April 14, 2025
One issue that has been lingering unresolved since the IRS began enforcing the employer mandate penalties under Internal Revenue Code section 4980H is whether the IRS even had the authority to do so in light of the fact that very few section 1411 notices were ever provided to employers by HHS. The IRS had attempted to circumvent this problem by using the letter 226J the IRS has been providing employers to assert that “the letter certifies, under section 1411 of the Affordable Care Act, that for at least one month in the year, one or more of your full-time employees was enrolled in a qualified health plan for which a PTC was allowed.” The issue for the IRS in taking this position is the statute is clear that HHS must provide the 1411 notice and not the IRS. Recently the United States District Court for the Northern District of Texas Fort Worth Division ruled in Faulk Company, Inc. v. Becerra that the IRS did not have the authority to penalize Faulk under IRC Code section 4980H because a proper section 1411 notice was never sent by HHS and the IRS did not have the authority to send the section 1411 notice. The remainder of the paper will explore the Court’s opinion and discuss the implications for how employers should move forward.
The Opinion
The Court provides a high level overview of the entanglement between Affordable Care Act section 1411 (also known by 42 U.S.C. 18081) and Internal Revenue Code section 4980H. For brevity we will only cover the most pertinent statutes in this article, but we encourage interested readers to review our previous publications for a thorough analysis of the pertinent statutes and regulations.
If a determination is made that an individual is eligible for an applicable premium tax credit or cost-sharing reduction, PPACA section 1411(e)(1) (also referred to as 42 U.S.C. section 18081(e)(1)) requires the Secretary of HHS to notify the Exchange. Once an Exchange receives such notice, it must notify the employer of the determination and the potential consequences. As the statute clearly and unambiguously states: “(iii) Employer Affordability – If the Secretary (of Health and Human Services) notifies an Exchange that an enrollee is eligible for a premium tax credit under section 36B of title 26 or cost-sharing reduction under section 18071 of this title because the enrollee’s (or related individual’s) employer does not provide minimum essential coverage through an employer-sponsored plan or that the employer does provide that coverage but it is not affordable coverage, the Exchange shall notify the employer of such fact and that the employer may be liable for the payment assessed under section 4980H of title 26. (see ( PPACA section 1411(e)(4)(B)(iii) also formally referenced to as (42 U.S.C. section 18081(e)(4)(B)(iii)).”
The facts of the Faulk case involved an employer who did not offer health insurance to 95 percent or more of its full-time employees. As a result, the Court’s analysis was for IRC section 4980H(a). However, and importantly, a similar analysis would apply for IRC section 4980H(b). A penalty may be assessed under IRC section 4980H(a) if: (1) an employer “fails to offer its full-time employees…the opportunity to enroll in minimum essential coverage…for any month” and (2) if “at least one full-time employee of the applicable large employer has been certified to the employer under ACA section 1411 as having enrolled for such month in a qualified health plan…”. The Court concluded that an employer must fail to offer coverage and receive certification under ACA section 1411 of such a failure before the IRS can assess a penalty under IRC section 4980H.
The Court then examined an HHS regulation in which HHS tried to delegate its authority to provide the section 1411 Notice to the IRS. The HHS regulation states “As part of its determination of whether an employer has liability under section 4980H of the Code, the Internal Revenue Service will adopt methods to certify to an employer that one or more employees has enrolled for one or more months during a year in a QHP for which a premium tax credit or cost-sharing reduction is allowed or paid. (see 45 C.F.R. 155.310(i))” The question before the Court was whether HHS had the authority to delegate the section 1411 notice obligations to the IRS. The Court ruled HHS could not delegate such authority to the IRS and, consequently, the IRS had no authority to penalize the employer in the case before the Court.
In arriving at its conclusion the Court relied on the plain meaning of the text in IRC section 4980H. The Court then found “that ‘certification’ to an employer is carried out ‘by reason of authority’ of ACA section 1411 – authority that is exclusively given to HHS, not the IRS. Based on this reading, IRC section 4980H demands certification be carried out by HHS. Critically, the court then went on to find that HHS had no authority to delegate its obligation to issue the section 1411 notice to the IRS and deemed the HHS regulation that did so, 45 C.F.R. section 155.310(i), as void and unenforceable. The Court concluded that “HHS did not have the authority to add any certification program to be administered by the IRS because ACA section 1411 does not allow HHS to delegate to the IRS.” In light of the Court’s decision, employers must receive a section 1411 notice from HHS prior to being penalized under IRC section 4980H.
Conclusion
The Court’s conclusion in this case is strongly supported by the plain language of the statutes and regulations in question. HHS has continued to exacerbate this issue by not sending out the section 1411 notice to most employers. However, that is not to say that no section 1411 notices have been sent out. I am personally in possession of 1411 notices sent by the Florida Exchange in 2016, the California Exchange in 2019, and the Georgia Exchange in 2024. It is disappointing HHS and the IRS relied on their flimsy position instead of providing employers the section 1411 notice through the proper channels. Many employers have been materially damaged by the government's incompetence and unwillingness to send the section 1411 notice as directed by the statute.
Moving forward, employers should not assume the 1411 notices will not go out as directed by the statute. Any decision to not offer health insurance to employers or to offer coverage that is not affordable should only be made after robust discussions with an attorney or individual who has a deep understanding of the rules and regulations. In private practice I continue to see employers who are getting dreadful advice. Word to the wise: choose your partners wisely.
Any employer who previously paid an ESRP penalty may want to explore the possibility of reclaiming the penalty from the IRS in light of the Faulk decision. If you would like to explore that possibility, please feel free to contact me personally.
Employers should monitor the appeals process in this case. While the statute strongly supports the Court’s interpretation, anything could happen on appeal if the Trump administration decides to pursue that avenue. As always, if you have any questions regarding ACA reporting or would like to learn how Accord Systems can assist you with your ACA reporting needs, please don’t hesitate to contact us.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
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