How Big Is Halbig? The Viability of the ACA's Employer Mandate Hangs in the Balance

By Adam C. Solander, Kara M. Maciel, Mark M. Trapp, and Stuart M. Gerson

Yesterday, the U.S. Court of Appeals for the District of Columbia and the U.S. Court of Appeals for the Fourth Circuit sent shockwaves through the country when they issued conflicting opinions on a key aspect of the ACA.  The cases are Halbig v. Burwell, D.C. Cir., No. 14-508 and King v. Burwell, 4^th Cir., No. 14-1158.  The question at issue in both cases was whether the IRS has the authority to administer subsidies in federally facilitated exchanges when the statute itself specifically authorizes subsides only in state exchanges.

According to the statutory text of the ACA, the penalties under the employer mandate are triggered only if an employee receives a subsidy to purchase coverage "through an Exchange established by the State under section 1311" of the ACA.  If a state elected not to establish an exchange or was unable to establish an operational exchange by January 1, 2014, the Secretary of HHS was required to establish a federal exchange under section 1321 of the ACA.

In 2012, the IRS promulgated regulations making subsidies available in both federally facilitated exchanges and state-run exchanges.  In those regulations, the IRS asserted that "the statutory language … and other provisions" of the ACA "support the interpretation" that credits are available to taxpayers who obtain coverage through both state and federally facilitated exchanges.

The individuals who brought the suits live in states that did not establish their own exchanges. They argue that the text of the ACA is clear and unambiguous: the IRS does not have the authority to administer subsidies in their states because the exchanges were not "established by the State."

The D.C. Circuit, in a 2-1 decision, in Halbig v. Burwell agreed with the appellants and vacated the IRS regulation.  The court focused heavily on the plain meaning of the statutory text and concluded "that the ACA unambiguously restricts the ... subsidy to insurance purchased on Exchanges established by the state."  In an opinion issued only hours later, the 4th Circuit, in a 3-0 decision, in King v. Burwell agreed with the IRS that the statutory language was not plain, but ambiguous. Accordingly, the court upheld the subsidies "as a permissive exercise of the agency's discretion."

Given the circuit court split, many commenters believe that Supreme Court review is necessary to resolve this issue.  However, while it is certainly possible, perhaps even likely, that the Supreme Court will review this issue, it may not be a foregone conclusion.  The Obama administration has already indicated it will seek en banc review of the Halbig decision by the entire D.C. Circuit.  If the full D.C. Circuit reverses the Halbig panel decision, the existing "circuit split" would be resolved, potentially making Supreme Court review less likely.  It should be noted that there are similar cases pending in district courts in the 10th and 7th Circuits, that if decided in favor of the challengers could create a circuit split even if the full D.C. Circuit reverses Halbig.

On the other hand, given the tremendous importance of this issue to the operation of the ACA, and the fact that under the plain meaning of the statute, the IRS regulation allows billions of dollars in tax credits without the authorization of Congress, the Supreme Court may accept review to fully settle this important question of federal law, regardless of whether there are conflicting decisions from the circuit courts. The Supreme Court has long operated under the "rule of four," a convention under which a grant of certiorari requires the approval of only four justices. Given the fact that the availability of the subsidies is an issue of national importance, and that two years ago four justices voted to strike down the ACA altogether, Supreme Court review of this issue appears likely. Ultimately, however, whether the Supreme Court will accept the case is a matter of speculation.

For employers, the most significant issue may be the potential impact the Halbig ruling could have on the Employer Mandate.  As noted above, the employer mandate penalties are only triggered by an employee going to the exchanges and purchasing subsidized health care.  Accordingly, if none of its employees receives a subsidy, then no penalties would be triggered against an employer.  Thus, for employers with employees in the 36 states with a federally facilitated exchange, the question arises how the Halbig decision impacts their decision and strategy to provide health coverage to their employees when the Employer Mandate takes effect in 2015 (or 2016 for employers with 50-99 employees).

Additionally, considering that the Employer Mandate and its penalty provisions have been extended twice before, this legal development could provide employers and trade associations with an opportunity to ask the Obama Administration to delay the Employer Mandate again until the Supreme Court has a chance to review the case, or even to scrap it altogether.

While more questions may be raised by the two conflicting court decisions, what is clear at this point is that yesterday's decisions are certainly not the final word on this issue.