District Court Refunds IRS Employer Shared Responsibility Payment

The latest challenge to the Affordable Care Act, (ACA) could a wrench into the federal government’s mechanism to collect employer shared responsibility payments. The case, Faulk Co., Inc. v. Becerra (Faulk), argued that federal regulations allowing the IRS to collect employer shared responsibility payments conflicted with statutory provisions of the ACA.

Background

As a reminder, the ACA implemented employer shared responsibility requirements for applicable large employers (ALEs), or ALE members.  An ALE is subject to the ACA employer mandate penalties for a month if they (1) fail to offer minimum essential coverage to at least 95% of their full-time employees and their dependents for a month, and (2) at least one full-time employee is certified for that month as having received a premium tax credit for coverage through the ACA. . Generally, an employer will receive a notice informing the employer when an employee is eligible for a premium tax credit due to the employer not offering affordable minimum essential coverage. Based on that notice, the employer may be assessed an employer shared responsibility payment (ESRP). Under existing procedures, the IRS has sought to make this certification through language in Letter 226-J that reads: “This letter certifies, under Section 1411 of the Affordable Care Act, that for at least one month in the year, one or more of your full-time employees was enrolled in a qualified health plan for which a PTC was allowed.”

Faulk v. Becerra

In Faulk, a Texas company stopped offering employees health insurance that satisfied the employer mandate. In 2021, the company received a 226-J Letter from the IRS informing the company of the agency’s intention to impose employer mandate penalties. After paying, the company sought a refund of the funds. The IRS failed to respond, so the company filed a lawsuit, claiming the processes for assessing and collecting the employer shared responsibility payments went against the language of the ACA. The company argued that the Department of Health and Human Services (HHS), rather than the IRS, was required to provide a certification related to the penalties assessments.

The judge ruled in favor of the employer, ruling that the IRS could not issue the Section 1411 certification required for employer mandate penalties and the employer was entitled to a refund of the penalty amount assessed. The court concluded that under the plain meaning of the law, the required certification needed to come from HHS rather than the IRS. Previously, HHS issued regulations that delegated certification responsibility to the IRS. However, the court held that HHS does not have authority to delegate this responsibility, and the regulations were void and unenforceable. The court determined that the IRS also lacked statutory authority to issue the certification required for ESRP. As a result, the IRS must refund the payment to the employer.

Looking Ahead

The court's conclusion in this case is based on the plain language of the statutes and regulations in question. It is currently unclear if the Trump administration will respond to this the ruling, which appears to alter the IRS’s existing process for enforcing the employer mandate. HHS has not consistently sent out Section 1411 notices to most employers, however some Section 1411 notices have been sent out by various state exchanges.  Employers should not assume that Section 1411 notices will not be issued as directed by the statute. 

Employers in the process of dealing with the IRS on potential employer shared responsibility payments may want to talk with legal counsel to determine if this ruling gives them an avenue to challenge the assessment.

For additional guidance on compliance with the Affordable Care Act, take a look at this resource: Affordable Care Act (ACA) Reporting Cheat Sheet: Reporting Made Easy.