A recent federal court decision in Texas could significantly impact how penalties under the Affordable Care Act (ACA) Employer Mandate are assessed and potentially open the door for refunds for some employers.
ACA Employer Mandate: A Quick Background
Under the ACA, large employers, those with 50 or more full-time employees, are required to offer affordable health insurance that meets minimum value standards. If they fail to do so, they may be subject to penalties under Section 4980H of the Internal Revenue Code.
These penalties, often called the Employer Shared Responsibility Payment (ESRP), are typically triggered when at least one full-time employee enrolls in coverage through an ACA marketplace and receives a premium tax credit. The IRS notifies employers of a potential penalty through a Letter 226-J.
The Court Case: A Shift in How Penalties Are Certified
Earlier this year, the U.S. District Court for the Northern District of Texas ruled in favor of an employer who challenged the IRS’s authority to impose ACA penalties without a formal certification from the Department of Health and Human Services (HHS).
According to the court, the ACA requires that an employer be “certified” under Section 1411 which means HHS (or an ACA marketplace) must formally confirm that an employee received a tax credit. For years, the IRS has treated its Letter 226-J as this certification, based on a 2013 regulation issued by HHS that effectively delegated the certification process to the IRS. But the Texas court ruled that this delegation was not legally valid and declared the regulation void.
As a result, the court found the penalty against the employer unlawful and ordered a refund of over $200,000. The ruling suggests that, without proper certification from HHS, the IRS may lack the authority to impose the penalty in the first place.
Implications for Employers
While this decision only applies within the Northern District of Texas for now, it raises serious questions about the process the IRS has used nationwide. If the ruling is upheld on appeal or adopted by other courts, it could reshape how ACA penalties are enforced or potentially invalidate some past penalties.
For now, employers who have recently received or paid ESRP penalties may want to:
While the ACA remains in force, this case adds a new wrinkle to compliance enforcement and could influence how penalties are handled going forward.
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This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.