Last Updated on May 27, 2025

A recent federal court decision raises serious questions about the validity of the IRS’s process for assessing penalties under the Affordable Care Act (ACA) Employer Mandate. The ruling could have major implications for employers nationwide who have received or paid these ACA penalties.

Background: The ACA Employer Mandate

Under the ACA’s Employer Shared Responsibility provisions (Section 4980H), applicable large employers (ALEs) must offer affordable, minimum essential health coverage to full-time employees or face potential penalties. These penalties, known as Employer Shared Responsibility Payments (ESRPs), are typically triggered when an employee receives a premium tax credit for coverage purchased through a health insurance marketplace.

The Faulk Company Lawsuit

In Faulk Company, Inc. v. Becerra, decided in April 2025 by the U.S. District Court for the Northern District of Texas, the court ruled that the IRS improperly assessed a $205,000 ACA penalty without proper legal authority. The issue centered around the role of the Department of Health and Human Services (HHS) in the certification process.

The court found that the ACA requires HHS- not the IRS- to certify that an employee has received a premium tax credit before the IRS can assess an ESRP. However, a 2013 regulation had allowed the IRS to effectively bypass this HHS certification requirement. The court declared this regulation invalid and ordered the IRS to refund the penalty.

Key Takeaways for Employers

1. The Certification Process Was Found Invalid

The ruling emphasized that HHS must certify each case before the IRS can issue penalties under the ACA. The IRS’s current practice, relying on its own Letter 226-J process, does not satisfy the statutory requirements, according to the court.

2. Penalties May Be Refundable

As a result of the decision, employers who have paid ESRPs in the last three years- particularly, those based on Letter 226-J notices- may be eligible for refunds. Employers should consider filing protective refund claims while further legal developments unfold.

3. The Decision Could Spark Broader Challenges

Although the decision currently applies only in the Northern District of Texas, it opens the door for similar legal challenges elsewhere. If the IRS does not appeal or loses further challenges, the agency may be forced to revise how it enforces ACA penalties.

4. Does Not Alleviate Employers From 1094/1095 Filing Requirements

This decision relates to the IRS’s ability to certify that an employee received a premium tax credit. It does not affect the current 1094/1095 reporting requirements.

What Employers Should Do Now

• Review Your ACA Penalty History: Employers who received IRS Letter 226-J notices or paid ACA penalties should revisit those cases with legal counsel or a qualified HR compliance provider.
• Monitor Future Developments: Watch for an appeal of the decision or further guidance from the IRS and HHS, as this case could prompt national changes to ACA enforcement.
• Consult Compliance Experts: If you are unsure whether your business is at risk or eligible for a refund, consult professionals who specialize in ACA compliance.

You Don’t Have to Navigate ACA Challenges Alone

The recent court decision striking down the current ACA penalty process is a pivotal moment for employers navigating complex compliance requirements. With potential refunds at stake and future enforcement practices now uncertain, it’s more important than ever to stay informed and proactive.

MyHRConcierge is here to help ease your ACA reporting pains and maintain compliance with ever-changing laws and regulations. MyHRConcierge’s robust ACACompli service can help you simplify your Affordable Care Act reporting.

If you’d like to sign up for our year-end reporting services, you can do so here. To learn more, contact us today at ccooley@myhrconcierge.com, 855-538-6947 ext. 108, or schedule a free consultation below: