Kind of Halbig Deal

July 22, 2014

Authored by: Chris Rylands

You may have heard about the potentially crippling blow to ACAMoney Puzzle (as some have described) dealt by a three-judge panel of the D.C. Circuit Court of Appeals today in Halbig v. Burwell.  Basically, a group of individuals and employers challenged the IRS rule that allowed tax credits to help pay for individual coverage through federally-run ACA marketplaces.  Their argument was that the literal reading of the statute only allowed these subsidies for individual policies purchased through state-run marketplaces.

At first blush, this might not sound all that important to employers, but it very well could be.  If this ruling holds, then it would undercut the ability of the IRS to impose the employer shared responsibility/“play or pay” penalties.

Recall that one triggering event for an employer to be hit with the play or pay penalty is that an employee receives a tax credit for coverage purchased through a marketplace.  As this website shows, only 14 states have established their own marketplaces, with one (Oregon) who had one reportedly moving to the federal marketplace next year.  (State partnership marketplaces are treated as federal marketplaces for purposes of the tax credits.)  If tax credits are not available through the federally-run marketplace, then that would significantly reduce the potential risk of employer penalties.

What about employers who have employees in multiple states with different types of marketplaces?  Should Halbig stand, that question is difficult to answer.  It would be up to the IRS to interpret how that would work, but it seems plausible that the IRS would say the full penalty amounts would still apply, even if only employees in states with state-run marketplaces can trigger them.

For now, the implications are minimal as nothing is likely to happen yet.  The Fourth Circuit Court of Appeals issued a contrary ruling in King v. Burwell shortly after Halbig was released.  The full D.C. Circuit could overturn Halbig or one or both of King and Halbig could go before the Supreme Court.  Until the difference is resolved, employers would be well-advised to pay attention to these cases, but continue any preparation for compliance with the employer shared responsibility provisions.