Premium Tax Credits and Federal Health
Insurance Exchanges: Questions and Answers
Jennifer A. Staman
Legislative Attorney
Erika K. Lunder
Legislative Attorney
Daniel T. Shedd
Legislative Attorney
December 19, 2014
Congressional Research Service
7-5700
www.crs.gov
R43833
Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
Summary
Legal challenges that may have a substantial impact on the implementation and operation of the
Patient Protection and Affordable Care Act (ACA) concern whether premium tax credits are
available for millions of individuals participating in federally administered health insurance
exchanges. These credits, which became available in 2014, are intended to help individuals pay
the premiums for private health plans offered through the insurance exchanges established under
the act. In addressing who may receive this credit, ACA refers to individuals who are “enrolled in
[a plan] through an exchange established by the State” under ACA. Following the issuance of IRS
regulations that allow for these credits to be available in both state and federally run exchanges,
lawsuits were filed claiming that the language of ACA prohibits the credits from being available
to individuals who obtain coverage in federally run exchanges. The Supreme Court has decided to
weigh in on this issue in King v. Burwell. While the Supreme Court has not yet set a date for oral
arguments in the King case as of the date of this report, it is expected that the case will be argued
sometime in March, and a decision would be rendered by the end of the Court’s term in June
2015 at the latest.
This report provides background on provisions of ACA relevant to this issue. It then answers
questions concerning the legal challenges and potential implications of the Court’s decision in
King.
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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
Contents
Introduction ............................................................................................................................... 1
I. Background ............................................................................................................................ 1
How does the premium tax credit interact with the individual and employer
mandates? ......................................................................................................................... 3
II. Litigation over Premium Tax Credits and Federally Facilitated Exchanges ......................... 4
What are some of the arguments made for and against whether the statutory text
of ACA permits premium tax credits in federally facilitated exchanges? ........................ 4
What lawsuits have been filed on this issue, and what is their current status? ................... 6
How did the plaintiffs have standing to sue?....................................................................... 7
Why were the taxpayers not required to file a tax refund suit? ........................................... 8
Cases addressing the issue have relied on the Chevron test. What is that? ......................... 9
If the King and Halbig courts were both applying Chevron, how did they reach
different results? ............................................................................................................. 10
What can we expect from the Supreme Court in King regarding a Chevron
analysis? ......................................................................................................................... 11
III. Potential Implications of the Court’s Decision in King ..................................................... 12
How many exchanges are considered to be run by the federal government and
could be impacted by the Supreme Court’s decision? .................................................... 12
If the Supreme Court upholds the IRS regulations at issue in King, what happens? ........ 12
If the Supreme Court finds that premium tax credits are unavailable in King, what
happens? ......................................................................................................................... 13
If the Court strikes down the IRS regulations at issue in King, what are some of
the ways in which the operation of ACA could be affected? ......................................... 13
If the Supreme Court in King finds that premium tax credits cannot be offered in
federally facilitated exchanges, what does a state have to do to “establish an
exchange” and continue offering premium tax credits? ................................................. 15
If the Supreme Court rules in favor of the challengers, would taxpayers enrolled
in plans in federal exchanges be forced to pay back any credits they have
claimed? ......................................................................................................................... 16
Could a ruling in the King case have consequences for other tax laws or credits? ........... 17
Contacts
Author Contact Information........................................................................................................... 18
Congressional Research Service
Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
Introduction
In November 2014, the Supreme Court agreed to review King v. Burwell,1 a case addressing an
important issue of implementation of the Patient Protection and Affordable Care Act (ACA).2 The
lawsuit involves the provision of premium tax credits, which became available in 2014 and are
intended to help certain individuals pay their premiums for private health insurance plans offered
through insurance “exchanges” established under ACA.3 At issue in King and other similar legal
challenges is whether the statutory language of ACA allows the IRS to provide these credits to
residents of states that declined to establish health insurance exchanges, where the state’s
exchange is instead facilitated by the federal government. The issue is considered a significant
one, given that the majority of states have a federally facilitated exchange,4 and millions of
individuals receive these credits in order to assist with the purchase of health insurance. This
report provides background on relevant provisions of ACA. It then answers questions concerning
the litigation and potential implications of the Court’s decision in King.
I. Background
As part of ACA’s intended goal of improving accessibility to health coverage, the act provides for
the establishment of “exchanges,” structured marketplaces for the sale and purchase of health
insurance.5 Section 1311 of ACA specifies that each state must establish an American Health
Benefit exchange that is either a state governmental agency or a nonprofit entity, in order to
provide health coverage to qualified individuals and employers.6 However, a separate section of
ACA, Section 1321, generally provides that if a state does not elect to establish an exchange, or if
the Secretary of Health and Human Services (HHS) determines that an electing state will not have
an operational exchange, or has not taken certain specified actions, the Secretary must establish
and operate an exchange within the state.7
In order to assist individuals in purchasing health insurance in an exchange, Section 36B of the
Internal Revenue Code, created by ACA, provides that certain lower and moderate-income
taxpayers may receive a refundable tax credit that is intended to help pay the cost of the health
insurance premium.8 A taxpayer may claim the credit at the end of the year when filing an income
1 759 F.3d 358, (4th Cir. 2014), cert. granted, 83 U.S.L.W. 3286 (U.S. Nov. 7, 2014) (No. 14-114). While the Supreme
Court has not yet set a date for oral arguments in the King case as of the date of this report, it is expected that the case
will be argued sometime in March, and a decision would be rendered by the end of the Court’s term in June 2015 at the
latest.
2 P.L. 111-148 (2010). ACA was amended by the Health Care Education and Reconciliation Act (HCERA) of 2010,
P.L. 111-152 (2010). These acts will be collectively referred to in this report as “ACA.”
3 26 U.S.C. § 36B. Exchanges are also referred to as “marketplaces.” See, e.g., Department of Health and Human
Services, The Center for Consumer Information & Insurance Oversight, Health Insurance Marketplaces, available at
http://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Marketplaces/index.html.
4 For more information, see footnotes 82-85 and accompanying text.
5 P.L. 111-148, § 1301 et seq. (codified at 42 U.S.C. § 18021 et seq.).
6 42 U.S.C. § 18021(b)(1), (d)(1). ACA also provides for the creation of small business health option program (SHOP)
exchanges that are directed at the small group market. These exchanges will not be addressed in this report. For more
information on SHOP, see CRS Report R43771, Small Business Health Options Program (SHOP) Exchange, by Annie
L. Mach and Joy M. Grossman.
7 P.L. 111-148, § 1321(c) (codified at 42 U.S.C. § 18041(c)).
8 26 U.S.C. § 36B.
