Oct. 20 Federal Update: Federal Shutdown Continues, Nearing its Third Week  

The federal government has paused all non-essential operations since Oct. 1 after failing to pass legislation to extend funding. Negotiations have primarily focused on extending Affordable Care Act (ACA) premium tax credits before the next ACA Marketplace open enrollment period, which begins Nov. 1.

Enhanced premium tax credits lower the percentage of income ACA Marketplace enrollees pay for coverage. According to Kaiser Family Foundation (KFF) estimates, if these credits expire, enrollees’ out-of-pocket costs would more than double.

Concerns about health care accessibility and affordability continue to grow alongside the ongoing effects of the government shutdown. Lapses in federal funding pose substantial challenges to nonprofits’ financial stability and to communities’ access to essential health and human services.

Funding for Community Health Centers and Temporary Assistance for Needy Families (TANF) expired Sept. 30, along with Medicare telehealth flexibilities. Meanwhile, vouchers for Head Start, the Child Care and Development Block Grant, and Title IV-B are frozen until the government resumes its required funding levels.

The impact continues to widen, with an estimated $28 billion in funding–reserved for more than 200 initiatives–now frozen or canceled across more than 100 Congressional districts.

Organizations that have received federal grants and contracts are encouraged to review the contingency plans of relevant agencies, along with their own grant and contract agreements. It is also critical to carefully document any missed reimbursements, delayed approvals, and paused monitoring. Finally, maintaining communication with congressional representatives remains essential to ensuring they understand the specific challenges your organization and community are facing. 

FNS Issues Guidance for the Implementation of H.R. 1 ABAWD Waivers

On Oct. 3, the Food and Nutrition Service issued guidance to all Supplemental Nutrition Assistance Program (SNAP) state agencies regarding the implementation of Sections 10102(b) and (c) of H.R. 1. The updated statute requires that areas must now have unemployment rates above 10% to qualify for time limit waivers for Able-Bodied Adults Without Dependents (ABAWDs).

The guidance also introduces a special ABAWD waiver criterion and a new type of exemption for individuals residing in Alaska and Hawaii. Under H.R. 1, the Secretary of Agriculture now holds the authority to approve waiver requests for areas of Alaska and Hawaii with unemployment rates at least 150% above the national unemployment rate. The authority is effective immediately and does not expire.

CMS Aims to Redefine States’ Ability to Direct Federal Funding to Emergency Medicaid Coverage for Immigrants 

The Centers for Medicare & Medicaid Services (CMS) recently issued a letter to state Medicaid directors announcing that the agency will interpret an emergency Medicaid provision of the Social Security Act to apply only to payments for direct medical care.

Following the passage of the Emergency Medical Treatment and Labor Act of 1986, all immigrants, regardless of legal status, became eligible for federally subsidized coverage in the event of a serious medical emergency.

While states are permitted to contract with insurers or managed care organizations to cover a broad range of services for beneficiaries at a fixed per-member per-month payment rate, CMS expressed concern over how some states have structured emergency care coverage and the resulting volume of requests for reimbursement.

As a result, CMS intends to limit the emergency Medicaid provision to apply only to payments for care and services necessary for the treatment of an emergency medical condition for individuals without legal status who are ineligible for full Medicaid benefits. This interpretation would exclude Medicaid managed care payments made on behalf of these individuals.

FNS Warns States Full SNAP Funding Cannot Continue Through November

On Oct. 10, the U.S. Department of Agriculture’s Food and Nutrition Service (FNS) notified regional and state SNAP directors that full November SNAP benefits cannot be issued without congressional action to pass appropriations legislation.

SNAP supports more than 40 million individuals nationwide, ensuring consistent access to nutritious food. A lapse in funding would have catastrophic impacts on families already facing food insecurity.

In response, Minnesota’s Department of Children, Youth, and Families has instructed counties and Tribal Nations not to approve new SNAP applications after Oct. 15 in anticipation of potential funding disruptions.

Sector Updates from the Judiciary

Federal Court Determines 501(c)(4) Exemption and Political Activity Standard Unconstitutional

In 2013, the Internal Revenue Service (IRS) denied the organization Freedom Path’s application for 501(c)(4) tax-exempt status after determining the organization had engaged in excessive political activity.

