On November 7, 2014, the United States Supreme Court agreed to consider a significant challenge to the Patient Protection and Affordable Care Act (ACA). The Fourth Circuit case, King v. Burwell, involves the availability of federal tax subsidies to low and moderate income individuals to subsidize the cost of premiums for health insurance purchased through public exchanges.

The King case extended federal tax subsidies to individuals who purchased health insurance through federally-operated exchanges. The case looks at whether the ACA limits federal tax subsidies to individuals who purchase health insurance through state-operated exchanges, or whether it can also permit subsidies to those obtaining insurance through federally-operated exchanges.

Currently, 16 states have opened their own exchanges, and the other 34 states rely on the federal government to operate their exchanges. The opponents contend that the ACA’s plain language limits federal tax subsidies to individuals who purchase insurance from exchanges established by a state. The federal government, on the other hand, argues that the ACA authorizes all individuals to receive federal tax subsidies purchased through an exchange, whether federal or state-run, based on IRS regulations interpreting the ACA. Lower federal courts are divided as another case decided by the D.C. Circuit of Appeals in 2014 concluded that the term “exchange” includes only state-established exchanges.

If the Supreme Court reverses the King v. Burwell decision and does not permit tax subsidies to individuals who purchase insurance in a state without its own exchange, the case likely will have significant impact on employers and employees. Employees who purchase health insurance in the 34 states with federally-operated exchanges would not be eligible for tax subsidies, and employers operating in these 34 states would not be subject to the employer mandate penalty, which is only triggered by an employee who receives a federal tax subsidy to purchase insurance.

California would not be immediately impacted by the King decision because California established its own state exchange. However, a reversal could significantly undermine the ACA by denying tax subsidies to individuals in these 34 states, and cause huge spikes in health care premiums to offset the expected loss of many healthy individuals who will forego purchasing insurance without tax subsidies.

Oral arguments are scheduled for March 2015 and a decision is expected by June 2015. We will continue to monitor this important case.