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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
tax return or claim an estimated credit during the year in the form of advance payments made
directly to the insurer and applied towards the premium.9
In general, there are two principal factors that affect whether a taxpayer will be eligible for a
premium tax credit: (1) whether the taxpayer meets the income and other requirements for the
credit;10 and (2) whether any months during the taxable year qualify as “coverage months” for the
taxpayer. With respect to this second requirement, in order for a taxpayer to receive a health
insurance premium credit under ACA, at least one month in the year must qualify as a coverage
month for the taxpayer.11 The term “coverage month” in Section 36B means the following:
[W]ith respect to an applicable taxpayer, any month if—
(i) as of the first day of such month the taxpayer, the taxpayer’s spouse, or any dependent of
the taxpayer is covered by a qualified health plan … enrolled in through an exchange
established by the State under section 1311 of the Patient Protection and Affordable Care
Act …12
In addition, the amount of the premium tax credit is equal to the sum of the “premium assistance
credit amount” for each coverage month the taxpayer experiences during the taxable year. The
premium assistance credit amount is defined as the amount equal to the lesser of
(A) the monthly premiums for such month for 1 or more qualified health plans offered in the
individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any
dependent … of the taxpayer and which were enrolled in through an exchange established
by the State under 1311 of the Patient Protection and Affordable Care Act, or
(B) the excess (if any) of—
(i) the adjusted monthly premium for such month for the applicable second lowest cost
silver plan with respect to the taxpayer, over
(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s
household income for the taxable year.13
9 42 U.S.C. § 18082. When filing their income tax returns at the end of the year, taxpayers who claimed an estimated
credit must calculate the amount of credit they are actually due and then reconcile that amount with the amounts
received as advanced payments—this will then affect the size of their refund or tax owed. 26 U.S.C. § 36B(f).
10 In order to be eligible for a premium credit, a taxpayer’s household income must be between 100% and 400% of the
federal poverty line (FPL) for the taxpayer’s family size. 26 U.S.C. § 36B(c)(1). Individuals with income below 100%
of the FPL are ineligible for a premium credit, but may qualify for assistance under Medicaid. An exception is made for
lawfully present aliens with income below 100% of the FPL, who are ineligible for Medicaid on account of their alien
status. 26 U.S.C. § 36B(e). These taxpayers will be treated as though their income is exactly 100% of FPL for purposes
of the credit.
11 26 U.S.C. § 36B(b)(1). Any month during which an individual is eligible for other minimum essential coverage
would not be counted as a coverage month. Examples of other minimum essential coverage include, but are not limited
to, affordable employer provided coverage, Medicare, and Medicaid.
12 26 U.S.C. § 36B(c)(2) (emphasis added).
13 26 U.S.C. § 36B(b)(2)(A)-(B) (emphasis added). It should be noted that the reference to the “silver plan” in
subsection (B) refers to one that is offered in the “same exchange” as plans described in subsection (A). 26 U.S.C. §
36B(b)(3)(B).
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Following passage of ACA, it was argued that, based on this language in Section 36B (i.e., “an
exchange established by the State under section 1311 of [ACA],”) premium tax credits are not
available to taxpayers in exchanges created by the federal government.14 In May 2012, the
Internal Revenue Service (IRS) issued final regulations related to the premium tax credit that
make the credits available to taxpayers who obtain coverage in both state and federally facilitated
exchanges.15 The preamble to the regulations explains the IRS’s position that the statutory
language of Section 36B supports this interpretation, and states that “the relevant legislative
history does not demonstrate that Congress intended to limit the premium tax credit to State
exchanges,” and that this reading of the language of Section 36B “is consistent with the language,
purpose, and structure of section 36B and the Affordable Care Act as a whole.”16 After issuance of
the regulations, at least four lawsuits were filed against the Administration, claiming the IRS
overstepped its authority when it made these credits available to individuals in states that have the
federal government run their exchanges.
How does the premium tax credit interact with the individual and employer
mandates?
In order to understand some key aspects of the King case and other litigation, it is helpful to look
at how ACA’s individual and employer mandates interact with the premium tax credit. Under
ACA, beginning in 2014, certain individuals must have “minimum essential” health coverage or
be subject to a tax penalty.17 This is known as the individual mandate. There is an exemption for
individuals whose contribution to health coverage is more than 8% of their household income.18
ACA specifies that this contribution is calculated for certain individuals as the annual premium
for the lowest cost plan available on an exchange in the state, minus any allowable premium tax
credit.19 Accordingly, if an individual is not allowed the premium credit, coverage becomes more
expensive and the unaffordability exemption may kick in, meaning that the individual does not
have to obtain coverage under the individual mandate. ACA also includes shared responsibility
requirements, commonly referred to as the employer mandate.20 The employer mandate imposes a
tax on “large employers” that do not offer health insurance to their employees or offer coverage
that fails to meet certain affordability and adequacy standards.21 ACA specifies that liability for
the tax is generally triggered when at least one of an employer’s full-time employees is allowed a
premium tax credit through a health insurance exchange.22 Accordingly, if credits are not
14 See, e.g., Wall Street Journal, Health Law Opponents Challenge Tax Credit, July 16, 2012, available at
http://online.wsj.com/article/SB10001424052702303933704577531271643114572.html.
15 Department of the Treasury, Internal Revenue Service, Health Insurance Premium Tax Credit, 77 Fed. Reg. 30377
(May 23, 2012).
16 Id. at 30378.
17 26 U.S.C. § 5000A. For background on the individual mandate, see CRS Report R41331, Individual Mandate Under
ACA, by Annie L. Mach and Joy M. Grossman.
18 26 U.S.C. § 5000A(e)(1).
19 26 U.S.C. § 5000A(e)(1)(B)(ii) (emphasis added).
20 26 U.S.C. § 4980H. For more information on the employer mandate, see CRS Report R41159, Potential Employer
Penalties Under the Patient Protection and Affordable Care Act (ACA), by Julie M. Whittaker.
21 Implementation of the employer mandate is being phased in. Beginning in 2015, employers with at least 100 full-
time equivalent (FTEs) workers will be subject to these requirements. In 2016, employers with at least 50 FTEs will
have to comply. To facilitate administration of these requirements, employers will report information (such as number
of employees and health plan information) to the IRS, beginning in 2015.
2226 U.S.C. § 4980H(b).
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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
available in states with federally run exchanges, large employers may not be subject to penalties
if they fail to offer affordable coverage to employees.23
II. Litigation over Premium Tax Credits and Federally Facilitated
Exchanges
What are some of the arguments made for and against whether the statutory
text of ACA permits premium tax credits in federally facilitated exchanges?
Challengers of the IRS regulations and certain legal commentators primarily argue that the plain
language of ACA is clear: receipt of a premium tax credit under ACA depends upon whether a
taxpayer was enrolled “through an exchange established by the State under section 1311 of the
[ACA].”24 According to the litigants, the federal government is not a “state,” and therefore, the
IRS cannot extend these credits to individuals participating in federally facilitated exchanges.25
Further, it has been asserted that if this phrase is interpreted to encompass both state and federally
facilitated exchanges, the words “established by the state” serve no purpose, and this violates a
basic principle of statutory interpretation that statutes should be construed to give effect “to all its
provisions, so that no part will be inoperative or superfluous, void or insignificant.... ”26
Challengers also assert that the federal government’s authority to establish exchanges comes from
Section 1321 of ACA, not Section 1311.27 Had Congress wanted to provide premium tax credits
to state and federally established exchanges, they argue, it could have clearly said so by
referencing this section of the act.28
Challengers and commentators also contend that it is at least “plausible” that Congress intended
to limit premium tax credits to state-run exchanges.29 It is claimed that in passing ACA, Congress
wanted states to create their own exchanges, but that it could not compel states to do so without
violating federalism principles under the Tenth Amendment. Accordingly, Congress used a carrot
and stick approach: it incentivized the states to take action by conditioning the availability of
credits upon whether a state established an exchange.30
Conversely, the Administration and others have argued that the challengers rely on the phrase, “an
exchange established by the State,” in isolation, and this leads to a flawed interpretation of the
act. According to the government, the text of ACA as a whole makes clear that premium tax
credits are available on all exchanges.31 For example, the government notes that ACA defines the
23 However, an employer may still potentially be subject to tax if the employer has a place of business in a state with a
federal exchange, but employs individuals who reside in a different state that has a state-run exchange.
