August 22, 2024

A Texas-based business recently filed a lawsuit against the Department of Health and Human Services (HHS) regarding Section 1411 of the Affordable Care Act (ACA). The complaint in Faulk Company, Inc v. HHS alleges that the Internal Revenue Service (IRS) unlawfully assessed the employer shared responsibility payment (ESRP) tax against them without the due process required by the ACA.

The Affordable Care Act’s (ACA) employer shared responsibility requirements (more commonly known as the “employer mandate”) requires applicable large employers (ALEs) – employers with 50 or more full-time and full-time equivalent employees – to offer “minimum essential coverage” that is “affordable” and meets “minimum value” to full-time employees and their dependents.

An employer may face penalties in two scenarios related to the employer mandate. First, if the employer fails to offer health insurance coverage to at least 95 percent of its full-time employees (and their dependents), and at least one full-time employee purchases insurance on an ACA Exchange and qualifies for a premium tax credit or cost-sharing reduction, the employer is penalized. In this case, the employer must pay a penalty for all its full-time employees minus the first 30 (including those who were offered coverage, even if only one employee receives the credit. Second, a penalty may apply if the employer offers health insurance, but the coverage does not meet either or both of the ACA’s "minimum value" or “affordability” standards, and at least one full-time employee purchases insurance on an ACA Exchange and qualifies for a premium tax credit or cost-sharing reduction. Not meeting “minimum value” (MV) would mean the plan’s calculated actuarial value would be less than 60 percent. A plan would also not be considered "affordable" if the employee's share of the premium for self-only coverage exceeds a certain percentage of their household income, but is generally enforced using one of three regulatory affordability safe harbor methods. In this scenario, the penalty applies to each full-time employee who receives a premium tax credit.

Section 1411 of the ACA specifically outlines the procedures for enforcing the employer mandate and determining whether an individual ought to be covered by a group health plan or an individual-market Exchange plan. According to this provision, HHS must determine whether an individual is eligible for premium tax credits or cost-sharing reductions when purchasing a qualified health plan in a state-based or federal Exchange. And, if during enrollment, an individual identifies themselves as an employee of a particular employer, enrolls in ACA coverage, and receives financial assistance, then HHS - under Section 1411 - is supposed to issue a notice to the plan sponsor which informs the employer that one or more of their employees has enrolled in an Exchange plan and received financial assistance. This notice from HHS was supposed to happen quickly at the time of enrollment so that an employer could review its offerings and plan enrollments and make sure individuals were appropriately offered or not offered coverage as intended by the plan’s terms and design.

However, this is not the standard practice. Currently, employers are often first notified of their potential ESRP liability two to three years later through an IRS 226-J letter – which initiates the IRS collection action. The IRS and HHS have generally contended that the inclusion of a fairly high-level reference to the Section 1411 notice embedded in the IRS’s 226-J letter serves as the legally required notice. But plans have generally expressed concern that this notice is insufficient and not actionable because the 226-J letter is received several years after the close of the plan year. This means that, by the time many employers receive the notice, they have already been deemed liable for the penalty and there’s no opportunity to review or take corrective action as was expected under the Section 1411 statutory language.

In the case of Faulk v. HHS, the Faulk Company contends that the ACA clearly requires HHS to first determine whether an employee is eligible for a premium tax credit and notify the employer before any penalties can be assessed. Since the Faulk Company was only notified via the IRS’s 226-J letter, the plaintiffs argue that it effectively denied them the opportunity to contest the determination or take corrective action before the penalty was imposed.

This case is not just significant for Faulk Company but could have widespread ramifications for all ALEs subject to the employer mandate. If the court rules in favor of Faulk Company, it may lead to a re-evaluation of current enforcement methods, potentially compelling the agencies to adopt a new approach in line with the original intent of the ACA. This could also open the door for other employers who have faced similar penalties without proper notification to seek redress or refunds.

Business Group on Health will continue to monitor developments related to the case and provide relevant updates as they arise.

We provide this material for informational purposes only; it is not a substitute for legal advice.

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