Supreme Court Upholds Tax Subsidies for Federally-Run Exchanges

The case of King v. Burwell provided a scare for residences receiving tax subsidies to help pay for health insurance in 37 states (including Arizona). The case was a challenge to the wording of the Affordable Care Act (AKA Obamacare), which stated that subsidies would only be available in an “exchange established by the state.” Since 37 states opted not to establish their own exchanges, the federal government stepped in and set it up for them. Later, the IRS ruled that residences in states with federally-run exchanges were also eligible to receive tax subsidies. Affordable Care Act

On June 25, 2015, in a 6-3 ruling, the Supreme Court affirmed that the previous determination by the IRS was valid. Writing for the majority, Chief Justice John Roberts essentially argued that it was the intent of Congress to provide subsidies in all 50 states and that a ruling in favor of the plaintiffs would “destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very “death spirals” that Congress designed the Act to avoid.

Roberts went on to write: “The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral. It is implausible that Congress meant the Act to operate in this manner.

Writing the dissenting opinion for the minority, Justice Antonin Scalia rejected the “outlandishness” of the majority ruling:

The Court has come up with nothing more than a general provision that turns out to be controlled by a specific one, a handful of clauses that are consistent with either understanding of establishment by the State, and a resemblance between the tax-credit provision and the rest of the Tax Code. If that is all it takes to make something ambiguous, everything is ambiguous.

Scalia closes by lamenting the Court continuing to rescue Congress from its own poorly written law:

Having transformed two major parts of the law, the Court today has turned its attention to a third. The Act that Congress passed makes tax credits available only on an “Exchange established by the State.” This Court, however, concludes that this limitation would prevent the rest of the Act from working as well as hoped. So it rewrites the law to make tax credits available everywhere. We should start calling this law SCOTUScare.

So in an argument over the literal interpretation of a law and the “intent” of that wording, the majority opinion ultimately concluded that the intent of Congress was to improve the health insurance markets rather than destroy them, and a ruling in favor of the plaintiffs would produce the latter result.

In the wake of the ruling, lawmakers on both sides of the aisle are likely breathing a sigh of relief. By all accounts, there was no immediate fallback plan in place had the Supreme Court ruled in favor of the plaintiffs; it would have taken an act of Congress to rectify the issue with the subsidies, and there is little motivation on the part of GOP lawmakers to help the President fix a law that none of them voted for.

For taxpayers, this ruling means nothing changes in the short term with regards to tax subsidies for purchasing health care plans on the public exchanges. However, there is still a lot of confusion about how large a subsidy (if any) you may be entitled to receive based on your income. This past year alone, thousands of taxpayers received more than they were eligible for and had to pay back some on their tax returns.

For further questions regarding the recent Supreme Court ruling or tax subsidies for health plans in general and how it affects your business, speak to your local accounting firm.

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