24See, e.g., Petition for Certiorari, at 24-25, King v. Burwell (No. 14-114).
25 See, e.g., King, 759 F.3d at 368; Halbig v. Burwell, 758 F.3d 390, 398 (D.C. Cir. 2014). See also 42 U.S.C. §
18024(d) (defining “State” to “mean[] each of the 50 States and the District of Columbia”).
26 See, e.g., Hibbs v. Winn, 542 U.S. 88, 101 (2004). See also Petition for Certiorari, at 25, King v. Burwell (No. 14-
114), citing Duncan v. Walker, 533 U.S. 167, 174 (2001).
27 See, e.g., King, 759 F.3d at 368.
28 See also Petition for Certiorari, at 25, King v. Burwell (No. 14-114), citing Custis v. United States, 511 U.S. 485, 492
(1994).
29 Id. at 32.
30 Id. at 14. See also Brief of Appellants, Halbig v. Burwell, No. 14-5018 (D.C. Cir. Oct. 3, 2014) (en banc) at 2-5.
31 See Brief of Appellees, Halbig v. Burwell, No. 14-5018 (D.C. Cir. Oct. 3, 2014) (en banc) at 41. See also id. at 46
(continued...)
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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
term “exchange” to mean “an American Health Benefit exchange under section 1311 of ACA.”32
When this definition is plugged into the text of Section 1321 of ACA, this provision compels the
Secretary of HHS to establish an “American Health Benefit exchange established under [Section
1311 of the ACA] within the State.”33 In other words, it is suggested that when HHS establishes
an exchange, it is one that is “established under 1311,” and therefore, credits may be offered in
the exchange. Additionally, Section 1321 of ACA provides that if a state does not establish an
exchange, the federal government is required to “establish and operate such exchange within the
State.... ”34 The government argues that the word “such” demonstrates that the exchange the
Secretary must establish is the one that the state declined to establish, conveying the idea that
state and federally run exchanges are one and the same, and that when the federal government
steps in to operate a state’s exchange on behalf of the state, “it does so standing in the state’s
shoes.”35 Explained another way, the government contends that the phrase “exchange established
by the State under section 1311 of ACA” is, in essence, “a statutorily created term of art that
includes federally-facilitated exchanges.”36
The government further argues that to limit premium tax credits to state-run exchanges is in stark
contrast to the act’s goal of expanding access to affordable health insurance and maintaining
stable insurance markets.37 It is asserted that if premium tax credits were unavailable in federally
facilitated exchanges, core provisions of ACA would not function properly.38 In addition, it is
claimed that millions of individuals would no longer be able to afford health insurance, and the
loss of these consumers would have an extremely detrimental impact on the insurance markets in
the affected states. This result, it is claimed, would defeat the main purpose of establishing
exchanges and credits in the first place.39 Also, according to the Administration, it is unreasonable
to think that Congress would have designed a statutory scheme that would potentially jeopardize
the effectiveness of the act and threaten insurance market security.40
(...continued)
(“[P]laintiff’s interpretation is wrong for the more basic reason that it is not faithful to the statute’s text. Instead, it
misreads that text in a manner that is divorced from statutory context and creates a statute at war with itself”).
32 See id. at 16.
33 See, e.g., Halbig, 759 F.3d at 399-400.
34 Brief of Appellees, Halbig v. Burwell, No. 14-5018 (D.C. Cir. Oct. 3, 2014) (en banc) at 22, quoting 42 U.S.C. §
18041(c) (emphasis added).
35 See, e.g., Halbig, 759 F.3d at 399-400 (“In other words, ‘such’ conveys what a federal exchange is: the equivalent of
the exchange a state would have established had it elected to do so.”) See also Nicholas Bagley, Three Words and the
Future of the Affordable Care Act, Journal of Health Politics, Policy and Law, available at
http://jhppl.dukejournals.org/content/early/2014/11/21/03616878-2867881.full.pdf+html.
36 Brief of Appellees, Halbig v. Burwell, No. 14-5018 (D.C. Cir. Oct. 3, 2014) (en banc) at 16.
37 Brief for Respondents in Opposition, King v. Burwell, No. 14-114 (U.S. Oct. 3, 2014) at 11-12.
38 See, e.g., id. at 24-27.
39 See id. at 24.
40 Brief for Respondents in Opposition, King v. Burwell, No. 14-114 (U.S. Oct. 3, 2014) at 25-26. (“Petitioners’
reading transforms that “flexibility” into a threat: a State may forgo establishing an exchange for itself only at the price
of crippling its insurance market and depriving its citizens of the tax credits at the heart of the Act ... There is no reason
to believe that Congress wanted to confront States with such a threatening choice, or would have designed an
alternative certain to fail.”).
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What lawsuits have been filed on this issue, and what is their current status?
As noted above, following issuance of the IRS regulations, at least four lawsuits were filed
claiming the agency overstepped its authority when it interpreted the statute to allow premium tax
credits to individuals participating in federally facilitated exchanges.
In Halbig v. Burwell, a group of individuals and employers residing in states that did not establish
exchanges filed suit against the Departments of HHS and Treasury, claiming the IRS regulations
violate the plain language of the ACA, which only permits credits to be available in “an exchange
established by the State.”41 In July 2014, the Court of Appeals for the D.C. Circuit reversed the
district court, holding that ACA “unambiguously restricts” the availability of premium tax credits
to health insurance purchased on state-established exchanges. Relying upon the judicial test
articulated by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council,42
the appeals court examined whether Congress had spoken to the issue at hand and found that the
statutory language of ACA clearly distinguishes between the creation of state and federally
created exchanges for purposes of the credit.43 The court also rejected the government’s
contention that such construction of ACA would lead to illogical results under the act.44 Finally,
the court examined the legislative history accompanying ACA and concluded that there was
nothing demonstrating that Congress intended a different result.45 The Halbig opinion was later
vacated pending review by the full appeals court of the D.C. Circuit, but the court subsequently
placed a hold on the case pending the Supreme Court’s decision in King.
Conversely, in King v. Burwell,46 the Court of Appeals for the Fourth Circuit upheld the IRS
regulations as a valid exercise of agency discretion. In King, Virginia residents filed suit
challenging the validity of the IRS rule, claiming that the IRS’s interpretation regarding the
availability of premium tax credits is contrary to the statutory language of ACA.47 On the same
day that the D.C. Circuit issued its decision in Halbig, the Court of Appeals for the Fourth Circuit
held that the relevant statutory language of ACA is ambiguous and subject to multiple
interpretations.48 Similar to Halbig, the court performed a Chevron analysis to determine whether
the IRS’s actions were authorized by ACA. First, the Fourth Circuit examined ACA’s statutory
language and found merit in both the plaintiff and defendant’s arguments.49 But the court
concluded that it could not conclusively determine what Congress intended with respect to this
issue, and that “nothing in the legislative history of the Act provides compelling support for either
side’s position.”50 The appeals court then found the IRS interpretation to be a reasonable exercise
of agency discretion, in concert with the overall goals of the ACA, and it deferred to the rule.51
41 758 F.3d 390 (D.C. Cir. 2014).
