How King v. Burwell Creates Tax Problems for Federal Health Insurance Exchanges and Consumers

In King v. Burwell, the Supreme Court will address whether Section 36B of the tax code grants a tax credit to persons who purchase health insurance policies on federally established health insurance exchanges.  The government says yes, but the challengers argue that tax credits are allowable only for consumers who purchase health insurance policies on state established exchanges. Commentators have expressed concern that the Court’s acceptance of the challenger’s argument would cripple the Obamacare legislation, whose success depends on robust consumer enrollment in health care plans. The RAND Corporation, for example, predicts that a government-adverse decision in King will mean a 9.6 million drop in enrollment and a substantial spike in health care premiums.

However, as I explain in a short forthcoming essay in the Yale Journal of Regulation Online,  this discussion threatens to mask the potential tax problems facing persons who purchase policies during the current enrollment season. Under Section 36B, the IRS makes advance payments of tax credits to health insurance companies on account of consumers. For example, someone might choose a health insurance plan whose monthly premium is $500.  But the consumer may pay only $100 to the insurance company, with the IRS transferring the remaining $400.

Right now, the IRS is making payments to health insurance companies, even for consumers who have purchased health insurance plans on federally established exchanges.  But many people don’t realize that if King v. Burwell goes against the government, consumers would, absent a special rule, have to pay the IRS back for the advance payments. So, wholly aside from the calamitous drop in future enrollment, King v. Burwell could require that millions of consumers pay back the IRS thousands of dollars.

The IRS enjoys some authority to deny retroactive effect to judicial decisions, including those issued by the Supreme Court.  However, the exercise of that authority raises some unanswered questions, and a cloud of certainty hangs over consumers who purchase health insurance policies on federally established exchanges.

The preceding post comes to us from Andy Grewal, Associate Professor of Law at the University of Iowa College of Law.  It is based on his recent paper entitled “How King v. Burwell Creates Tax Problems for Consumers and What The Treasury Can Do About It,” which is forthcoming in the Yale Journal on Regulation Online and is available here.