In researching Section 4980H assessable payments, commonly referred to as the ACA employer penalty, I came across some potentially significant statements in IRS Notice 2011-36, dated May 23, 2011. The Notice, which reflects an official statement of the IRS, solicits public comments related to regulations under Section 4980H.

In describing the statutory scheme, the IRS seemed to acknowledge that Section 36B premium tax credits and Section 4980H penalties are allowed or assessed only for policies purchased on exchanges established and operated by the States, and not for the Federally-facilitated exchanges (the King v. Burwell issue). Specifically, the IRS referred to “premium tax credits to assist individuals in purchasing coverage through State Exchanges.” The IRS also contemplated that a penalty applies to employers when an employee obtains “health insurance through a State Exchange.” The reference to only State Exchanges seems consistent with the arguments of the challengers in King v. Burwell, who argue that credits and penalties do not apply for purchases on Federally-facilitated Exchanges.

One might respond that “State Exchanges” does not refer to only Exchanges established and operated by the States. That is, the phrase might be a term of art that would also reach the Federally-facilitated Exchanges, because those Exchanges are organized for the benefit of and reach persons in various States.

There are two powerful rejoinders to this view. First and foremost, the Treasury and IRS expressed their understanding that the phrase “State Exchange” means an Exchange distinct from the Federally-facilitated Exchanges. In the Preamble to the 2012 premium tax credit regulations, the IRS responded to arguments expressed by commentators, similar to the King challengers,’ that Section 36B “limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans on State Exchanges.” T.D. 9590, 77 FR 30377-01 (May 23, 2012).

The IRS rejected those arguments and in so doing, understood that “State Exchanges” refers to only those Exchanges established and operated by a State, and did not reflect an umbrella term for all Exchanges. The IRS concluded that Section 36B extends credits whether someone purchased a policy on the “State Exchange, regional Exchange, subsidiary Exchange, [or] the Federally-facilitated Exchange.” It then hammered this point home and again acknowledged that State Exchanges referred to a subset of Exchanges, concluding that “the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges,” 77 FR 30378 (May 23, 2012).

The above statements come from the regulations’ Preamble, but nothing in the operative text changes those statements. The regulations define “Exchange” generally and by cross-reference to HHS regulations, and grant credits to those “enrolled in one or more qualified health plans through an Exchange.” See Treas. Reg. Section 1.36B–1(k); Treas. Reg. Section 1.36B–2(a)(1). The regulations do not suggest that “State Exchange” refers to any Exchange that exists within a state.

The HHS regulations that the IRS adopted via cross-reference, 45 CFR 155.20, also do not offer any definition of “State Exchange” that would contradict this view. Those regulations simply offer a broad definition of the phrase “Exchange,” and do not address the meaning of “State Exchange” used by the IRS in the 2011 Notice.

Notice 2011-36, when placed alongside the 2012 IRS regulations, supports the view that the Notice, by referring to a “State Exchange,” contemplated that credits and penalties would relate only to policies purchased on an Exchange established and operated by a State. Cf. also Treasury Letter to Congressman Lankford, 2013 WL 4402558 (July 31, 2013) (concluding that ACA does not “limit the tax credit solely to state exchanges”).

There’s a second reason to think that the Notice adopted a view consistent with the King challengers’. The IRS Notice was issued in May 2011, right around the time that the storm was brewing over the scope of Section 36B. Based on the little we know of the IRS’s decision-making process, senior officials starting contemplating expanding Section 36B to Federally-facilitated Exchanges in Spring of 2011, and proposed regulations were issued in August 2011. If Notice 2011-36 were consistent with the IRS’s later positions, we would expect the language in the Notice to continue to be used in official IRS announcements.

However, the IRS immediately abandoned the “State Exchanges” phrasing. A Westlaw search reveals no other instance of the IRS using “State Exchange,” except in the two materials I cited above, where the IRS adopted a defensive posture. Notice 2012-17 (Feb. 2012), which also related to the forthcoming 4980H regulations, used the broader “State-based Affordable Insurance Exchanges” language. Notice 2012-58 (Aug. 2012), issued a few months after the King v. Burwell regulations became final, dropped the reference to States entirely and referred only to “Affordable Insurance Exchanges.” The eventual Section 4980H regulations followed that phrasing, eliminating any reference to States. 78 FR 218-01 (January 2, 2013).

I can’t read minds, and I would welcome comments from agency officials, but it seems like the IRS deliberately rejected Notice 2011-36’s characterization of the statutory scheme. Instead of referring to credits and penalties for only State Exchanges, the IRS eventually broadened the scope of the provisions to reach “Affordable Insurance Exchanges.” This broadening lends further support to the idea that the original Notice embodied a view consistent with the King challengers’. The IRS would not need to change the “State Exchanges” phrasing if it obviously included Federally-facilitated Exchanges.

And now on to the $64,000 question: Does this apparent flip-flop prove that the IRS already admitted defeat in King v. Burwell? You’ll have to forgive me for the provocative title to this blog post, but the answer is “no.” Even if, as seems to be the case, Notice 2011-36 adopted a view consistent with the King challengers’, the IRS is entitled to change its position, subject to some limitations. Alternatively, Notice 2011-36 might be wrong, in which case a court could reject it. Or, the Notice might be entitled to minimal weight, because it does not purport to offer an authoritative position, nor does it offer much by the way of reasoning. (Of course, that second infirmity has not stopped the IRS from claiming Chevron deference for the King v. Burwell regulations.)

Nonetheless, the Notice may shed light on a couple issues. First, the defenders of the IRS’s position sometimes argue that their expansive reading of Section 36B is so blindingly obvious that the challengers must be acting for solely political reasons. I have long rejected that view because I thinkKing v. Burwell presents a nuanced question. Notice 2011-36 supports that conclusion because some at the IRS believed that credits and penalties related only to State Exchanges and even put that understanding in an official publication.

Also, Notice 2011-36 raises questions about the processes that the IRS used to issue the King v. Burwell regulations. Those regulations express a view different from the early Notice, yet the IRS made no mention of the Notice when it promulgated the regulations. King v. Burwell has given rise to some spirited and aggressive debates over the ACA, but I think that persons on both sides should support agency clarity in connection with major rulemaking. Cf. generally Fox v. FCC, 556 U.S. 502, 515 (2009) (an agency cannot “depart from a prior policy sub silentio or simply disregard rules that are still on the books”). If the IRS believes that its current interpretation is obviously correct and its prior interpretation was obviously wrong, then it should explain why. Courts, after all, have grappled with and even accepted the challengers’ serious textual arguments.

As always, I welcome comments on this post. But please note that there are technical issues with this site’s commenting system, and I would appreciate any feedback via my email address (Google it) or via Twitter @AndyGrewal.

By Andy Grewal