42 467 U.S. 837 (1984)
43 Id. at 394.
44 Id. at 402-04.
45 Id. at 406-12.
46 759 F.3d 358 (4th Cir. 2014).
47 The commonwealth of Virginia declined to establish a state-run exchange.
48 King, 759 F.3d at 363.
49 Id. at 367-72.
50 Id. at 372.
51 Id. at 374-75. As the appeals court in King explained:
[I]t is ... clear that widely available tax credits are essential to fulfilling the Act’s primary goals and
that Congress was aware of their importance when drafting the bill. The IRS Rule advances this
(continued...)
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The plaintiffs in King appealed their case directly to the Supreme Court. In November 2014, the
High Court agreed to review the case.
In addition to Halbig and King, two other cases addressing this issue are currently pending. In
Oklahoma ex rel. Pruitt v. Burwell,52 a district court in Oklahoma concluded, similar to Halbig,
that the plain text of ACA is clear that premium tax credits are only available in exchanges
established by a state. It noted that “as [ACA] presently stands, ‘vague notions of a statute’s basic
purpose are nonetheless inadequate to overcome the words of its text regarding the specific issue
under consideration.’”53 The district court ordered the IRS rule to be vacated, but stayed the
decision pending an appeal. While the case is currently on hold at the Court of Appeals for the
Tenth Circuit, the State of Oklahoma has petitioned the Supreme Court to review its case together
with King.54
In a fourth case, Indiana v. IRS, the state of Indiana and 39 of the state’s school districts filed suit
challenging the validity of the IRS regulations. The district court found that the state and the
school districts had standing to challenge the IRS regulation, and it denied the Administration’s
motion to dismiss the case.55 The court in Indiana is also likely to stay the proceedings in this
case, pending the Supreme Court’s decision in King.
How did the plaintiffs have standing to sue?
In all of the court decisions thus far, the taxpayers were found to have standing to sue even
though it is atypical for someone to have standing to challenge a tax credit on the grounds that the
IRS took an overly permissible interpretation of the statute. The government has not raised the
issue of standing before the Supreme Court in King. Standing is an integral part of the “case or
controversy” requirement in Article III of the Constitution,56 and it reflects the idea that the role
of the judiciary is limited under the separation of powers principle upon which the government is
founded.57 The standing requirement is generally understood to require the plaintiff show a
(...continued)
understanding by ensuring that this essential component exists on a sufficiently large scale. The
IRS Rule became all the more important once a significant number of states indicated their intent to
forgo establishing exchanges. With only sixteen state-run exchanges currently in place, the
economic framework supporting the Act would crumble if the credits were unavailable on federal
exchanges. Furthermore, without an exception to the individual mandate, millions more Americans
unable to purchase insurance without the credits would be forced to pay a penalty that Congress
never envisioned imposing on them. The IRS Rule avoids both these unforeseen and undesirable
consequences and thereby advances the true purpose and means of the Act. It is thus entirely
sensible that the IRS would enact the regulations it did, making Chevron deference appropriate.
Confronted with the Act’s ambiguity, the IRS crafted a rule ensuring the credits’ broad availability
and furthering the goals of the law. In the face of this permissible construction, we must defer to the
IRS Rule. Id.
52 2014 U.S. Dist. LEXIS 139501 (E.D. Okla. 2014).
53 Id. at 25 (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 261 (1993)).
54 Petition for a Writ of Certiorari Before Judgment, State of Oklahoma ex rel. Pruitt v. Burwell, No. 14-7080 (U.S.
Nov. 18, 2014).
55 Indiana v. IRS, 2014 U.S. Dist. LEXIS 111068 (Aug. 12, 2014).
56 See U.S. CONST. Art. III, § 2, cl. 1.
57 See Allen v. Wright, 468 U.S. 737, 750 (1984).
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“personal injury fairly traceable to the defendant’s allegedly unlawful conduct and likely to be
redressed by the requested relief.”58
It is usually the case that a taxpayer who is eligible to receive a tax credit due to an IRS’s
interpretation of a statute would not be injured since the government is interpreting the statutory
language in a way that is favorable to the taxpayer. Furthermore, no one else would generally
have standing either (e.g., taxpayers generally do not have standing solely because of their
taxpayer status to challenge an expenditure of government funds).59
So, how did the taxpayers get standing to challenge the IRS regulation? Courts found standing
based on the relationship between the premium tax credit and the individual and employer
mandates. In King and Halbig, the courts determined that the plaintiffs faced an economic injury
in that they would have to buy insurance or pay the individual mandate’s penalty since their
eligibility for the premium tax credit under the IRS regulation meant they would not qualify for
the mandate’s unaffordability exemption.60 Similarly, the courts in Pruitt and Indiana found that
the states had standing to challenge the regulation because, as employers, they would face
compliance costs and other expenses due to the employer mandate.61 These costs were
attributable to the IRS regulation because the states would only be subject to the employer
mandate if a state employee was allowed the premium tax credit, which, since the states had
federally run exchanges, could only occur due to the IRS’ interpretation of the statute.
Why were the taxpayers not required to file a tax refund suit?
In general, taxpayers who want to challenge the application of a federal tax law must do so
through a tax refund suit.62 This rule reflects a fundamental principle that tax laws can generally
only be challenged after the taxes are paid, at which point the taxpayer may sue for a refund. The
courts in these cases, however, generally found that the taxpayers were not required to go through
the tax refund process in order to challenge the IRS’s Section 36B regulation.
First, the Anti-Injunction Act (AIA) generally prohibits courts from hearing suits for the purpose
of restraining the assessment or collection of any tax.63 If the AIA applied here, it would mean
that the plaintiffs could only bring their cases as a tax refund suit. However, in the 2012 case
NFIB v. Sebelius,64 the Supreme Court, while upholding the individual mandate as a valid
exercise of Congress’s taxing power, also held that the individual mandate is a penalty, not a tax,
for AIA purposes and thus fell outside the act’s scope. Key to the Court’s analysis was that
Congress had labeled the mandate as a “penalty” in the relevant statute and had not otherwise
provided it should be treated as a tax for purposes of the AIA.65 It appears that due to the Court’s
58 Id. at 751.
59 See, e.g., DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 344-45 (2006) (reasoning that such taxpayers’ injuries are
not particularized to those plaintiffs, but rather common to the general taxpaying public, and hypothetical because
whether they will occur or be redressed depends on future actions by a legislative body).
60 See King, 759 F.3d at 365-66; Halbig, 758 F.3d at 396-97.
61 See Pruitt, 2013 U.S. Dist. LEXIS 113232 at *29-30; Indiana, 2014 U.S. Dist. LEXIS 111068 at *18-23.
62 See 26 U.S.C. § 7421, 7422; 28 U.S.C. §§ 1346(a)(1), 2201(a).
63 26 U.S.C. § 7421(a).
64 132 S. Ct. 2566 (2012). For more information, see CRS Report R42698, NFIB v. Sebelius: Constitutionality of the
Individual Mandate, by Erika K. Lunder and Jennifer A. Staman.
