September 2012 Volume 9 Number 1

A Gap in PPACA: No Subsidies for Insurance Purchased from Federal Exchanges?

By Amy Sanders, J.D. Candidate, Vanderbilt University Law School, Class of 20131

AuthorA gap in the Patient Protection and Affordable Care Act2 (“PPACA”) could leave many citizens ineligible for the federal subsidies meant to make health insurance coverage more affordable. The quirk—either a scrivener’s error or overlooked loophole—could be a serious blow to an already contentious healthcare reform effort. Who to remedy the situation? Employers.

Exchanges and Eligibility

PPACA requires all residents of the United States to retain minimal essential health coverage, imposing a monetary penalty for failure to do so.3 The individual mandate, as it is known, is softened by tax credits made available only to certain lower-income individuals purchasing insurance through one-stop-shop Health Insurance Exchanges (“Exchanges”) which will be established in each state by either the state or federal government.4

An amendment to an early draft of PPACA gave states the flexibility to elect not to establish an Exchange, providing for a federally-run Exchange in states electing to opt out.5 However, there is no parallel amendment to the tax credit provision. That is, subsidies for state residents are only available if the state elects to create an Exchange, so lower-income individuals in opt-out states will not be eligible for the subsidies.6

The Internal Revenue Service (“IRS”), the agency charged with administering the tax credits, is ignoring the textual anomaly and interpreting PPACA as making tax credits available through all Exchanges.7 The IRS is not acting arbitrarily: subsequent legislation shows that this is the statutory scheme Congress envisioned.8

The Effect on Employers

The increase in insureds expected to result from the soon-to-be-mandatory minimal essential coverage9 could be attributable in part to employer-sponsored plans, even though PPACA does not require employers to offer health insurance coverage to employees. Instead, employers are incentivized. Beginning in 2014, large employers (fifty or more full-time employees) not offering comprehensive and affordable insurance will be subject to a nondeductible penalty of up to $2,000 for each full-time employee, minus the first thirty, if any of their full-time employees qualify for and receive a federal subsidy through an Exchange.10

The Road to the Courthouse

If anyone is to challenge the IRS interpretation, it will have to be employers. Generally, there is no standing for a taxpayer to contest a tax benefit conferred upon someone else,11 so citizens in states that have elected not to establish an Exchange would lack standing to challenge the regulation. Large employers, however, will have standing because they can show an “injury” resulting from the IRS rule extending tax credits to enrollees of both state and federal Exchanges. The source of the injury—the penalty imposed on large employers who do not offer coverage if an employee receives a premium or cost-sharing subsidy through an Exchange—is a strong motivator to challenge the IRS interpretation.12

Large employers can find their sticking point in the plain text of PPACA § 1401, which amends § 36B of the Internal Revenue Code: the tax assessment (penalty) is triggered if “at least one full-time employee . . . has been certified to the [large] employer under § 1411 as having enrolled . . . in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid.”13

Section 1411(a)(2) prescribes the procedures for determining eligibility for Exchange participation, outlining criteria for premium tax credits, available under § 1401, and reduced cost-sharing, available under PPACA § 1402.14 Section 1401 makes tax credits available through state Exchanges established under § 1311—with no mention of federal Exchanges, which are established pursuant to § 1321(c). Thus, a strict reading of § 36B does not make subsidies available through federal Exchanges, meaning that large employers fined for not offering coverage could challenge the fine by asserting the employee received the tax credit in error. An employer’s motivation for trying to take tax credits away from employees, despite the potential effects on morale and loyalty, lie in avoiding the penalty: the employer cannot be fined if its employees do not collect tax credits. This argument would provide judicial opportunity to review the IRS regulations.15

The penalty imposed when an employee is eligible for reduced cost-sharing is trickier to maneuver. Reduced cost sharing is allowed for an “eligible insured” falling within the range of 100–400 percent of the federal poverty line.16 As defined by § 1402, an eligible insured is one who enrolls in a certain level qualified health plan “in the individual market offered through an Exchange.”17 This is not expressly limited to state Exchanges. Also within § 1402, however, is a prohibition on reduced cost-sharing “with respect to coverage for any month unless the month is a coverage month with respect to which a credit is allowed to the insured . . . under section 36B.”18 Carried through to its logical conclusion using same analysis as for the tax credits, a strict textual interpretation of § 36B means that an individual enrolled in a federally-run Exchange does not qualify for either a tax credit or reduced cost-sharing.

