PAUL L. FRIEDMAN, District Judge.
On May 23, 2012, the Internal Revenue Service issued a final rule implementing the premium tax credit provision of the Patient Protection and Affordable Care Act (the "ACA" or "Act"). In its final rule, the IRS interpreted the ACA as authorizing the agency to grant tax credits to certain individuals who purchase insurance on either a state-run health insurance "Exchange" or a federally-facilitated "Exchange." Plaintiffs contend that this interpretation is contrary to the statute, which, they assert, authorizes tax credits only for individuals who purchase insurance on state-run Exchanges. Plaintiffs therefore assert that the rule promulgated by the IRS exceeds the agency's statutory authority and is arbitrary, capricious, and contrary to law, in violation of the Administrative Procedure Act.
This matter is now before the Court on the parties' cross-motions for summary judgment. The Court heard oral argument on the motions on December 3, 2013. After careful consideration of the parties' papers and attached exhibits, the Act and other relevant legal authorities, the regulations promulgated by the IRS, and the oral arguments presented by counsel in open court, the Court will grant the defendants' motion, deny the plaintiffs' motion, and enter judgment for the defendants.
A. The Affordable Care Act
On March 23, 2010, Congress enacted the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010), with the aim of increasing the number of Americans covered by health insurance and decreasing the cost of health care. Nat'l Fed'n of Indep. Bus. v. Sebelius , 132 S.Ct. 2566, 2580 (2012). Under the ACA, most Americans must either obtain "minimum essential" health insurance coverage or pay a tax penalty imposed by the Internal Revenue Service. 26 U.S.C. § 5000A; see Nat'l Fed'n of Indep. Bus. v. Sebelius , 132 S.Ct. at 2580. Uninsured individuals who might otherwise have difficulty obtaining health insurance are provided certain tools to facilitate the purchase of such insurance. Specifically, the law provides for the establishment of "Exchanges, " through which individuals can purchase competitively-priced health insurance. See 42 U.S.C. §§ 18031, 18041. The Act also authorizes a federal tax credit for many low- and middle-income individuals to offset the cost of insurance purchased on these Exchanges. 26 U.S.C. § 36B. Large employers are expected to share the costs of health insurance coverage for their full-time employees, and employers who do not provide affordable health care may be subject to an "assessable payment" or tax. 26 U.S.C. § 4980H.
At issue in this case is whether the ACA allows the IRS to provide tax credits to residents of states that declined to establish their own health insurance Exchanges, that is, in states where the federal government has stepped in and is running the Exchange. Because this dispute necessitates a careful examination of certain features of the ACA - in particular, the Exchanges, the Section 36B tax credits, the minimum insurance requirement for individuals, and the Section 4980H assessment imposed on some employers - these features are described in more detail below.
1. The Exchanges
The ACA provides for the establishment of American Health Benefit Exchanges, or "Exchanges, " to facilitate the purchase of health insurance by private individuals and small businesses. See 42 U.S.C. § 18031(b)(1); 42 U.S.C. § 300gg-91(d)(21). The Department of Health and Human Services ("HHS") has described an Exchange as "a mechanism for organizing the health insurance marketplace to help consumers and small businesses shop for coverage in a way that permits easy comparison of available plan options based on price, benefits and services, and quality." Centers for Medicare & Medicaid Services, Initial Guidance to States on Exchanges, http://www.hhs.gov/cciio/resources/files/guidance_to_states_on_exchanges.html (visited Jan. 5, 2014); see also H.R. REP. NO. 111-443, pt. II, at 976 (March 17, 2010) (describing an Exchange as "an organized and transparent marketplace for the purchase of health insurance' where individuals and employees (phased-in over time) can shop and compare health insurance options") (internal quotation omitted).
Each health insurance plan offered through an Exchange must provide certain minimum benefits, as set forth in regulations promulgated by HHS. 42 U.S.C. §§ 18021(a)(1), 18022. In addition to serving as a marketplace for health insurance, an Exchange can determine an individual's eligibility to obtain an advance payment of a federal premium tax credit and his or her eligibility to be deemed exempt from the individual minimum coverage requirement. See 42 U.S.C. § 18031(d)(4).