65 See NFIB, 132 S.Ct. at 2583.
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decision in NFIB, the government did not raise the AIA issue in the premium tax credit litigation
when the individual mandate provided the basis for the plaintiffs’ standing.66 However, the
government did argue that the AIA prevented the plaintiffs’ lawsuits when the employer mandate
was the basis for standing. As such, three courts looked at this issue, and they reached different
results. The Pruitt court, using the Court’s analysis in NFIB, found that the statute’s reference to
the employer mandate as an “assessable payment” evidenced congressional intent for it not to be
treated as a tax for AIA purposes.67 The Indiana court determined the AIA did not apply due to
binding precedent in the Seventh Circuit.68 However, the district court in Halbig held that the
employer mandate was a tax for purposes of the AIA and therefore dismissed the claims of the
employers in the suit (the appellate court did not address this issue). The district court reasoned
that Congress used the term “assessable payment” interchangeably with “tax” and intended them
to have the same meaning.69
Distinct from the AIA issue but conceptually related, is the question of whether any of these
plaintiffs were otherwise required to bring their challenges to the Section 36B regulation as a tax
refund suit. Across the four cases, the government argued several different theories as to why
other provisions of law required a tax refund suit. For example, the Administrative Procedure Act
(APA) allows challenges to final agency actions “for which there is no other adequate remedy in a
court,”70 and the government argued that a tax refund suit was an adequate remedy since the
taxpayer could receive any overpayment plus interest. The courts rejected these arguments for
various reasons. For example, courts rejected the APA argument, reasoning that a tax refund suit
was inadequate since it did not provide the same type of prospective relief as that provided under
the APA.71
Cases addressing the issue have relied on the Chevron test. What is that?
Under the APA, a party aggrieved by an agency’s action may bring suit if he believes the agency
has acted beyond its scope of authority.72 A court would review such a challenge by employing
the test established by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense
Council.73
The Chevron test proceeds in two parts to determine whether an agency has acted within its
statutory authority. First, if Congress has spoken clearly on an issue, then the agency and the
courts “must give effect to the unambiguously expressed intent of Congress.”74 However, if the
66 The fact these cases are challenging the premium tax credit, as opposed to the individual mandate, is arguably not
relevant for AIA purposes since the Supreme Court has held that a credit does not involve the assessment or collection
of tax for purposes of a federal law similar to the AIA. See Hibbs v. Winn, 542 U.S. 88, 101 (2004).
67 Oklahoma, 2013 U.S. Dist. LEXIS 113232 at *36.
68 Indiana, 2014 U.S. Dist. LEXIS 111068 at *24 (referencing Korte v. Sebelius, 735 F.3d 654 (7th Cir. 2013)).
69 See Halbig v. Sebelius, 2014 U.S. Dist. LEXIS 4853, *32-34 (D.D.C. Jan. 15, 2014).
70 5 U.S.C. § 704.
71 See King, 759 F.3d at 366-67; Halbig, 758 F.3d at 397-98. See also Indiana, 2014 U.S. Dist. LEXIS 111068 at *24
(characterizing IRS’ reading of the employer mandate statute as requiring a tax refund suit as “tortured”).
72 5 U.S.C. §§ 701, 702, 706.
73 Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984); see also Mayo Found. for Med. Educ. & Research v. United
States, 562 U.S. 44 (2011) (“The principles underlying our decision in Chevron apply with full force in the tax
context.”).
74 Chevron, 467 U.S. at 842-43.
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statute is ambiguous or silent, the court must determine whether the agency’s construction of the
statute is “permissible.”75 The second part of the test is a deferential standard for judicial review.
A reviewing court shall not determine whether the agency’s construction is the most obvious or
the best interpretation of the statute in question, but, instead, must yield to the agency’s
construction if it is merely a “permissible” reading of the statute.
The federal appellate courts—the Fourth Circuit and the D.C. Circuit (prior to the decision being
vacated)—that evaluated the premium tax credit regulation both employed the Chevron test to
determine whether tax credits were available in states that operate under a federal exchange.
If the King and Halbig courts were both applying Chevron, how did they reach
different results?
Because the second step of the test provides the agency with considerable deference, often cases
involving a Chevron analysis will turn on whether a court determines the statutory text to be
ambiguous. This is precisely what happened in the cases involving the premium tax credits. For
example, in Halbig, the D.C. Circuit stated, “Because we conclude that the ACA unambiguously
restricts the section 36B subsidy to insurance purchased on exchanges ‘established by the State,’
we ... vacate the IRS’s regulation.”76 Since the court found the text to be clear, the court did not
have to proceed to step two, and the D.C. Circuit determined that the IRS regulation could not
stand. As previously discussed, however, the D.C. Circuit vacated the Halbig decision pending an
en banc review.
However, the Fourth Circuit, when reading the same provision of law, stated in King, “[W]e find
that the applicable statutory language is ambiguous and subject to multiple interpretations.
Applying deference to the IRS’s determination, however, we uphold the rule as a permissible
exercise of the agency’s discretion.”77 The Fourth Circuit, because it found the text to be
ambiguous, proceeded to the highly deferential second step of the Chevron test and upheld the
agency action.
How do courts determine whether a statutory provision is ambiguous?
The Supreme Court, in a footnote, established that courts should use the “traditional tools of
statutory construction” in order to ascertain whether “Congress had an intention on the precise
question at issue.”78 Courts often will use the structure of a statute to determine whether other
sections of an act inform how the statutory provision in question should be evaluated. In addition,
courts routinely use dictionaries to help ascertain the meaning of statutory language. The purpose
75 Id.
76 Halbig, 758 F.3d at 394.
77 King, 759 F.3d at 363.
78 Chevron, 467 U.S. at 843 n. 9. According to the American Bar Association’s (ABA) black letter statement of
administrative law: “Step one of Chevron does not dictate that courts use any particular method of statutory
interpretation. However, the court should use “the traditional tools of statutory construction” to determine whether the
meaning of the statute is clear with respect to the precise issue before it. For most judges, these tools include
examination of the text of the statute, dictionary definitions, canons of construction, statutory structure, legislative
purpose, and legislative history.” Section of Administrative Law & Regulatory Practice, American Bar Ass’n, A
Blackletter Statement of Federal Administrative Law, 54 ADMIN L. REV. 1, 44 (2002).
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of the legislation can also be helpful in determining whether Congress has spoken clearly on an
issue.79
It is worth noting that the use of legislative history as a means of statutory interpretation has been
a controversial subject.80 The debate over the use of legislative history during Chevron step one
stems from a much broader doctrinal debate between judges who believe legislative intent should
be used to interpret statutes (commonly referred to as “intentionalist” judges) and judges who
believe that the text of a statute is the only reliable means of determining a statute’s meaning
(commonly referred to as “textualist” judges).
Is it common for courts to disagree on whether a statute is ambiguous?
Although the Chevron test has become a foundational principle of administrative law, judicial
disagreement on whether a statute is ambiguous is not uncommon. Even the Justices of the
Supreme Court often find themselves divided on whether Congress has spoken clearly on a
specific issue. In numerous cases, including Chemical Manufacturers Association v. Natural
Resources Defense Council81 and FDA v. Brown & Williamson Tobacco Corp.,82 the Supreme
Court has split 5-4 on the issue of whether Congress has “directly spoken to the precise question
at issue.”83 Many issues at step one of the test appear to arise from a particular judge’s willingness
to look beyond the plain text of the statute to the intent of Congress in order to determine whether
the provision is ambiguous—that is, whether a judge is a “textualist” or an “intentionalist.” A
textualist judge tends to believe that a stricter reading of the text should control when determining
the meaning of a statute, while an intentionalist judge tends to be willing to look at the broader
purpose of the statute and legislative intent when interpreting a law.
