D.C. Circuit and Fourth Circuit split - Is section 36B subsidy available for insurance purchased only from state exchanges, or available if from federal exchange? 

July 22: The D.C. Circuit and Fourth Circuit today reached opposite conclusions in challenges to Treasury regulations that interpret a tax credit or subsidy available under section 36B with respect to health benefit (insurance) purchased from a federal exchange.

With today’s decisions, these two circuits are “split” concerning this issue—seen by some as a key to the Affordable Care Act, i.e., without the tax subsidy, the effectiveness of the federal exchange would be questionable.

D.C. Circuit

The U.S. Court of Appeals for the District of Columbia today reversed a federal district court decision and vacated Treasury regulations concerning a subsidy—tax credit—available under Code section 36B for insurance purchased on health benefit (insurance) exchanges, pursuant to provisions of the Affordable Care Act. Halbig v. Burwell, No. 14-5018 (D.C. Cir. July 22, 2014)

The D.C. Circuit majority opinion concludes that “…the ACA unambiguously restricts the section 36B subsidy to insurance purchased on Exchanges [that are] established by the State.” Thus, the decision does not recognize the section 36B subsidy for insurance purchased on a federal exchange.

Read the D.C. Circuit’s 72-page decision [PDF 402 KB]. Concurring and dissenting opinions are included.

Fourth Circuit

The U.S. Court of Appeals for the Fourth Circuit, however, reached an opposite conclusion in a decision released today. The Fourth Circuit found that the applicable statutory language was ambiguous and granted deference to the Treasury regulations as a permissible exercise of agency discretion. King v. Burwell, No. 14-1158 (4th Cir. July 22, 2014)

Read the Fourth Circuit’s 46-page decision [PDF 93 KB]


Section 36B makes tax credits available as a form of subsidy to individuals who purchase health insurance through marketplaces—i.e., exchanges that are established by one of the 50 states or the District of Columbia.

Treasury regulations (2012) interpreted section 36B to authorize the subsidy also for insurance purchased on an exchange established by the federal government. Reg. section 1.36B-2(a)(1).

A group of individuals and employers residing in states that did not establish exchanges challenged the Treasury regulations and IRS’s interpretation of section 36B that would make them subject to certain penalties under the ACA. In both cases, the federal district courts rejected this challenge (granting summary judgment for the government in one, and granting the government’s motion to dismiss in the other).

On appeal, the D.C. Circuit today reversed, concluding that the ACA unambiguously restricts the section 36B subsidy to insurance purchased on exchanges established by a state.

The Fourth Circuit, however, affirmed the decision of the federal district court, thus setting up a split between these two circuit courts of appeals.

KPMG observation

What can be considered to be “take aways” from today’s decisions?

First, if the subsidy is only available with respect to the state exchanges, then employees on a federal exchange would be worse off than employees in states with a functioning state exchange.

Second, there is the issue of an employer penalty. Under the Treasury regulations, if an employer does not offer a full-time employee “affordable” minimum essential coverage, under which at least 60% of the value is provided by the employer, and the employee chooses to go to an exchange and obtain a subsidy, the employer is subject to an “employer shared responsibility” penalty of $2,000 or $3,000 per year, per employee. If this penalty were only to apply with respect to the state exchanges, and not to a federal exchange, employers would not be significantly penalized for failing to offer coverage, and one of the sources of funding for the subsidy would be in doubt.

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