A court in Texas has given employers a new weapon in the fight against Affordable Care Act (ACA) penalties.
Under the ACA, a large employer can be subject to penalties if it fails to offer coverage to enough of its full-time employees, or if the coverage it offers does not meet certain requirements. Typically, employers learn of a possible penalty when they receive a "Letter 226-J" from the Internal Revenue Service (IRS). Employers contest these penalties by having their lawyers a series of forms to the IRS, along with a letter making all the available arguments.
For years, one of the arguments in those letters has been that no penalty can be imposed until the Department of Health and Human Services (HHS) sends the employer a "certification." The IRS has routinely rejected this argument. According to the IRS, HHS delegated the certification to the IRS, and the Letter 226-J is itself the certification.
Recently, however, an employer brought the issue before the Federal District Court for the Northern District of Texas and won. The court held that under the ACA, the certification process must be administered by HHS and could not be delegated to the IRS. Because HHS currently has no certification process in place, the IRS is arguably unable to impose penalties.
Why only arguably? Because this decision is binding only in the Northern District of Texas. The IRS and HHS could decide to change their procedures to conform to this ruling, but they also could decide to maintain their longstanding position internally and in every other district court until those courts rule against them.
Employers should also note that ACA penalty challenges must follow specific procedures and time frames. For example, employers should not expect ACA penalties imposed and paid a decade ago to be refunded based on this new case.
If your company has recently received a penalty notice, contact the authors as soon as possible so you can take advantage of this development.