What can we expect from the Supreme Court in King regarding a Chevron
analysis?
The Court will almost certainly perform a Chevron analysis to determine whether IRS’s
interpretation of the statute is permissible. As discussed above, it is not uncommon even for the
Justices of the Supreme Court to disagree on whether a statute is clear or ambiguous. Ultimately,
the outcome of the decision could largely depend on the Court’s analysis under step one of the
Chevron test. In addition to determining whether the premium tax credits are available in states
with a federal exchange, it is also possible that the Supreme Court’s decision could help clarify
how the first step of the Chevron test should be applied.
79 For a detailed review of statutory interpretation, see CRS Report 97-589, Statutory Interpretation: General
Principles and Recent Trends, by Larry M. Eig.
80 For a discussion of the debate over the permissible tools of statutory interpretation in the Chevron test, see CRS
Report R41260, The Jurisprudence of Justice John Paul Stevens: The Chevron Doctrine, by Todd Garvey.
81 470 U.S. 116 (1985).
82 529 U.S. 120 (2000).
83 Chevron, 467 U.S. at 842-43.
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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
III. Potential Implications of the Court’s Decision in King
How many exchanges are considered to be run by the federal government and
could be impacted by the Supreme Court’s decision?
There is disagreement over the answer to this question. The D.C. Circuit in Halbig indicated in
dicta there were 36 federal exchanges, while the Fourth Circuit in King noted there were 34.84 In
2014, there were 27 states with exchanges run entirely by the federal government. Seven states
maintained “partnership exchanges,” which HHS considers to be federally facilitated.85 While
HHS maintains authority over these exchanges, a state can administer and operate certain
exchange activities.86 There were also two “federally supported state-based exchanges,” in which
the states received approval from HHS to run their own exchange and perform all exchange
functions, but the states relied on the federally facilitated exchange IT platform (i.e.,
www.healthcare.gov).87 The Supreme Court in King may provide insight on what constitutes a
federally facilitated exchange.
If the Supreme Court upholds the IRS regulations at issue in King, what
happens?
If the Supreme Court finds that the IRS regulations at issue in King are valid, it may be presumed
that the agency would not need to amend the regulations or take any other action, and that
premium tax credits would remain available for individuals participating in state and federally run
exchanges in every state and the District of Columbia. However, such a holding may not preclude
the IRS from amending the regulations at a future date. Assuming that the Court performs a
Chevron analysis and finds that the statutory language of ACA is ambiguous and subject to
multiple interpretations,88 the agency would remain free to amend the regulations, so long as the
amendments are consistent with the statute.89 Thus, it is possible that if the Supreme Court in
King decides to defer to the IRS’s interpretation of ACA, an administration could later amend the
regulations in a manner that affects the provision of premium tax credits in federal and state-run
exchanges. The Court’s opinion in the King case may address this scenario.
84 Halbig, 758 F.3d at 395. Cf. King, 759 F.3d at 364.
85See Department of Health and Human Services, The Center for Consumer Information & Insurance Oversight, State
Health Insurance Marketplaces, available at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/state-
marketplaces.html.
86 It may be noted that the partnership exchange model was introduced by HHS in regulations; the statutory language of
ACA does not recognize these exchanges. See 76 Fed. Reg. 41866, 41870 (July 15, 2011); 77 Fed. Reg. 18310, 18325-
26 (Mar. 27, 2012). It also may be noted that should the Court rule against the Administration in King, some have
questioned whether the partnership exchanges could potentially be treated as state-established exchanges for purposes
of obtaining premium tax credits. See, e.g., Jeff Overley, 3 Wild Cards if Gov’t Loses ACA Subsidies Fight, available
at http://www.law360.com/articles/594829/3-wild-cards-if-gov-t-loses-aca-subsidies-fight. See also Louise Radnofsky,
States Try to Protect Health Exchanges From Court Ruling, Wall Street Journal, available at http://online.wsj.com/
articles/states-try-to-protect-health-exchanges-from-court-ruling-1406328692.
87 It appears that for 2015, there are 14 state-based exchanges, 7 state-partnership exchanges, 3 federally supported
exchanges, and 27 federally facilitated exchanges. See Kaiser Family Foundation, State Health Insurance Marketplace
Types, available at http://kff.org/health-reform/state-indicator/state-health-insurance-marketplace-types/.
88 See footnotes 71-81 supra and accompanying text.
89 Committee for Effective Cellular Rules v. Fed. Communications Comm’n, 53 F.3d 1309, 1317 (D.C. Cir. 1995).
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If the Supreme Court finds that premium tax credits are unavailable in King,
what happens?
If the Supreme Court finds that the IRS regulation at issue in King is invalid so that individuals
participating in federally run exchanges would no longer be eligible for the credit, then several
things might happen. The IRS would presumably act to address the problematic aspects of the
Section 36B regulations. Additionally, the agency (and HHS) might determine that additional
rulemaking or guidance is appropriate to address possible issues arising from the interaction
between the premium tax credit and other parts of the IRC and ACA (discussed in the next
question).
The IRS, affected taxpayers, and insurance companies might also confront issues due to the
timing of the Court’s decision. It is likely the decision will be released late in the Court’s term,
after April 15, 2015, but before the end of June. By that time, taxpayers claiming the credit for tax
year 2014 will have generally done so. Additionally, some taxpayers will be receiving the credit
for tax year 2015 in the form of advanced payments made directly to their insurance companies.90
Thus, in addition to raising questions about whether taxpayers who received the credit would be
required to pay it back (see below), it seems possible the timing of the Court’s decision might
present issues with respect to the advanced payments being made for 2015 insurance contracts.
One point to note is that while the Court’s decision may result in some taxpayers losing their
eligibility for the premium tax credit, it would not impact their ability to claim other tax benefits.
Thus, for example, affected taxpayers who purchased insurance would be able to deduct their
premiums as an itemized deduction to the extent their total medical expenses exceed 10% of
adjusted gross income.91
If the Court strikes down the IRS regulations at issue in King, what are some
of the ways in which the operation of ACA could be affected?
If premium tax credits cannot be offered in health insurance exchanges run by the federal
government, many believe there could be a profound effect upon the operation and
implementation of ACA as a whole because certain central provisions of the act depend upon the
availability of premium tax credits.92
90 Some affected taxpayers might find themselves in the position of having bought insurance with the expectation they
would be receiving a credit for which they are suddenly no longer eligible. They may argue this is unfair, particularly
since they relied on an unambiguous IRS regulation. From a legal perspective, the fact taxpayers may have concluded a
transaction in reliance on prior tax law is generally not important and would not support a claim against the government
(e.g., for violation of due process or breach of contract). See, e.g., United States v. Carlton, 512 U.S. 26, 34 (1994) (no
due process violation from retroactive change in tax law); Nat’l R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe
Ry. Co., 470 U.S. 451, 465-66 (1985) (statutes do not create a contractual arrangement absent clear evidence of
congressional intent to do so).
