A recent federal court ruling carries significant implications for employers subject to the Affordable Care Act’s (ACA) employer mandate. In Faulk Company, Inc. v. Becerra, the U.S. District Court for the Northern District of Texas determined that the Internal Revenue Service (IRS) lacks the authority to assess ACA penalties against employers without a prior certification from the Department of Health and Human Services (HHS). This decision may offer new grounds for employers to contest previously assessed ACA penalties.
Background
Under the ACA, applicable large employers (ALEs), defined as those with 50 or more full-time or full-time equivalent employees, are required to offer affordable, minimum essential coverage to full-time employees or face potential penalties under Section 4980H. Traditionally, the IRS has assessed these penalties based on data provided through Forms 1094-C and 1095-C, without direct input from HHS.
In the Faulk Company case, the IRS assessed a penalty exceeding $205,000 against Faulk Company without HHS involvement. Faulk challenged the penalty, arguing that the ACA mandates certification by HHS, not solely the IRS, before penalties can be imposed. The court concurred, ruling that HHS lacked the authority to delegate this certification duty to the IRS, and therefore, the penalty was invalid. As a result, the IRS was ordered to refund the full amount to the employer.
Key Takeaways for Employers
The ruling highlights a potentially critical procedural flaw in how ACA employer mandate penalties have been assessed. Consequently, employers who were assessed penalties without HHS certification may now have grounds to seek a refund.
Next Steps for Employers
Employers who have paid ACA employer mandate penalties should engage qualified legal or tax professionals to evaluate whether the penalty was assessed without HHS certification and whether the ruling in Faulk Company applies to their specific situation.