Verifying this reading of the statute is § 1402(f)(1) which expressly gives any term used in § 1402 the same meaning it is given in § 36B.19 “Coverage month,” as defined in § 36B(c)(2), means that, as of the first day of the month, an individual is insured by virtue of being “enrolled in” a qualified health plan offered “through an Exchange established by the State under section 1311.”20 Therefore, only coverage plans offered through state-run Exchanges can fall into a “coverage month” in which a tax credit is available, so enrollees of a federally-run Exchange do not qualify for reduced cost-sharing.

When Plain Text is Not So Clear

Many questions will confront a reviewing court: did Congress intend to omit federal Exchanges from the tax credit scheme established in § 36B? Did Congress sidestep or delay the tax conduit status issue by delegating the decision to the IRS? Or, is this simply a drafting error?

Existing under the constraints of the nondelegation doctrine, the primary role of an agency is “faithful agent” of Congress.21 The IRS can only act within the limits of the statute conferring authority from the legislature to regulate conduct. It follows that a court will likely frame its inquiry using Chevron, the two-step test allowing reasonable agency interpretations as long as the statute has not clearly spoken to the issue.”22

The inclusion of federal Exchanges in the IRS rule delineating availability of subsidies is best evaluated using the traditional tools that courts employ in statutory construction.23 Analyzing the broader statutory context, legislative history, post-enactment reports of the Congressional Budget Office, and subsequent legislation, it is evident that the availability of subsidies through Federal Exchanges is not as clear as the plain text of § 36B suggests. For example, § 1004 of HCERA requires state and federal Exchanges to report tax credits data to the IRS, which makes sense only when federal Exchanges administer subsidies. Reading § 36B together with the later-enacted § 1004 illustrates Congress’ intention that both state and federal Exchanges would administer tax credits for insurance premiums.

To arrive at its broad construction of the statute, the IRS likely employed the substantive canon of statutory construction that drives agencies: “advance the interpretation that best advances the statutory purpose (so long as the statutory text can accommodate that interpretation).”24 As the agency responsible for developing the regulatory framework under which Exchanges will administer the tax credits to eligible insureds, the IRS is keenly aware that affordability of minimum essential coverage is crucial for the success of PPACA. Ensuring all Americans have access to affordable, comprehensive health insurance is the statute’s paramount purpose. Exchanges are integral to the statute’s healthcare reform strategy, making available federal tax credits and cost-sharing reductions to those needing financial assistance to comply with the individual mandate.

To defend its position, the IRS will probably argue that the omission of federal Exchanges from § 1401 was not intentional; it resulted from drafting a mammoth statute in a way that was hardly chronological. One might understand that Congress intended the federal Exchanges to be interchangeable with those established by the state. The IRS would be well-advised to also point out that there is no interjurisdictional issue for money flowing from the federal purse through federal Exchanges, so it was not necessary for Congress to specifically allocate funds for these subsidies in the text of PPACA. The power of an agency to implement and manage a congressionally created program “necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.”25


At least one state has wasted no time in dealing with this issue. On September 19, 2012 Oklahoma attorney general Scott Pruitt filed an amended complaint26  in Oklahoma v. Sebelius, challenging the validity of the IRS rule that provides for tax credits through federally run exchanges. Oklahoma indicates that it does not plan to establish a state run exchange and that the IRS rule imposes costs on large Oklahoma employers that do not provide federally qualifying health benefits to their employees (if one employee receives a subsidy through a federally run exchange).


