On April 10, 2025, the U.S. District Court for the Northern District of Texas decision in Faulk Company, Inc. v. Xavier Becerra et al., determined that the Internal Revenue Service (IRS) lacked the authority to impose an Affordable Care Act (ACA) employer mandate assessment against Faulk Company, Inc. (Faulk) for failing to provide employee health coverage. This article explores the considerations at issue and the decision’s potential impact on employers.
Background:
Under the ACA, applicable large employers – those averaging at least 50 full-time employees (including full-time equivalents) in the prior calendar year – face penalties if they fail to offer health coverage to full-time employees or if the coverage does not meet required standards. When an employer does not provide compliant coverage, eligible employees may receive a premium tax credit to purchase insurance through an Exchange. If one or more employees receive this credit, the employer then may incur an Employer Shared Responsibility Payment (ESRP). The IRS notifies employers of potential ESRP liability through Letter 226-J, which requires a timely review and response by the employer. Depending on the facts and circumstances, the proposed assessment may ultimately result in an ESRP being imposed on the employer.
Important to the issue in Faulk, the ACA directs the responsibility for determining employer compliance to the Department of Health and Humas Services (HHS). If HHS finds an employer noncompliant, it must notify the Exchange, which in turn issues two notices, one advising the employer of potential ESRP liability and another outlining the right to appeal. When an ESRP penalty is confirmed, HHS must certify that finding to the employer. Once HHS certifies liability, the IRS has authority to assess and collect the ESRP.
However, in an attempt to streamline the above process, HHS issued 45 C.F.R. § 155.310(i), delegating the duty to certify that an ESRP penalty is owed to the IRS. As mentioned above, the IRS issues Letter 226-J to complete such certification requirement.
Faulk Company, Inc. v. Xavier Becerra et al.
Faulk, a Texas-based janitorial services provider for schools, stopped offering ACA-required employee health coverage in 2019. In 2021, the IRS issued Letter 226-J, proposing an ESRP. Faulk paid the penalty “under protest”, later filed a refund claim, and ultimately sued in June 2024. Faulk argued that its due process rights were violated when the IRS issued Letter 226-J before HHS certified the ESRP, as required by the ACA.
The central issue was whether HHS had authority to delegate its certification responsibility to the IRS. The court ruled that the ACA does not authorize HHS to delegate its duty to certify to an employer that an ESRP penalty is owed. As such, HHS exceeded its authority under the ACA by attempting to delegate this function, making the IRS’s ESRP assessment improper. The IRS was ordered to refund $205,621.71 to Faulk, which was the amount they previously paid for its 2019 ESRP penalty.
Employer Takeaways
It is important to note that there is no nationwide injunction against the agencies regarding the current assessment process; the relief in this decision is applicable solely to this particular set of facts. That said, this decision could have significant implications for past and future ESRP assessments. If upheld, it may require the IRS and HHS to develop a new process for imposing ESRPs. However, because the ruling could be overturned on appeal, employers should consult legal counsel before relying on this decision. Sequoia will continue to monitor and communicate ACA Employer Mandate litigation updates, as available.
Additional Resources:
Connect with a Sequoia consultant to learn how Sequoia’s compliance services are integrated in our benefits services and tailored solutions. And if you’re already a Sequoia client, stay on top of your employer obligations with your Compliance Checklist that highlights important compliance dates, action items, and resources.
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