Section 1311 of the ACA provides that "[e]ach State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an Exchange')[.]" ACA § 1311(b)(1), codified at 42 U.S.C. § 18031(b)(1). If, however, a state decides not to establish its own Exchange, or fails to establish an Exchange consistent with federal standards, Section 1321 of the Act directs HHS to step in and establish "such Exchange" in that state. ACA § 1321(c)(1), codified at 42 U.S.C. § 18041(c)(1); see 45 C.F.R. § 155.105(f). While sixteen states and the District of Columbia have elected to set up their own Exchanges, thirty-four states rely on federally-facilitated Exchanges. Seven of these thirty-four states have chosen to assist the federal government with its operation of federally-run Exchanges, while twenty-seven states have declined to undertake any aspect of Exchange implementation. See State Decisions for Creating Health Insurance Marketplaces, Kaiser State Health Facts, http://kff.org/health-reform/state-indicator/health-insurance-Exchanges/ (visited Jan. 5, 2014).
2. Premium Tax Credits
The Act authorizes tax credits for many low- and middle-income individuals who purchase health insurance through the Exchanges. The Exchanges administer a program to provide advance payments of tax credits for eligible individuals; where an advance payment is approved, the Exchange arranges for the payment to be made directly to the individual's insurer, lowering the net cost of insurance to the individual. 42 U.S.C. §§ 18081-18082. The section of the Act setting forth how this tax credit is determined - ACA § 1401, codified at 26 U.S.C. § 36B - calculates this credit based in part on the premium expenses for the health plan "enrolled in [by the individual] through an Exchange established by the State under [42 U.S.C. § 18031]." 26 U.S.C. § 36B(b)(2)(A); see also 26 U.S.C. § 36B(c)(2)(A)(i).
As an example, amicus Families USA calculates that a single parent with two children in Florida, earning $41, 000, would likely be charged about $5700 per year for a "silver-level" insurance plan on the federally-facilitated Exchange operating in that state. If the tax credit is available, the family would pay approximately $2700 for this insurance, after receiving a tax credit of about $3000. If the tax credit is unavailable, the family would bear the full cost of health insurance. Brief of Amicus Curiae Families USA 7 (citing Kaiser Family Foundation, Subsidy Calculator, available at http://kff.org/interactive/subsidy-calculator).
3. Minimum Insurance Requirement and Unaffordability Exemption
Under the Act, most individuals must obtain health insurance or face a tax penalty imposed by the IRS. This penalty in 2014 is one percent of an individual's yearly income or $95 for the year, whichever is higher, 26 U.S.C. § 5000A(c)(2)-(3), but it "cannot exceed the cost of the national average premium for qualified health plans' meeting a certain level of coverage." Liberty Univ., Inc. v. Lew, 733 F.3d 72, 84 (4th Cir. 2013) (quoting 26 U.S.C. § 5000A(c)(1)(B)). Individuals unable to afford coverage, however, are exempt from the minimum insurance requirement, and therefore can avoid the tax penalty. 26 U.S.C. § 5000A(e). The unaffordability exemption generally is available to an individual whose health insurance costs exceed eight percent of his or her annual household income. 26 U.S.C. § 5000A(e)(1)(A). An individual's costs are determined with reference to the price of the relevant insurance premium minus the tax credit described above. 26 U.S.C. § 5000A(e)(1)(B)(ii).
4. Section 4980H Assessable Payments on Large Employers
Under the ACA, many or most employers are expected to offer health insurance plans to their employees, and large employers who do not offer affordable health insurance coverage to their full-time employees are subject to an "assessable payment" or tax under 26 U.S.C. § 4980H. Imposition of the Section 4980H assessment is triggered when a full-time employee purchases subsidized coverage on an Exchange. 26 U.S.C. § 4980H(a)-(b). After an employee purchases insurance, the Exchange determines whether the employer failed to offer affordable health insurance to that employee. If so, and if the employee meets the income requirements and other criteria, the employee will be deemed eligible for a premium tax credit. The Exchange then notifies the employer that the employer will be assessed a Section 4980H payment. 26 U.S.C. § 4980H(d). The employer has the opportunity to administratively appeal that notice. 26 U.S.C. § 18081(f)(2).
