District Court Determines IRS Lacks Authority to Impose ACA Penalties

April 22, 2025

On April 10, 2025, Faulk Co. vs. Becerra, a federal court in the Northern District of Texas Fort Worth Division granted the plaintiff’s motion for summary judgment after determining that the IRS lacked the authority to impose penalties on the plaintiff for failing to offer its employees coverage as required under the ACA.

The plaintiff stopped offering minimum essential health insurance coverage to its employees in 2019. The ACA requires employers with 50 or more employees to offer that coverage or face potential penalties. The IRS presented the plaintiff with a 226-J letter informing them of the agency’s intent to impose penalties for this failure. The letter also purported to be a certification that one or more employees received a tax credit and enrolled in a plan offered through an exchange. The plaintiffs paid the penalties “under protest” in 2021 and then requested a refund from the IRS in 2022 and received no response.

The plaintiff filed the lawsuit against the federal government, alleging that the IRS lacked the authority to issue the certification necessary for imposing the ACA penalties and asked for a refund for those penalties. The ACA requires that an employer must fail to offer coverage and that “at least one full-time employee of the applicable large employer has been certified to the employer under [the ACA] as having enrolled for such month in a qualified health plan…”. The plaintiff asserted that the ACA gives the authority to grant the certification to HHS, not the IRS. Accordingly, the plaintiff asserted that the IRS did not have the authority to issue the certification and impose a penalty.

The court agreed with the plaintiff. The court acknowledged that there were different ways to interpret the statute but determined that the best reading of the ACA provides that the authority to issue a certification resides solely in HHS. The court also determined that the ACA did not give HHS the ability to delegate this authority to the IRS. Although HHS delegated this authority to the IRS via a rule, in the court’s view, the rule is invalid because it exceeds the authority granted under the statute. Accordingly, the certification must come from HHS before the ACA penalty is imposed.

As a result, the court granted the plaintiff its motion for summary judgement and ordered the government to refund the penalties that the plaintiff paid.

Employer Takeaway

Since the IRS is currently the agency that imposes ACA penalties, the potential impact of this opinion and order is enormous, with consequences not just for penalty assessments going forward but for those penalties already imposed by the IRS. However, it is important to keep in mind that the district court ruling may be appealed, and employers should consult with their attorneys before challenging the federal government on this basis.

Faulk Co. vs. Becerra