91 26 U.S.C. § 213 (threshold is reduced to 7.5% for taxpayers who are at least 65 years old). These taxpayers would no
longer be limited by the provision that prohibits a deduction for the portion of the premiums that is equal to the amount
of the premium tax credit. 26 U.S.C. § 260C(g).
92 See generally David Blumenthal and Sara R. Collins, The Supreme Court Decides to Hear King v. Burwell: What Are
the Implications? The Commonwealth Fund Blog, (Nov. 7, 2014), available at http://www.commonwealthfund.org/
publications/blog/2014/nov/the-supreme-court-decides-to-hear-king. See also King, 759 F.3d at 374,( “As the
defendants ... explain, denying tax credits to individuals shopping on federal Exchanges would throw a debilitating
wrench into the Act’s internal economic machinery ...”).
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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
As noted above, ACA contains certain interconnected provisions that are designed to increase
accessibility to health insurance.93Among these provisions, ACA contains certain market reforms
that, among other things, require health insurers to accept every individual who applies for
coverage, prevent them from imposing exclusions from coverage based on preexisting conditions,
and restrict insurers from charging higher premiums based on an individual’s health status.94
Based on these requirements, it is argued that in order to prevent an “adverse selection” scenario,
where individuals wait to purchase health insurance until they need care, ACA compels
individuals to purchase insurance through the individual mandate.95 In order to make this required
coverage affordable, ACA provides for premium tax credits and other subsidies.96 It has been
argued that eliminating premium tax credits would be detrimental to this scheme, as these
provisions “work in tandem to achieve the Act’s fundamental goals of expanding health-insurance
coverage and promoting a functioning individual insurance market in each State.”97
Relatedly, it is also expected that if premium tax credits are unavailable to individuals enrolled in
a federally run exchange, fewer individuals will be required to have health insurance under ACA’s
individual mandate . As discussed in the “I. Background” section, there is an exemption from the
individual mandate for individuals whose contribution to health coverage is more than 8% of
household income.98 ACA specifies that this contribution is calculated for certain individuals as
the annual premium for the lowest cost plan available on an exchange in the state, minus any
allowable premium tax credit.99 Accordingly, if an individual is not allowed the premium credit,
coverage becomes more expensive, and the unaffordability exemption may kick in, meaning that
the individual does not have to obtain coverage under the individual mandate. It has been
predicted that eliminating the premium tax credits in states with federally run exchanges would
exempt more individuals from the individual mandate, and would make coverage unaffordable
for many of these individuals.100
Commentators have also noted that if the Supreme Court invalidates the IRS rule, this could have
a debilitating effect on the federally run exchanges.101 The idea is that absent these credits, many
healthy people would not purchase health coverage.102 However, individuals with more serious
health conditions would probably remain in the market. Thus, some argue that the population in
these plans could become skewed toward sicker, more expensive enrollees, and this may lead to a
rise in premiums in affected exchanges.103
93 Brief for Respondents in Opposition, King v. Burwell, No. 14-114 (U.S. Oct. 3, 2014) at 3.
94 P.L. 111-148, § 1201 (codified at 42 U.S.C. § 300gg-1; 42 U.S.C. § 300gg-3; 42 U.S.C. § 300gg-4).
95 See, e.g., Halbig, 758 F.3d at 409.
96 See, e.g., id.
97 Brief for Respondents in Opposition, King v. Burwell, No. 14-114 (U.S. Oct. 3, 2014) at 6.
98 26 U.S.C. § 5000A(e)(1).
99 26 U.S.C. § 5000A(e)(1)(B)(ii) (emphasis added).
100 See Linda J. Blumberg, John Holahan, and Matthew Buettgens, Halbig v Burwell: Potential Implications for ACA
Coverage and Subsidies, Robert Wood Johnson Foundation, Urban Institute, (July 2014), available at
http://www.urban.org/UploadedPDF/413183-Halbig-v-Burwell-Potential-Implications-for-ACA-Coverage-and-
Subsidies.pdf.
101 See, e.g., Nicholas Bagley, Three Words and the Future of the Affordable Care Act, Journal of Health Politics,
Policy and Law, available at http://jhppl.dukejournals.org/content/early/2014/11/21/03616878-2867881.full.pdf+html.
102 Id.
103 Id. Additionally, as the dissenting Justices of the Supreme Court noted in NFIB v. Sebelius “[w]ithout the federal
subsidies, individuals would lose the main incentive to purchase insurance inside the exchanges, and some insurers may
(continued...)
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The absence of premium tax credits in states with a federally facilitated exchange could also
affect the application of the employer mandate.104 As discussed in the “I. Background” section,
ACA specifies that liability for the excise tax under the employer mandate is generally triggered
when one or more of an employer’s full-time employees is allowed a premium tax credit through
a health insurance exchange.105 Accordingly, if credits are not available in states with federally
run exchanges, large employers may not be subject to penalties if they fail to offer affordable
coverage to employees.106
If the Supreme Court in King finds that premium tax credits cannot be offered
in federally facilitated exchanges, what does a state have to do to “establish an
exchange” and continue offering premium tax credits?
If the Court finds that premium tax credits are not available in federally run exchanges, the
question arises what states would have to do to in order for their exchange to be “established by
the state under section 1311” for purposes of the credit.
Current law and regulations articulate what steps a state must take in order for the federal
government not to set up an exchange within the state. Section 1311 of ACA specifies that a state
“shall” establish an exchange that meets certain specified requirements.107 This section provides
that an exchange must be “a governmental agency or nonprofit entity that is established by a
State.”108 Additionally, under this section, among other things, an exchange must implement
procedures related to the certification of health plans; provide for the operation of a telephone
hotline; maintain a website under which current and prospective plan enrollees may obtain plan
information; assign ratings to qualified health plans in the exchange, in accordance with criteria
developed by the Secretary of HHS; use a standard format for presenting health benefit plan
options in the exchange; and inform individuals of their eligibility for public programs such as
Medicaid and assist with this enrollment.109 Current regulations also set forth numerous
requirements that a state must meet in order for its exchange to be approved by HHS.110 As
described above, if a state does not have this approval (or conditional approval) by a certain
deadline, HHS will establish and operate the state’s exchange.111
(...continued)
be unwilling to offer insurance inside of exchanges. With fewer buyers and even fewer sellers, the exchanges would not
operate as Congress intended and may not operate at all.” 132 S. Ct. 2566, 2674 (2012) (Scalia, Kennedy, Thomas, and
Alito, JJ., dissenting). For more information on the NFIB case, see CRS Report R42698, NFIB v. Sebelius:
Constitutionality of the Individual Mandate, by Erika K. Lunder and Jennifer A. Staman.
104 Implementation of the employer mandate is being phased in. See discussion supra note 21.
10526 U.S.C. § 4980H(b).
106 However, an employer may still potentially be subject to tax if the employer has a place of business in a state with a
federal exchange, but employs individuals who reside in a different state that has a state-run exchange.
107 42 U.S.C. § 18021. See also Halbig, 758 F.3d at 399 (“[D]espite its seemingly mandatory language, § 1311 of the
Act more cajoles than commands. A state is not literally required to establish an Exchange; the ACA merely
encourages it to do so.”).
108 42 U.S.C. § 18021(b).
109 42 U.S.C. § 18021.
