Faulk, a janitorial services company, stopped providing minimum essential health insurance coverage to its employees in 2019. On December 1, 2021, the Internal Revenue Service (IRS) issued a Letter 226-J to Faulk proposing an excise tax known as the Employer Shared Responsibility Payment (ESRP) for tax year 2019 because Faulk failed to offer its full-time employees minimum essential coverage under the Affordable Care Act (ACA). The Letter 226-J provided a preliminary calculation of the ESRP at $205,621. The Letter 226-J also purported to serve as “certification” that at least one of Faulk’s full-time employees enrolled in health coverage provided by the Exchange.
Faulk disagreed with the proposed ESRP but paid the amount under protest. Faulk then sought a refund from the IRS but received no response. In June 2024, Faulk filed a lawsuit again the United States Department of Health and Human Services (HHS) and IRS (collectively the “Government”) for violating its due process rights. Specifically, Faulk alleged that the Government improperly categorized the Letter 226-J as a “certification” that at least one of Faulk’s full-time employees enrolled in health coverage provided by the Exchange. The Letter 226-J “certification” came from the IRS, whereas Fault argued it was required to come from HHS before the ESRP could be assessed.
The ACA requires applicable large employers (employing fifty or more full-time equivalent employees) to provide their full-time employees with minimum essential coverage. The ESRP is triggered when: (1) an employer fails to offer substantially all of 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 in the Exchange (i.e., Covered California in California) for such month. Based on the second requirement, the employer must receive certification of the failure to provide coverage before the IRS may assess an ESRP.
The issue in the lawsuit was which agency could issue the certification. HHS delegated authority to the IRS to issue the certification, which the IRS purports to do through Letter 226-J. However, Faulk argued that the certification must come from HHS based on the statutory language.
After considering multiple interpretations of the ACA, the Court agreed with Faulk. The Court interpreted the ACA as giving HHS the exclusive authority to issue the certification based on ACA section 1411 and Internal Revenue Code section 4980H. The ACA requires HHS to issue a certification notifying an employer that at least one full-time employee has enrolled in the Exchange before the IRS enters the picture and assesses the ESRP. As a result, HHS cannot delegate the certification requirement to the IRS.
Since the Court found that the IRS could not issue the certification, the IRS’s Letter 226-J did not serve as certification to Faulk, and therefore, not all of the due process requirements had been met before assessing the ESRP. The Court ordered the IRS to refund Faulk the entire $205,621 ESRP.
Faulk Company, Inc. v. Becerra, 2025 U.S. Dist. LEXIS 68580, 2025 WL1085080 (N.D. Tex. 2025).
Note: This case brings into question whether any of the Letters 226-J the IRS has issued to applicable large employers assessing the ESRP are valid. While the Faulk case was in the Northern District of Texas, which does not hold precedent in a federal district court located in California, it brings forth an argument any applicable large employer could bring to challenge a Letter 226-J anywhere in the country. Based on this case, HHS and the IRS may modify their procedures so that certifications come from HHS before the IRS proposes and assesses the ESRP.