Does the Premium Assistance Program Extend to Section 1321 Exchanges? – Why Employers Should Care

One uncertainty created by the Patient Protection and Affordable Care Act (the Act) is whether a person enrolled in a Federal Exchange is entitled to participate in the premium tax credit or cost-sharing reduction program (the premium assistance program) created by the Act. The Act is not clear on this issue and the answer will have a profound effect on the implementation of the Act.

The Act allows a State to establish an Exchange (a section 1311 Exchange) to offer qualified health plans to individuals and employers.  If a State does not create an Exchange, a different section of the Act directs the federal government to establish and operate an Exchange (a section 1321 Exchange) in that particular State.  A casual reader of the Act would not distinguish the potential difference between Exchanges established under sections 1311 and 1321. However, a close, articulate reading of the Act could lead the different Exchanges to cause the Act to fail to achieve its intended purpose.

The Act in section 1401 (section 36B of the Internal Revenue Code), in an effort to make health care coverage more affordable to people making between 100 and 400 percent of the federal poverty line, created a premium assistance program.  The premium assistance program is only available for months in which the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer is covered by a qualified health plan “…that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act…”  Despite the absence of any reference to Exchanges established under section 1321, the IRS in the final regulations it released on section 36B of the Internal Revenue Code extended the premium assistance program to include not only Exchanges established under section 1311, but also Exchanges established under section 1321.  It is unclear if the IRS had the authority to take such action.

The argument presented by Jonathan H. Alder and Michael Cannon is that the IRS did not have the authority to extend the premium assistance program to Exchanges established by the federal government under section 1321.  There in-depth paper entitled Taxation Without Representation: The Illegal Rule to Expand Tax Credits Under The PPACA argues the plain language of the Act limits the premium assistance program to individuals receiving their coverage through Exchanges established by the States under section 1311.  It is hard to argue the point, as the Act specifically mentions section 1311 when discussing who is eligible for the premium assistance program, but fails to mention anything regarding section 1321.

Others, like Timothy Jost in Tax Credits in Federally Facilitated Exchanges Are Consistent With The Affordable Care Act’s Language And History, have taken the position the IRS is authorized to read the Act to extend the premium assistance program to Exchanges established under section 1321.  Jost correctly points out if the premium assistance program is not extended to Exchanges created under section 1321, the Act will fail to achieve its purpose.  Both papers make plausible arguments the legislative history and Chevron deference support their position.  If you are interested in additional details, I would highly recommend reading both papers. 

One of the reasons the Act will fail if the premium assistance program is not extended to Exchanges established under section 1321 is both taxes associated with the Play or Pay Mandate require an employee to enroll in “a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee…”  Consequently, if an employer is operating exclusively in a State that does not offer an Exchange under section 1311, the employer could never be subject to either penalty associated with the Play or Pay Mandate if Alder and Cannon are correct.  (Query what an employer would do if Alder and Cannon are correct and the employer operated in two states, one with an Exchange established under 1311 and one with an Exchange established under 1321?) To date 31 States have not established an Exchange under section 1311.  The 31 States are – Alabama, Alaska, Arizona, Arkansas, Delaware, Florida, Georgia, Illinois, Indiana, Kansas, Louisiana, Maine, Michigan, Missouri, Montana, Nebraska, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, West Virginia, Wisconsin, and Wyoming.  If the premium assistance program is limited to an Exchange established under section 1311, employers operating exclusively in the States listed above will not be subject to the Play or Pay Mandate. This would be a large blow to one of the revenue producing provisions of the Act.  It would also give certain States, those that did not establish an Exchange under section 1311, a competitive advantage for certain business ventures.

The lack of clarity could also cause havoc regarding the Individual Mandate.  For more on that issue I would suggest reading Alder and Cannon’s paper as it is beyond the scope of this blog.  While it may seem odd a provision this critical to the implementation of the Act was overlooked, there is evidence the President, his administration and Congress expected all States to establish an Exchange under section 1311.  As Alder and Cannon point out, there is evidence the Act was drafted in this fashion to provide States an incentive to establish an Exchange under section 1311.  The incentive being the State’s citizens would have access to the premium assistance program that would make health care more affordable.  If indeed that was the case, the President, his administration, and Congress did a poor job forecasting the number of States that would establish an Exchange under section 1311.  There misguided forecast could kill the Act unless a court sides with Jost and his colleagues.

Digging deeper into the history of the Act, the death of Democratic Senator Edward Kennedy and subsequent victory of Republican Scott Brown has led to the mess surrounding the Act.  By shockingly winning Kennedy’s Senate seat Brown caused the Democrats to lose their super majority in the Senate.  To avoid an inevitable Republican filibuster, the bill that had already passed in the Senate was passed verbatim by the House which gave Congress a limited ability to amend and make corrections to the Act.  This drafting history helps explain the mess created by the Act which Congress has passed on to employers to try to figure out.

The issue of who is eligible for the premium assistance program will inevitably end up in the courtroom.  Unfortunately, standing issues will likely impede an employer or individual from challenging the issue before a tax is imposed upon them which will not occur until 2015. An answer may come sooner if Oklahoma’s challenge to this issue is allowed to proceed.    This could be another big battle the Act faces at the Supreme Court, a place the Act is becoming quite familiar.

I could see the issue being resolved either way.  For now employers will have to comply with the Play or Pay Mandate, but this is a potential future out for employers operating exclusively in States that have not established an Exchange under section 1311.