Under current law, 501(c)(4) organizations are required to “primarily” engage in activities that promote social welfare, while all other activities, including political activity, must remain secondary. However, clear limits do not currently exist. Previous rulings have suggested that exceeding roughly 15% of total activities may constitute excessive political involvement, though this threshold is not formally codified.

Further complicating compliance, the IRS applies a “facts and circumstances” test–a non-exhaustive list of 11 factors used to assess whether advocacy communications cross a line into a prohibited political campaign intervention. The test includes six illustrative scenarios, but lacks explicit definitions, leading to concerns about inherent arbitrary and inconsistent enforcement of the 501(c)(4) political activity standards.

Freedom Path subsequently filed a lawsuit, and the U.S. District Court for the District of Columbia ruled that the IRS guidance is unconstitutionally vague.  The court could not determine whether the organization was entitled to tax-exempt status as a result. Both the organization and the IRS have been ordered to propose new standards for 501(c)(4) tax-exempt eligibility and permissible political activity. While the ruling applies exclusively to Freedom Path, the resulting guidance from the IRS will offer clarity across the sector regarding the extent and nature of allowable political engagement for 501(c)(4) social welfare organizations.

Federal Court Temporarily Pauses Mass Reductions in Force

The U.S. District Court for the Northern District of California issued a temporary restraining order against the most recent series of mass reductions in force, finding they are likely “illegal and in excess of authority.”

The order follows the dismissal of more than 4,100 federal employees across nearly six agencies, approximately 1,100 to 1,200 of whom were employed by the U.S. Department of Health and Human Services (HHS).

An estimated 100 to 150 federal employees were dismissed from the Substance Abuse and Mental Health Services Administration (SAMHSA), following a reduction of nearly half of the agency’s workforce in April. Reductions primarily occurred within the Center for Mental Health Services, the Center for Substance Abuse Treatment, the Center for Substance Abuse Prevention, and the Office of Communications.

The U.S. Department of Housing and Urban Development (HUD) similarly distributed mass layoff notices. Reductions were concentrated within the Office of Fair Housing and Equal Opportunity, which investigates claims of discrimination and abuse. Nearly 100 equal opportunity specialists who investigate fair housing complaints received reduction-in-force notices at field offices nationwide. The entirety of HUD’s Denver and San Francisco regional offices—overseeing 13 states combined—also received notices. Additional reductions extended to five other regional offices’ fair housing staff, as well as the division responsible for distributing and administering block grants for affordable housing and community development.

Appeals Court Upholds Abortion Access in Missouri

The Western District Court of Appeals upheld a lower court’s decision pausing enforcement of Missouri state laws restricting access to abortion.

The decision follows the passage of Amendment 3, a constitutional amendment that overturned a near-total abortion ban and protected access to reproductive health care.

The court emphasized the irreparable harm caused by denying abortion care and issued a temporary injunction blocking several restrictive regulations. While the injunction remains in place, patients will not be required to attend two visits at least 72 hours apart before obtaining an abortion, and clinics will not be required to be licensed as ambulatory surgical centers.

Federal Courts Rule Against Grant Conditions

The U.S. District Court for the District of Rhode Island issued a preliminary injunction against the U.S. Department of Housing and Urban Development (HUD), prohibiting the agency from requiring any recipients or subrecipients among the plaintiffs to agree to new conditions.

Domestic violence victim aid organizations filed the lawsuit following HUD’s attempts to condition federal grant funding in ways that would restrict diversity, equity, and inclusion (DEI) efforts. Under the temporary restraining order, HUD and HHS are also barred from requiring grantees to certify that they will not use funds to promote elective abortions or “gender ideology.”

The ruling came shortly after the U.S. District Court for the District of Columbia granted a request from Planned Parenthood affiliates to vacate HHS guidance issued in July. That guidance required grant recipients to revise programming to recognize more than two sexes and to avoid violating parents’ religious beliefs.

