The recent federal district court decision in Faulk Company, Inc. v. Xavier Becerra, et al., No. 24-cv-00609-P (N.D. Tex. 2025) significantly alters the primary mechanism used by the U.S. Department of Health and Human Services (HHS) and the Internal Revenue Service (IRS) to enforce the Affordable Care Act (ACA). Faulk Company, Inc. sought a refund of the $205,621.71 Employer Shared Responsibility Payment (ESRP) it had paid under protest. Faulk asserted that the ESRP was not properly assessed by the IRS because the IRS proposed assessment document, Letter 226-J, included required notices that could only be issued by HHS. Faulk had received no notices from HHS. The court agreed, and ordered the IRS to refund the remitted ESRP to Faulk.
The ESRP is an excise tax imposed on employers with 50 or more employees when one of their employees purchases health insurance through a health care exchange (Exchange), and receives a premium tax credit or cost-sharing reduction. The court ruled that HHS and the IRS failed to comply with the ACA’s procedural requirements for assessing the ESRP.
Specifically, the court found that the ACA designates HHS — not the IRS — as the primary agency responsible for overseeing employer compliance. As the primary enforcer, it is HHS that must provide employers with a notice of potential ESRP liability and a separate notice of appellate rights (although these notices may be combined). HHS may provide these notices through the Exchanges. Only after these two notices are provided to the employer may the IRS commence the process for assessing an ESRP.
A key focus of the court’s decision was an HHS regulation that delegated the notification duties to the IRS. The court determined that HHS lacked the authority to make this delegation, and declared the regulation void and unenforceable.
Some, if not all, of the Exchanges have adopted rules to provide the required notices. It is not clear, however, how many Exchanges consistently issue the required notices before the IRS Letter 226-J is sent to an employer. If Exchanges improve their processes for timely issuance of these notices, the issue identified by the court could be resolved. In the meantime, as the Faulk case moves through the appeals process, employers may have an additional ground for challenging an IRS Letter 226-J proposing an ESRP assessment.
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