ACA exchanges face Supreme Court scrutiny

There’s a lot of buzz surrounding the Affordable Care Act and the impending U.S. Supreme Court decision in King v. Burwell.

While some headlines have us believing the legality of the ACA rests in the hands of the Supreme Court, that’s not the case. Rather, the justices are only evaluating the legality of a piece of the ACA: subsidies.

Under the ACA, subsidies are available for certain individuals who purchase coverage through exchanges that are established by states. But if a state does not establish an exchange, the ACA requires the federal government to establish an exchange for the state.

At issue before the Supreme Court is whether these federally facilitated exchanges qualify as exchanges established by the states, so individuals who purchase coverage through a federally facilitated exchange are entitled to ACA subsidies.

While the case involves a small part of the law, it could have a big impact. If the Supreme Court rules that subsidies are only available in states that run their own exchange, millions of people will lose their subsidies — and likely their insurance.

This could seriously undermine the ACA’s effectiveness at reducing the number of uninsured people, but it will not repeal the law. That would require an act of Congress — and maybe a large enough vote to overcome a presidential veto.

So what’s at stake for businesses? A business subject to the ACA’s employer responsibility rules may incur penalties if it fails to offer medical coverage to enough full-time workers or offers coverage that is unaffordable. These penalties are only triggered if at least one employee obtains subsidized coverage through an exchange.

If the Supreme Court rules that subsidies are only available through a state-run exchange, then whether a business is subject to ACA employer responsibility penalties will depend on where its employees live:

  • If all employees and their dependents reside in states without a state-run exchange, the employer would not be subject to any employer responsibility penalties.
  • But if any employees reside in states with state-run exchanges, the business would still be subject to potential penalties if any of these employees obtain subsidized coverage through the state-run exchange — and the penalty would be calculated based on the employer’s total number of full-time employees, not just those living in states with a state-run exchange.

Regardless of the Supreme Court’s decision, keep in mind other ACA requirements will still apply unless Congress takes some action to repeal or modify the ACA. These ACA requirements include:

  • Coverage mandates that apply to all health plans, including coverage for young adults through age 26, first-dollar coverage of preventive health care and prohibitions on annual and life-time coverage limits.
  • ACA fees, reinsurance fees and the tax on insurers.
  • W-2 reporting of the cost of health plan coverage.
  • ACA reporting requirements for 2015 and beyond, with reporting set to begin in January 2016.
  • The “Cadillac tax” on high-cost health plans, scheduled for 2018.

If the Supreme Court rules that subsidies are only available through state-run exchanges, there will still be questions as to which states are deemed to be operating state-run exchanges. Although 17 states took steps to set up exchanges, three of these states today rely on the federally facilitated exchange — but could they still count as state-run exchanges?

Also, when crafting rules for exchanges, the federal government allowed states that chose not to run their own exchanges to participate in the operation of the federally facilitated exchange through a federal-state partnership exchange. Seven states — including Michigan — received approval. Would these partnership exchanges count as state-run exchanges?

If the Supreme Court rules that subsidies are available through state and federal exchanges, these questions won’t matter. On the other hand, if the justices rule that subsidies are only available through state-run exchanges, then these questions become very important, but it’s unclear whether the court will address them in its ruling. It may take another round of rule-making and litigation for the courts to sort out these issues.

The court’s decision is expected by the end of June. Watch to see what the implications will be for employer responsibility penalties.

Norbert F. Kugele is a partner at Warner Norcross & Judd LLP. He works extensively to help employers understand and comply with ACA requirements. He can be reached at

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