For employers facing the penalty, all roads lead back to § 36B: a large employer in a state electing not to establish a state-run Exchange does not seem to be subject to the penalty, because an employee receiving a subsidy or cost-sharing reduction under a federal Exchange will not trigger liability. If required to pay the penalty, an employer whose employees receive tax credits or reduced cost-sharing through a federal exchange would suffer harm from the IRS rule. A large employer in such a position would have both standing and motivation to challenge the scope of IRS regulation that makes tax credits available through federal Exchanges.27


J.D. Candidate, Vanderbilt University Law School, Class of 2013. The author’s complete analysis of the issue will be published in the Vanderbilt Law Review, Spring 2013. The author would like to acknowledge Professor J. Blumstein, who was among the first to identify the issue explored here, although nothing in this article should be taken to indicate that he does or does not agree with the views expressed.

2Patient Protection and Affordable Care Act (“PPACA”), Pub. L. No. 111-148, 124 Stat. 119 (2010) (to be codified in scattered sections of 42 U.S.C. & 26 U.S.C.) and Health Care and Education Reconciliation Act of 2010 (“HCERA”), Pub. L. No. Law 111-152, 124 Stat. 1029 (2010) are collectively referred to as PPACA.

PPACA § 1501(b) (to be codified at I.R.C. § 5000A)


Id. § 1311(d)(2), 1401(a) (to be codified at I.R.C. § 36B(b)(2)), 1411 (to be codified at 42 U.S.C.A. § 18081).


Id. § 1311(d)(2).


Through PPACA § 1401, which amends § 36B of the Internal Revenue Code, Congress created a refundable premium tax credit available through state Health Insurance Exchanges established under § 1311 of PPACA — with no mention of § 1321(c)’s federal Exchanges.


Treas. Reg. §§ 1, 602 (2012) (final regulation stating that statutory language, purpose, and structure support the IRS interpretation).




CBO’s March 2011 Estimate of the Effects of the Insurance Coverage Provisions Contained in the Patient Protection and Affordable Care Act (Public Law 111-148) and the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), Cong. Budget Office & Joint Comm. on Taxation (Mar. 18, 2011), available at


PPACA § 1302(c)(4)-(d), 1513 (to be codified at I.R.C. § 4980), 2707.

11See Peter Suderman, No Insurance Subsidies Through ObamaCare’s Federal Health Exchanges?, Reason Magazine (Sept. 8, 2011),

PPACA § 1513 (to be codified at I.R.C. § 4980).



14Id. § 1411(a)(2) (to be codified at 42 U.S.C.A. § 18081).

See David Hogberg, Companies Could Challenge ObamaCare Employer Fines, Investor’s Business Daily (Sept. 16, 2011),


PPACA § 1402(b) (to be codified at 42 U.S.C.A. § 18071).




Id. § 1402(f)(2) (to be codified at 42 U.S.C.A. § 18071).


Id. § 1402(f)(1) (to be codified at 42 U.S.C.A. § 18071).

20PPACA § 1401(a) (to be codified at I.R.C. § 38B) (emphasis added).
21Jerry L. Mashaw, Between Facts and Norms: Agency Statutory Interpretation as an Autonomous Enterprise, 55 U. Toronto L.J. 497, 502–03 (2005).
22See Chevron v. Natural Res. Defense Council, 467 U.S. 837 (1984). Note that the Supreme Court rejected tax exceptionalism in 2011, stating that the “principles underlying our decision in Chevron apply with full force in the tax context.” Mayo Found. for Med. Educ. & Research v. United States, 131 S.Ct. 704, 713 (2011).
23See Chevron v. Natural Res. Defense Council, 467 U.S. 837, 842–43 n.9 (1984).
24William N. Eskridge, Jr. & Lauren E. Baer, The Continuum of Deference: Supreme Court Treatment of Agency Statutory Interpretations from Chevron to Hamdan, 96 Geo. L.J. 1083, 1201 (2008)
25Chevron, 467 U.S. at 843.
26Complaint on file with author.
27See Jonathan H. Adler & Michael F. Cannon, Op-Ed., Another ObamaCare Glitch, Wall St. J., Nov. 16, 2011,

The ABA Health eSource is distributed automatically to members of the ABA Health Law Section . Please feel free to forward it! Non-members may also sign up to receive the ABA Health eSource.