110 42 C.F.R.§ 155.10 et seq. These regulations specify, for example, that a state must submit an “exchange blueprint”
that specifies how the state’s exchange meets the requirements set out in the regulations, and the state must demonstrate
readiness to execute this blueprint. 45 C.F.R. § 155.105.
111 45 C.F.R. § 155.105(f).
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While the circumstances under which the federal government will assist with establishing an
exchange within the state are thus well described in current law and regulations, the question of
what it means to have “an exchange established by the state under 1311” could arguably be
somewhat different than whether the federal government has chosen to assist with establishing an
exchange within the state. Questions have been raised, for example, regarding whether states
could qualify as having state-established exchanges while retaining a certain degree of federal
marketplace infrastructure (e.g., certain state-based exchanges utilize healthcare.gov).112 The
Supreme Court may address what states must do in order to “establish an exchange” so that
premium credits are available. Alternatively, the Court may render a decision without answering
this question. In that case, the answer may ultimately require administrative action by IRS and
HHS, or further litigation to be resolved.
If the Supreme Court rules in favor of the challengers, would taxpayers
enrolled in plans in federal exchanges be forced to pay back any credits they
have claimed?
As mentioned, taxpayers are allowed to claim the credit when they file their taxes at the end of
the year or may choose to receive an estimated credit paid in advance to their insurance company.
For both sets of taxpayers, it is not clear that any who claimed the credit might be required to pay
it back if the Court were to strike down the regulation.113 On the one hand, as a general rule,
taxpayers who improperly claim tax credits must pay them back and, in the case of taxpayers
receiving an estimated premium tax credit in advance, pay back any excess. Further, the IRS is
generally able to go back to the previous three tax years in order to reclaim erroneously paid
refunds, even when the agency was at fault for the overpayment.114 And in some situations, courts
have recognized that the IRS occasionally gets the law wrong and it is the taxpayer’s
responsibility to get it right.115 As such, if the Court were to strike the regulation so that taxpayers
who purchased insurance in federally facilitated exchanges were not allowed the credit, it might
be argued that taxpayers could be required to pay back any claimed credit to the IRS.
On the other hand, these taxpayers claimed the credit due to their reliance on an unambiguous
IRS-promulgated regulation. As such, it is arguably unfair to require them to pay back any
claimed credit, perhaps particularly so if they were not party to the litigation resulting in their
denial of the credit. Further, the situations where courts have not reacted sympathetically to
taxpayers who relied on erroneous IRS information can be distinguished since those taxpayers
were relying on guidance less formal than a regulation. In light of all this, even if there might be a
legal basis for concluding that taxpayers might have to pay back the credit, it seems possible the
Court, Congress, or IRS would take mitigating actions. For example, if the Court were to strike
down the regulation, the Court could conceivably limit its holding so that taxpayers who had
received the credit (whether through the advance payment or end-of-year filing) would not be
112 See generally Bluementhal and Collins, note 92 supra.
113 In no case does it appear that the insurance company who received the advanced payment would be responsible for
paying back the credit since that company merely accepted the credit as payment from the taxpayer for the premiums.
114 26 U.S.C. § 6229. See also O’Bryant v. United States, 49 F.3d 340 (7th Cir. 1995).
115 See, e.g., Carpenter v. United States, 495 F.2d 175, 184 (5th Cir. 1975) (dismissing the fact that the taxpayer had
relied on an inaccurate statement of law found in an IRS publication since “it is for the Congress and the courts and not
the Treasury to declare the law applicable to a given situation”); Miller v. Comm’r, 114 T.C. 184, 195 (2000) (“Well-
established precedent confirms that taxpayers rely on such [IRS] publications at their peril. Administrative guidance
contained in IRS publications is not binding on the Government, nor can it change the plain meaning of tax statutes.”).
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affected. Similarly, the IRS might have the authority to provide that taxpayers who had already
claimed the credit would not have to pay it back or to take no action to assess and collect the
amounts from them.116 It is also possible that Congress could address the issue by legislation.
CRS is not aware of any example of where a court struck a credit or other tax benefit and the
people who had already received the benefit were required to pay it back; however, it should be
noted that this issue rarely arises because, as discussed above, no one typically has standing to
bring this type of suit.
Could a ruling in the King case have consequences for other tax laws or
credits?
A consideration in assessing whether King may have implications for tax law generally is
recognizing that the situation presented is uncommon. The plaintiffs are challenging an IRS
regulation that interprets a statute so that they are eligible for a credit. Normally, a taxpayer would
not want to sue arguing the IRS had impermissibly broadened a statute to benefit them, and in any
case, would not have standing to do so. Here, the plaintiffs’ concerns and standing are based on
the interaction between the premium tax credit and the individual mandate. This type of
interaction between a tax benefit and obligation is rare. Thus, due to the atypical facts present
here, it is not clear whether King, regardless of how the Court rules, will have broad implications
for impact tax law generally.
King and the other cases nonetheless might provide two procedural issues in which Congress
might be interested—the applicability of the AIA and the relationship between the APA and tax
refund suits (note that neither issue has been appealed to the Court). This is not to suggest that the
lower courts necessarily got these issues wrong. Rather, these cases might be of interest because,
as discussed above, it is generally the rule that taxpayers challenging a federal tax law must do so
through a tax refund suit, and while the government argued these taxpayers needed to do the
same, the courts rejected this. Regardless of which side it agrees with, Congress might be
interested in looking at these decisions to see if statutory clarification is needed. First, as
discussed above, the AIA generally prohibits suits that restrain the collection and assessment of
federal taxes. While the Supreme Court in NFIB found that the individual mandate was not a tax
for purposes of the AIA because Congress labeled it as a penalty, Congress’s motivation in using
the term “penalty” appears open to debate. In light of the Court’s holding and its application to
the cases here, as well as potential extension to other excise taxes,117 it might be of interest to
Congress to look at these cases to ensure their reasoning is consistent with the congressional
intent behind the AIA and, if so, how other excise taxes might be affected. Similarly, the issue of
whether a tax refund suit is an “adequate remedy” under the APA does not frequently arise, and it
might be of interest to Congress to look at how the courts in these cases interpreted the interaction
between the two acts.
116 26 U.S.C. § 7805 (giving the Treasury Secretary the authority to “prescribe all needful rules and regulations for the
enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in
relation to internal revenue”); 26 U.S.C. § 36B(g) (providing the Secretary with the authority to “prescribe such
regulations as may be necessary to carry out the provisions of this section,” including those to provide for “the
coordination of the credit allowed under this section with the program for advance payment ... ”).
117 See, e.g., Korte v. Sebelius, 735 F.3d 654 (7th Cir. 2013) (finding that the excise tax in Section 4980D on the failure
to meet certain group health plan requirements was a penalty for purposes of the AIA, reasoning that, while Congress
clearly labeled it as a tax, it functions as a penalty).
Congressional Research Service
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Premium Tax Credits and Federal Health Insurance Exchanges: Questions and Answers
Author Contact Information
Jennifer A. Staman
Daniel T. Shedd
Legislative Attorney
Legislative Attorney
jstaman@crs.loc.gov, 7-2610
dshedd@crs.loc.gov, 7-8441
Erika K. Lunder
Legislative Attorney
elunder@crs.loc.gov, 7-4538
Congressional Research Service
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