanges, in accordance with the Adler and Cannon analysis. In this vein, Representatives Scott DesJarlais (R-TN) and Phil Roe (R-TN) have introduced a Joint Resolution (H.J. Res 112) disapproving of the IRS final rule and requesting that the rule have no force or effect. They argue that the IRS does not have the authority to revise the ACA or fix any drafting error.[3]

The IRS could revise its definition in the future. It is possible that a future IRS ruling could revise its initial regulation to bar the availability of tax premium subsidies in federally facilitated Exchanges. Such a change of agency position would need to be accompanied by an analysis that explains why the agency is revising its position on the matter and offers evidence to support the changes it proposes to make. Because the revised position would be a significant change in a federal regulation governing billions of dollars in federal payments, the change in agency position would need to be effectuated through a formal notice and public comment process, and final changes would have to be supported by the agency’s rulemaking record.

[1] 26 C.F.R. §1.36B-1.
[2] 77 Fed. Reg. 30378 (May 23, 2012).
[3] Adler, J. & Cannon, M., Taxation without Representation: The Illegal IRS Rule to Expand Tax Credits under the PPACA, Case Research Paper Series in Legal Studies, Working Paper, July 2012.
26 C.F.R. §1.36B-1.
77 Fed. Reg. 30378 (May 23, 2012).
Adler, J. & Cannon, M., Taxation without Representation: The Illegal IRS Rule to Expand Tax Credits under the PPACA, Case Research Paper Series in Legal Studies, Working Paper, July 2012.

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