Today, in King v. Burwell, the United States Supreme Court voted 6-3 to uphold the availability of subsidies provided by the Affordable Care Act (“ACA”) in federal Exchanges. This ruling means that, for most employers, the threat of ACA penalties is a reality.
The ACA requires most Americans to have health insurance coverage or pay a penalty, and the ACA provides subsidies for individuals within a certain income range in order to make health insurance more affordable. In addition, the ACA requires the creation of a health insurance marketplace, or “Exchange,” in each state in which people can compare and purchase health insurance. The Exchanges are the sole mechanism through which Americans can obtain health care subsidies. States were offered the opportunity to establish their own Exchange but states could also opt to have the federal government establish the Exchange on their behalf. Thirty-six states opted not to create a state-run Exchange and instead allowed the federal government to establish their Exchanges. Opponents to the ACA argued that the law only permitted ACA subsidies to participants in state Exchanges and were unavailable to participants in those states with federally run Exchanges.
In reaching its decision, the Court relied on the legislative intent behind the ACA in its interpretation of the statutory language. The phrase at issue declares that subsidies are available through “an Exchange established by the State.” The Court interpreted this phrase to include both state and federally-operated Exchanges. This interpretation is consistent with the regulations implementing the subsidies where the IRS defines “Exchange” as an Exchange established by the state or the federal government. As a result, this ruling permits individuals who purchase health coverage through a state or federally run Exchange to receive subsidized health care coverage.
Subsidies are a crucial component of the ACA and limiting their availability to state-run Exchanges would completely undermine the statutory scheme. Chief Justice Roberts, writing for the majority, reasoned that Congress enacted the ACA to improve the health insurance market, so the Court should strive to read provisions in the ACA in such a way that is consistent with Congress’s intent.
This decision resolves many of the ambiguities surrounding the implementation of the ACA’s requirements. Employers can now count on penalties for non-compliance with the ACA’s employer mandate. This mandate is often called the “Pay or Play Mandate” or “Employer Shared Responsibility Mandate,” and employers with an average of at least 50 full-time employees (and full-time equivalent employees) are subject to the mandate. Under the ACA, an employer must provide health coverage that is affordable and provides “minimum value” or pay a penalty. The employer may be subject to two penalties: (1) the “no offer” penalty if an employer fails to provide minimum essential health coverage; and, (2) the “insufficient coverage” penalty if the employer provides minimum essential health coverage but the coverage is either unaffordable or does not provide minimum value. In either case, employer penalties are triggered only when an employee receives subsidized coverage through an Exchange. As a result, the statutory scheme is effective only where employers are subject to the threat of penalties which are triggered through the provision of health care subsidies to individuals. This ruling makes it clear that subsidies are available for all Exchange plans—whether offered through the state or the federal government—and; thereby, all employers in those states face the threat of ACA penalties. In light of this ruling, it is crucial for employers to evaluate the potential costs to their organization to determine whether they will pay the penalty or offer adequate coverage to full-time employees and their dependents.
If you have any questions regarding this alert, how this ruling impacts your organization or have any additional questions about your benefits plan, please contact your McGrath North attorney.