This decision also follows the Trump administration’s prior pause on requirements for $1.3 billion in grants, which mandated that states assist federal immigration enforcement to qualify for Victims of Crime Act funding. The release of these conditions follows a multi-state lawsuit alleging that the requirements were unconstitutional and unrelated to the purpose of the grants.

North Dakota Upholds Law Prohibiting Gender-Affirming Care for Minors

The North Dakota District Court upheld a state law prohibiting gender-affirming care for minors. District Judge Jackson Lofgren cited concerns “regarding the capacity of minors to understand and appreciate the long-term consequences” of such care.

House Bill 1254 classifies a health care provider’s decision to prescribe or administer hormone treatments or puberty blockers to a transgender minor as a misdemeanor, and performing gender-affirming surgery on a minor as a felony.

Approximately half of all U.S. states have enacted similar bans on gender-affirming care for minors.

Federal Court Permits Enforcement of ACA Marketplace Changes

The U.S. District Court for the District of Massachusetts denied a coalition of states’ request to temporarily block the Centers for Medicare & Medicaid Services (CMS) rule RIN 0938-AV61.

The rule introduces significant changes, including:

• Repealing the monthly special enrollment period for individuals with projected household incomes at or below 150% of the federal poverty level.
• Standardizing the annual open enrollment period beginning with the 2027 plan year.
• Excluding Deferred Action for Childhood Arrivals (DACA) recipients from eligibility for ACA Exchange coverage and Basic Health Program (BHP) coverage in states operating a BHP.

Collectively, these changes are expected to restrict marketplace eligibility and affordability under the Affordable Care Act. CMS estimates that between 725,000 and 1.8 million people will lose coverage in 2026 due to the final rule.

The lawsuit alleges that the rule is arbitrary and capricious, exceeding the agency’s authority and violating the Administrative Procedure Act. Plaintiffs challenge provisions that shorten enrollment periods, introduce a monthly $5 marketplace user fee, and exclude transgender health care from the list of essential health benefits subject to mandatory coverage.

Nevertheless, the court determined that states’ concerns regarding enrollment losses and fees were premature, allowing the rule to remain in effect while litigation continues.

Litigation on Our Radar

Supreme Court Hears Arguments on State Law Prohibiting Conversion Therapy for Minors

On Oct. 7, the Supreme Court heard arguments in a case challenging Colorado’s law prohibiting conversion therapy for minors.

Licensed counselor Kaley Chiles filed the lawsuit, arguing the law violates free speech protections. The Colorado law prohibits licensed mental health professionals from providing treatment intended to change a minor’s sexual orientation or gender identity.

Lawmakers passed the measure in response to growing evidence linking conversion therapy to increased depression, anxiety, and suicide risk. The ban aligns with guidance from leading medical organizations, including the American Medical Association, American Psychological Association, and American Academy of Pediatrics.

Justice Samuel Alito questioned whether the law constitutes “viewpoint discrimination,” while Justice Ketanji Brown Jackson asked why medical professionals would receive differing constitutional protections based on treatment type. The case follows the Court’s recent decision to uphold a state law banning gender-affirming care for minors.

The Tenth Circuit previously upheld Colorado’s law, determining it regulates conduct rather than speech. If the Supreme Court finds that it infringes on speech, it will be subject to strict scrutiny—the highest level of judicial review. A decision is expected in summer 2025 and could affect similar laws in 27 states.

Supreme Court Considers Major Aspects of the Voting Rights Act

On Oct. 15, the Supreme Court heard arguments in a case alleging that Louisiana violated the Constitution’s Equal Protection Clause by creating a second majority-Black congressional district that relied too heavily on race.

The case raises the question of whether the Constitution permits the intentional creation of majority-minority districts to ensure minority voters can elect candidates of their choice. Previous courts have found such districts may be required under Section 2 of the Voting Rights Act, which prohibits election rules that discriminate based on race.

Justice Brett Kavanaugh questioned whether race-based remedies under the Voting Rights Act remain justified six decades after its passage, emphasizing the need for eventual limits.

The ruling is expected to have major implications for congressional map drawing in Louisiana and several other states, potentially reshaping minority representation nationwide.

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