Federal Health Exchange Tax Subsidies Disputed

July 25, 2012

There is now a growing dispute regarding whether tax subsidies will be available to those individuals purchasing insurance through a federal exchange and whether some employer penalties can be imposed for failure to provide insurance through federally run exchanges.

Section 1401 of the Patient Protection and Affordable Care Act (PPACA) provides subsidies to those “which were enrolled through an Exchange established by the State under 1311 (sic) of the Patient Protection and Affordable Care Act.”  Similar language is in Internal Revenue Code section 36B.  Federally run exchanges are established under section 1321 of the Act.

Various law professors, Cato Institute scholars and Virginia Attorney General Ken Cuccinelli, among others, are also arguing that states can protect businesses subject to the employer mandate and penalties from fines under PPACA by failing to establish state level exchanges.  This generally affects employer with 50 or more employees. They argue that restricting tax credits to state-run Exchanges was a deliberate policy choice and is consistent with the plain language of the statute.  To read their arguments, click here.

Others, including Timothy S. Jost, a law professor from Washington and Lee University School of Law, assert that this is merely a drafting error, and one of many in the bill. To read his argument, click here.

The IRS has issued regulations that allow the premium subsidies whether the exchange is federally or state run.  These regulations are likely to be challenged in court unless Congress changes the wording of the statute.

NSBA supports voluntary health care exchanges as a means of fostering a competitive and informed health insurance marketplace.