B. The IRS Rule
The Internal Revenue Service has promulgated regulations making the premium tax credit available to qualifying individuals who purchase health insurance on state-run or federally-facilitated Exchanges. See 26 C.F.R. § 1.36B-1(k); Health Insurance Premium Tax Credit, 77 Fed. Reg. 30, 377, 30, 378 (May 23, 2012) (the "IRS Rule"). Specifically, 26 C.F.R. § 1.36B-2(a)(1) provides that an applicable taxpayer who meets certain other criteria is allowed a tax credit if he or she, or a member of his or her family, "[i]s enrolled in one or more qualified health plans through an Exchange." 26 C.F.R. § 1.36B-1(k) provides that the term Exchange "has the same meaning as in 45 C.F.R. § 155.20, " which in turn defines Exchange in the following manner:
Exchange means a governmental agency or non-profit entity that meets the applicable standards of this part and makes [Qualified Health Plans] available to qualified individuals and/or qualified employers. Unless otherwise identified, this term includes an Exchange serving the individual market for qualified individuals and a [Small Business Health Options Program] serving the small group market for qualified employers, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by HHS.
45 C.F.R. § 155.20 (emphasis added). Participants in federally-facilitated Exchanges thus are eligible for the premium tax credit under the IRS Rule.
In describing the Rule, the IRS noted that "[c]ommentators disagreed on whether the language in [26 U.S.C. §] 36B(b)(2)(A) limits the availability of the premium tax credit only to taxpayers who enroll in qualified health plans on State Exchanges." 77 Fed. Reg. at 30, 378. The IRS rejected such a limitation, explaining:
The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.
C. This Litigation
Plaintiffs are a group of individuals and employers residing in states that have declined to establish Exchanges. Pursuant to its statutory authority under 42 U.S.C. § 18041(c)(1), HHS has established Exchanges in those states. Under the IRS Rule, tax credits are available to eligible individuals purchasing qualified health plans in those states.
Plaintiffs contend that 26 C.F.R. § 1.36B-1(k) and related regulations violate the plain language of the ACA, which provides that an individual's tax credit is calculated based on the cost of insurance purchased on "an Exchange established by the State under [42 U.S.C. § 18031]." 26 U.S.C. § 36B(b)(2)(A). Plaintiffs argue that the regulations exceed the scope of the agency's statutory authority and are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, " in violation of the Administrative Procedure Act, and they therefore must be set aside. 5 U.S.C. § 706(2)(A), (C); see Compl. ¶¶ 37, 40. Plaintiffs also contend that the agency's explanation for its interpretation of the statute is "arbitrary, capricious, unsupported by a reasoned basis, and contrary to law." Compl. ¶ 41.
Plaintiffs filed this action on May 2, 2013, naming as defendants HHS, the Department of the Treasury ("Treasury"), and the IRS, as well as the heads of those agencies. After serving defendants, plaintiffs promptly moved for summary judgment, and defendants filed a motion to dismiss. Briefing on plaintiffs' summary judgment motion was stayed pending a decision on defendants' motion to dismiss. In their motion to dismiss, the defendants argued that plaintiffs lacked standing; that their claims were not ripe; that this suit was precluded by the Anti-Injunction Act and other statutes; and that the case must be dismissed for failure to join indispensable parties. Plaintiffs in turn filed a motion for a preliminary injunction. For the reasons stated in open court on October 22, 2013, the Court denied plaintiffs' motion for preliminary injunction on the ground that plaintiffs had failed to establish risk of irreparable harm. The Court also denied the defendants' motion to dismiss, with leave to renew their justiciability challenges at the summary judgment stage.
Briefing on plaintiffs' summary judgment motion resumed, and defendants filed a cross-motion for summary judgment. These motions are now ripe for decision.
II. JUSTICIABILITY OF PLAINTIFFS' CLAIMS
Defendants urge this Court to dismiss plaintiffs' claims on various jurisdictional and prudential grounds. Defendants argue that the individual plaintiffs lack Article III standing and that their suit is barred by a provision of the Administrative Procedure Act, 5 U.S.C. § 704. Defendants raise similar challenges against the employer plaintiffs. In addition, defendants assert that the employer plaintiffs' claims are precluded by the Anti-Injunction Act, 26 U.S.C. § 7421(a), and by prudential standing principles. The Court rejects ...