By Alden Bianchi and Ed Lenz
A federal court in Texas has struck down the government’s process for assessing employer penalties under the Affordable Care Act, casting doubt on the enforceability of those penalties. The decision is important, since it affects employers’ liability under the ACA’s employer shared responsibility rules.
The ACA requires employers with 50 of more employees to offer their full-time employees “minimum essential health insurance coverage” or pay a tax penalty if at least one full-time employee receives a premium tax subsidy to purchase health insurance from a state health insurance exchange (the exchanges also are called “marketplaces”).
Since the ACA employer mandate became effective in 2015, the Internal Revenue Service has sent thousands of “226J” letters to employers certifying the assessment of tax penalties based on employees having enrolled in an exchange health plan and receiving a tax subsidy. In doing so, the government missed a critical procedural step. ASA led a broad coalition of business groups in 2018 urging the government to correct the error, but no action was taken. The court’s ruling in Faulk Co. Inc. v. Xavier Becerra, confirms the coalition’s view that the government’s penalty process was legally flawed.
The court held that the ACA requires that before the IRS can assess tax penalties, the U.S. Department of Health and Human Services (not the IRS) must first certify to the employer that an employee has been determined eligible for a tax subsidy, notifying the employer of its potential liability and the right to appeal the subsidy determination. Because the department never issued such a certification, the court said the employer cannot be penalized and was entitled to a refund.
Although the court’s decision is legally binding only with respect to the plaintiff in this case, it can be cited as authority in other cases. It is unclear whether the government will appeal the decision or whether the Department of Health and Human Services and the U.S. Department of the Treasury will undertake the major change in administrative procedures required to comply. Congress could act to compel the change, but that is highly unlikely in the current political environment.
If the decision stands and the certification process is not fixed, the IRS may be unable to assess penalties, existing penalties may have to be refunded, and employers may no longer have an enforceable mandate to offer group health plan coverage to their full-time employees.
In view of the court’s decision, ASA members that have received IRS 226J letters and face tax assessments should consult with expert ACA counsel for guidance on how best to proceed.
To read the case, see Faulk Co. Inc. v. Xavier Becerra, U.S. District Court for the Northern District of Texas (April 10, 2025; No. 4:24-cv-00609-P)
Alden Bianchi is counsel to the law firm of McDermott Will & Emery in Boston specializing in employee benefits law. He has long advised ASA and its members on ACA compliance matters.
Ed Lenz is senior counsel at ASA.
The post Court Ruling Casts Doubt on Enforceability of ACA Employer Penalties appeared first on American Staffing Association.