The Court of Appeals for the District of Columbia dealt the Obama Administration a major blow today when the court ruled 2-1 that only state health exchanges plans are eligible for tax subsidies. The IRS had promulgated a rule that health exchanges run by the federal government were eligible for the subsidies.
Here is the conclusion of the primary opinion:
We reach this conclusion, frankly, with reluctance. At least until states that wish to can set up Exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly. But, high as those stakes are, the principle of legislative supremacy that guides us is higher still. Within constitutional limits, Congress is supreme in matters of policy, and the consequence of that supremacy is that our duty when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process. This limited role serves democratic interests by ensuring that policy is made by elected, politically accountable representatives, not by appointed, life-tenured judges.
The basic issue is that the Affordable Care Act (aka ObamaCare) allows a tax credit for exchanges established by a state. Are federal exchanges established by a state? The court ruled they weren’t.
UPDATE: The Fourth Circuit ruled in a similar case that the IRS rule was valid. This is almost certainly heading to the US Supreme Court with a decision probably next June.
While this decision will be appealed (to either an en banc panel of the DC Circuit Court of Appeals or the US Supreme Court), it appears sound. The law is what’s written, and neither the Administration nor the IRS can avoid such bright lines.
This is likely to cause more headaches for both taxpayers and tax professionals next year. It is almost certain this case will be appealed, and the appeals will likely not be resolved until next Spring at the earliest. Will tax credits be allowed for an Exchange in, say, Kansas, where the Exchange is run by the federal government? I have no idea. Both California and Nevada have exchanges run by the state, so subsidies in these states appear legal. However, Nevada will be moving to a federal exchange for 2015 so this could have a major impact then (2015 returns prepared in 2016).
Tags: HealthCareLegislation