Today, the U.S. Court of Appeals for the District of Columbia Circuit, in a 2-1 decision, invalidated a key component of the Patient Protection and Affordable Care Act (“ACA”).  Specifically, the court struck down the provision of the ACA that provides subsidies to individuals who buy health insurance coverage on the Marketplace Exchanges run by the federal government. The court held that subsidies are available only to people who purchase health insurance on state-run exchanges. Currently, the majority of individuals enrolled in a Marketplace Exchange receive federal subsidies. This ruling essentially makes subsidies unavailable in 36 states where the federal government runs the Marketplace Exchanges. Only 14 states and the District of Columbia created their own exchanges in time for 2014.

As background, the ACA requires individuals to have health insurance coverage or pay a penalty (the “individual mandate”). The subsidies were designed to make coverage more affordable for lower-income individuals so that they could comply with the individual mandate. The court’s holding will also have a significant effect on the “employer mandate” that requires applicable large employers to pay a penalty if they do not offer affordable healthcare coverage to their full-time employees. The employer penalties are only triggered when an employee receives a federal subsidy when purchasing health insurance coverage through a Marketplace Exchange.

The Obama Administration has announced that it is seeking a hearing before the entire appeals bench. It is likely that this issue will be ultimately decided by the U.S. Supreme Court.  While this case continues its way through the legal process, federal subsidies will continue to be provided to lower-income individuals who purchase health insurance coverage through a Marketplace Exchange.

For more information on the ACA, contact your Executive Compensation and Employee Benefits Counsel at Smith, Gambrell & Russell.