Funding of Affordable Care Act Cost-Sharing Payments found Unconstitutional: A Battle that may well Wage into the Future

A federal district court has found that funding of cost-sharing payments under Section 1402 of the Affordable Care Act (ACA) made by the federal government to insurers is unconstitutional. The ACA created a permanent appropriation for the Code Sec. 36B premium assistance tax credit but not for cost-sharing, the court found.

The court enjoined additional payments under Code Sec. 1402 until a valid appropriation is in place. However, the court stayed its injunction pending appeal. A White House spokesperson predicted that the Obama administration will appeal the decision.


Section 1402 of the ACA provides a discount that lowers the amount individuals pay out-of-pocket for deductibles, coinsurance, and copayments for health insurance obtained through the ACA Marketplace. Generally, the individual must enroll in a qualified health plan (a Silver level plan) and have a household income that exceeds 100 percent but does not exceed 400 percent of the poverty line for a family of the size involved. Individuals with income between 100 and 250 percent of the poverty line qualify for an additional reduction. Eligibility for the Code Sec. 36B credit is also a prerequisite to receiving cost-sharing reductions.

The U.S. Treasury has been making advance payments of cost-sharing reductions to insurers in the ACA Marketplace. In 2014, House Republicans filed suit challenging the payments as unconstitutional.

Court’s analysis

Under Article 1 of the U.S. Constitution, “no money shall be drawn from the Treasury, but in consequence of appropriations made by law.” The expenditure of public funds is proper only when authorized by Congress. Appropriations legislation, the court explained, provides legal authority for federal agencies to incur obligations and to make payments out of the Treasury for specified purposes. Appropriations legislation has the limited and specific purpose of providing funds for authorized programs.

A “permanent” or “continuing” appropriation, once enacted, makes funds available indefinitely for their specified purpose; no further action by Congress is needed. A “current appropriation,” by contrast, allows an agency to obligate funds only in the year or years for which they are appropriated.

The Code Sec. 36B credit was added to a pre-existing list of permanently appropriated tax credits, the court found. Cost-sharing under Section 1402 was not added to that list, the court added.

The court rejected the government’s argument that ACA’s provisions for cost-sharing the Code Sec. 36B credit are economically and programmatically integrated. Premium tax credits are payable under Code Sec. 36B. Cost-sharing reductions are payable under Section 1402 of the ACA. The two are textually and legally distinct, the court found. The cost-sharing reductions, unlike the Code Sec. 36B credit, do not reduce an individual’s tax liability. The payments are made to compensate insurers for the costs that they bear.

Legislation enacted after the ACA also did not support the government’s argument. The 2013 Continuing Appropriations Act required the government to certify eligibility for premium tax credits and reductions in cost-sharing before making the credits and reductions available. However, the court found that the temporary appropriations act merely allowed Congress to require certification of eligibility prior to monies being distributed; it did not create an appropriation for cost-sharing.

If you have any questions, do not hesitate to give us a call at the office, 314-993-4285.

*This information was received from CCH Federal Tax Weekly*

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