On June 25, 2015, the Supreme Court of the United States ruled that tax credits are available to individuals in states that have a federal Exchange under Section 1321 of the Affordable Care Act (the Act or the ACA). In a 6-to-3 ruling, the majority opinion declined to treat the issue as merely a matter of deference to the Internal Revenue Service’s interpretation of the Act. Instead, the Court said that, “It is especially unlikely that Con­gress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort,” adding, “This is not a case for the IRS.” The Court observed that, “The Affordable Care Act contains more than a few examples of inartful drafting” and found the relevant provisions to be ambiguous. However, the Court then interpreted the ACA as making tax credits available for insurance purchased on any Exchange created under the Act. According to the Court, “Those credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid.” In a sharp dissent, Justice Scalia disagreed with Chief Justice Roberts’s majority opinion, stating, “Words no longer have meaning if an Exchange that is not established by a State is ‘established by the State.’” King v. Burwell, No. 14–114, Supreme Court of the United States (June 25, 2015).


The ACA, under 42 U. S. C. §18031(b)(1), requires that every state operate an “Exchange,” which is a health insurance marketplace, usually online, allowing individual consumers to compare and purchase insurance plans. The ACA, pursuant to §18041(c)(1), also requires the federal government to establish an Exchange if a state does not. This alternative means of establishing and maintaining an Exchange gave rise to the present controversy because the ACA states, “A State may elect to authorize an Exchange established by the State under this section to enter into an agreement with an eligible entity to carry out 1 or more responsibilities of the Exchange” (emphasis added). 

In 2012, the Internal Revenue Service (IRS) and the U.S. Department of the Treasury promulgated a rule (now embodied in regulations issued under Section 36B of the Internal Revenue Code) to allow premium tax credits for individuals who purchase coverage through an Exchange, regardless of whether the state or federal government established the Exchange.

In 2014, the District of Columbia Circuit Court of Appeals ruled, in Halbig v. Burwell, that individuals are not eligible to receive premium tax credits if they enroll in qualified health plans through Exchanges established by the federal government rather than through Exchanges established directly by the states in which they reside. In King v. Burwell, the Fourth Circuit Court of Appeals reached the opposite conclusion. The Fourth Circuit decided that the IRS is permitted to interpret the ACA to allow premium tax credits in all 50 Exchanges established under the ACA, even though the U.S. Department of Health and Human Services (HHS), rather than the states themselves, established or operated the Exchanges in a majority of the states. 

The Court agreed to hear the case to decide whether the IRS may permissibly interpret Section 36B of the Internal Revenue Code to extend tax-credit subsidies for coverage purchased through Exchanges established by the federal government under Section 1321 of the ACA.

The Supreme Court’s Decision 

Chief Justice Roberts first analyzed what qualifies as an “Exchange” under Section 36B. According to the majority opinion, whether the phrase in Section 36 B—“an Exchange established by the State under [42 U. S. C. §18031]”—refers to state Exchanges only or to all Exchanges is ambiguous, notwithstanding the apparently plain language of the provision itself.

Given this ambiguity, the Court interpreted Section 36B within the broader structure of the ACA and ruled that, to interpret “Exchange” in Section 36B as applying only to state Exchanges “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” (referring to situations in which premiums rise to the point that fewer individuals purchase insurance and “insurers began to leave the market entirely.”) 

According to the Court,

the Act indicates that State and Federal Exchanges should be the same. But State and Federal Exchanges would differ in a fundamental way if tax credits were available only on State Exchanges—one type of Exchange would help make insurance more affordable by providing billions of dollars to the States’ citizens; the other type of Exchange would not. 

Finding that “[i]t is implausible that Congress mean the Act to operate in this manner,” the Court decided that tax credits are not limited to state Exchanges. The Court thus affirmed the Fourth Circuit’s decision.

The Dissent 

Justice Scalia, writing for himself and Justices Thomas and Alito, strongly objected to the approach taken by the Court in upholding the IRS’s interpretation of Code Section 36B. Terming the majority’s approach “interpretive jiggery-pokery” that ignored the plain language of the ACA, Justice Scalia rejected the notion that the role of Section 36B in the overall scheme of the ACA supported the IRS’s interpretation. Justice Scalia concluded that the majority’s approach amounts to an unjustified judicial revision of the ACA, trampling on Congressional prerogatives for the sake of once again saving the ACA from what may well have been “inartful drafting” on Congress’s part.

Practical Impact

“This Court’s decision confirms the advice we have given since the Affordable Care Act was adopted,” said Joel A. (“Buddy”) Daniel, who chairs Ogletree Deakins’ 37-lawyer Employee Benefits and Executive Compensation Practice Group. “Employers should plan their compliance strategies based on the assumption that the Act and the regulations issued under it are here to stay.”

Importantly, the Court’s decision does not alter employer responsibilities under the ACA’s “employer mandate” and its related tax reporting obligations. Since the enforcement mechanism behind the employer mandate—tax penalties under Code Section 4980H—are premised on the availability of tax-credit subsidies for exchange coverage, had the Court rejected the IRS’s approach, the “teeth” of the employer mandate would have effectively been removed in the majority of states where federal exchanges operate. However, the Court’s decision affirms the IRS’s regulatory approach, thereby preserving the employer mandate as well.

Timothy G. Verrall is a shareholder in the Houston office of Ogletree Deakins and is a member of the Employee Benefits and Executive Compensation Practice Group.

Hera S. Arsen, Ph.D. is managing editor of firm publications and is based in the Torrance, California office of Ogletree Deakins.


Which training method is of interest to you?


Which training method is of interest to you?

Skip to content