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Photo of The Supreme Court Addresses Federal Health Care Subsidies and Same-Sex Marriage

The Supreme Court Addresses Federal Health Care Subsidies and Same-Sex Marriage

Employers' Advisor Blog Archives
July 13, 2015

Two recent Supreme Court decisions have implications for employee benefit plan sponsors: King v. Burwell, decided June 25, 2015, and Obergefell v. Hodges, decided June 26, 2015.

King v. Burwell

The Affordable Care Act requires the creation of an “Exchange” in each state. The Exchanges function as insurance marketplaces that allow individuals to compare and purchase health insurance plans. Under the ACA, each state has the right to establish its own Exchange, as New York has done. If a state does not establish its own Exchange, the ACA requires the secretary of Health and Human Services to establish and operate an Exchange within the state. The ACA provides tax credits for low-income individuals enrolled in an insurance plan purchased through “an Exchange established by the state under [the ACA].” On its face, the quoted language seems clear; only individuals who live in states that have established their own Exchanges can receive tax credits. The IRS has ruled, however, that tax credits are available for coverage purchased through all Exchanges, and not just Exchanges “established by the state.”

The IRS interpretation was challenged by four residents of Virginia, a state that did not establish its own Exchange, and the case found its way to the U.S. Supreme Court. Specifically, the issue before the court was whether the ACA’s tax credits are available in states that have a federal Exchange. In a split decision (6-3) handed down on June 25, 2015, the Supreme Court held that tax credits are available to individuals in all states. Justice Roberts, writing for the majority, found that the statutory words at issue – “an Exchange established by the state” – were ambiguous when viewed in context and with a view to their place in the overall statutory scheme. Having found that the language at issue was ambiguous, the majority looked to the broader structure of the ACA and determined that treating state and federal Exchanges differently would produce a substantive effect that is not compatible with the rest of the law because it would destabilize the individual insurance market in any state with a federal Exchange and likely create the very “death spirals” that Congress designed the ACA to avoid.

How does this ruling impact employers?

It is now clear that employers with full-time employees in states that have federal Exchanges can be exposed to “play-or-pay” penalties if one or more their full-time employees receives a tax credit for Exchange coverage. While some employers in these states may have anticipated the opposite result, it is likely that few (if any) of them formulated their play-or-pay strategies with the opposite result in mind.

Obergefell v. Hodges

In another split decision (5-4), the Supreme Court held that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state. The decision overturned laws of four states – Michigan, Kentucky, Ohio, and Tennessee – that prohibit marriages between individuals of the same sex. The effect of the ruling is to legalize same-sex marriages nationwide.

How does this ruling impact employers?

The ruling in Obergefell v. Hodges will have the following implications for employee benefit plans:

  1. The ruling will promote uniform administration of spousal benefits for companies that have employees in multiple states.
  2. For employers that offer benefits to same-sex spouses, the decision may have implications under state tax law. For federal tax purposes, a marriage of same-sex individuals that is valid in a domestic or foreign jurisdiction that recognizes same-sex marriage is recognized as legal regardless of where the couple resides. Thus, for example, the value of employer-paid health care coverage for a same-sex spouse is generally nontaxable for federal tax purposes, even if the employee and spouse reside in a state that does not recognize same-sex marriages. For state tax purposes, the tax consequences may be different if an employee and spouse reside in a state that does not recognize same-sex marriages. In those states, an employer may be required to treat as taxable wages for state tax purposes an amount equal to the value of the spouse’s coverage. As a result of the court’s ruling, it will no longer be necessary for employers in those states to continue to tax the value of coverage provided to a same-sex spouse. Further guidance in this area is needed.
  3. Employers that do not currently offer benefits to same-sex spouses will need to undertake a careful review of the litigation and liability risks associated with such an exclusion. The EEOC, for example, has taken the position that health plans that only allow for coverage of opposite-sex spouses constitutes sex discrimination under Title VII; the fact that ERISA does not require health plans to cover spouses is irrelevant. While the court’s decision did not involve Title VII, the court’s reasoning may carry over into Title VII disputes.
  4. Employers that maintain domestic partner benefits may reasonably choose to discontinue those benefits if they were adopted to accommodate same-sex couples who could not get legally married in their home state.