A federal appeals court in Washington will hear oral arguments Tuesday in a lawsuit challenging the heart of the health care reform law — the extension of federal premium subsidies to millions of uninsured U.S. residents to buy coverage in public exchanges.

The suit, filed by several individuals and employers, contends that the IRS overstepped its authority in its 2012 rule saying that the subsidies are available through both state and federal insurance exchanges.

The plaintiffs argue that under the Patient Protection and Affordable Care Act, premium subsidies are limited to states that have set up insurance exchanges, and not the 36 states where the U.S. Department of Health and Human Services established exchanges after the states declined to do so.

Earlier, Judge Paul Friedman of the U.S. District Court for the District of Columbia rejected that argument: “There is no evidence that either the House or Senate considered making tax credits dependent on whether a state participated in the exchanges,” he wrote.

The plaintiffs now want the U.S. Court of Appeals for the District of Columbia to overturn Judge Friedman's ruling.

The ramifications of the litigation are huge. If premium subsidies are limited to coverage provided only through state insurance exchanges, millions of lower-income uninsured U.S. residents living in states that declined to set up exchanges, such as Ohio, Pennsylvania and Texas, would lack access to the subsidies and may remain uninsured.

In its most recent report, the Department of Health and Human Services said that as of March 1, 4.2 million people had enrolled in the exchanges, with just 1.6 million enrolled in state exchanges and 2.6 million in the federal exchanges. More than 80% of enrollees in both federal and state exchanges are eligible for the premium subsidies, HHS said.

The outcome of the litigation could have significant implications for employers. That is because health care reform law penalties against employers that do not offer coverage or do not offer affordable coverage apply only if an employee eligible for a premium subsidy uses it to buy coverage through a public exchange.