District Court Invalidates Certification Procedure for ACA Minimum Coverage Penalty

(Parker Tax Publishing May 2025)

A district court granted summary judgment for an employer in its suit for a refund of the employer shared responsibility payment (ESRP) it paid for failure to offer its employees minimum essential health coverage under the Affordable Care Act (ACA). The court found that under the ACA, the Department of Health and Human Services is required to certify an employer before the ERSP may be assessed and therefore the employer was not properly assessed when the IRS issued it a Letter 226-J proposing the ESRP. Faulk Company, Inc. v. Becerra, et al., 2025 PTC 130 (N.D. Tex. 2025).

Background

Faulk Company, Inc. (Faulk) is a Texas corporation that provides janitorial services for Texas schools. Before 2019, Faulk offered minimum essential health insurance coverage to its employees as directed by the Affordable Care Act (ACA) (Pub. L. 114-48). In 2019, Faulk stopped providing this coverage to its employees.

On December 1, 2021, the IRS issued a Letter 226-J to Faulk proposing an excise tax, the employer shared responsibility payment (ESRP), for Faulk's failure to offer its full-time employees minimum health insurance coverage under the ACA. The Letter 226-J advised Faulk that the IRS's preliminary calculation of the ESRP was $205,621. The Letter 226-J purported to serve as a "certification" to Faulk prior to the assessment of the ESRP. Faulk responded to the Letter 226-J by informing the IRS that it disagreed with the proposed assessment and that Faulk was paying the ESRP under protest. Faulk filed a refund claim with the IRS for the 2019 ESRP but received no response.

Faulk then filed a complaint in a district court. The complaint alleged that the Department of Health and Human Services (HHS) and the IRS violated Faulk's statutory due process rights by improperly categorizing the Letter 226-J as a "certification" to Faulk prior to the assessment of an ESRP. Faulk argued that HHS, not the IRS, was required to provide the certification, and that the certification lacked proper notice of potential liability and notice of a right to appeal. Faulk and the government filed cross-motions for summary judgment.

Employer Shared Responsibility Payment

The ACA was enacted in 2010 with the goal of increasing the number of Americans covered by health insurance and decrease the cost of health care. To that end, Section 1411 of the ACA provides that businesses employing at least 50 full-time employees must provide their employees minimum health insurance coverage (i.e., the employer mandate). An employer's compliance with ACA Section 1411 is enforced through the ESRP. Under Code Sec. 4980H(a), the ESRP may be assessed by the IRS if (1) an employer fails to offer its full-time employees the opportunity to enroll in minimum essential coverage for any month; and (2) if at least one full-time employee of an applicable large employer has been "certified to the employer under [ACA Section 1411]" as having enrolled for such month in a qualified health plan. Thus, an employer must fail to offer the coverage and receive certification under ACA Section 1411 of such failure before an ESRP may be assessed by the IRS.

A regulation issued by the Department of Health and Human Services (HHS), 45 C.F.R. Sec. 155.310(i) (HHS Certification Regulation), provides that as part of its determination of whether an employer has a liability under Code Sec. 4980H, the IRS "will adopt methods" to certify to an employer that one or more employees has enrolled in a qualified health plan. As stated in the HHS Certification Regulation, HHS delegated authority to the IRS to complete the "certification" required to properly assess an ESRP under Code Sec. 4980H. The IRS carries out this certification through the Letter 226-J.

District Court's Analysis

The district court granted summary judgment for Faulk and ordered the government to refund the $205,621 ESRP assessed for 2019. The court agreed with Faulk that under Code Sec. 4980H, the required certification must come from HHS, not the IRS. Although Code Sec. 4980H is silent as to which agency must provide certification, the court determined that the use of the word "under" in Code Sec. 4980H(a)(2) means that certification to an employer is carried out "by reason of the authority" of ACA Section 1411 - authority that is exclusively given to HHS, not the IRS.

The court acknowledged that the word "certification" does not explicitly appear anywhere in ACA Section 1411 with respect to the employer mandate. Nonetheless, the court drew upon the context of both statutes to determine the meaning of "certified to the employer under section 1411" in Code Sec. 4980H(a)(2). In the court's view, Congress likely used "certified" to refer broadly to the two notices guaranteed to employers prior to assessment of an ESRP: (1) notice to the employer of its liability under Code Sec. 4980H, and (2) notice of an employer's appellate rights. The court reasoned that if Congress had merely intended for the IRS to certify an employer, as a process entirely detached from the notices required in ACA Section 1411, there would be no need to refer back to ACA Section 1411. Instead, Code Sec. 4980H would simply command the IRS to provide its own certification. The court said that concluding otherwise would render the reference to ACA Section 1411 in Code Sec. 4980H meaningless.

The court further held that the HHS Certification Regulation should be set aside as void an unenforceable. The court reasoned that HHS did not have authority to add any certification program to be administered by the IRS because ACA Section 1411 does not allow HHS to delegate to the IRS and nothing in Code Sec. 4980H authorizes the IRS to issue the certification.

For a discussion of the employer shared responsibility payment, see Parker Tax ¶191,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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