If your organization has ever received IRS Letter 226-J, you know an employer shared responsibility payment (ESRP) under the Affordable Care Act (ACA) can quickly become a high-stakes issue.
The current dispute isn't about whether the IRS can assess ESRP penalties. Instead, it focuses on a procedural question that could significantly affect how those assessments are challenged: Who must certify that an employee received a premium tax credit before an ESRP can be assessed?
Two recent federal court decisions reached opposite conclusions, creating uncertainty that employers and advisors should understand.
The Certification Question
An ESRP is a tax penalty that may apply when an applicable large employer fails to offer affordable, minimum essential coverage to full-time employees and one or more of those employees receive a premium tax credit through the Marketplace.
Before the IRS assesses an ESRP, the ACA requires an employer to be "certified" as having employees who received those premium tax credits. The question boils down to who can "certify" an employer's ESRP exposure and whether the IRS's usual process is enough.
This issue was addressed differently in two recent federal cases.
Two Courts, Two Different Results
In Faulk v. Becerra, a Texas federal court sided with the employer. The court concluded that the ACA's certification framework requires action from HHS or a Health Insurance Exchange, not just the IRS. In that court's view, the IRS's standard ESRP process, including Letter 226-J, did not satisfy the required certification step. Because that step had not occurred, the employer was entitled to relief.
In Supreme Linen Services v. United States, a Florida federal court went the other way. That court emphasized that ESRP arises under Internal Revenue Code Section 4980H, so the IRS generally administers it unless Congress clearly assigns the function elsewhere. The court also rejected the idea that ACA employer notice and ESRP certification are the same thing. It held that the IRS could provide the necessary certification through its existing process, including the use of Letter 226-J.
Where the Courts Disagree
At a practical level, the split comes down to three questions:
1. Which agency must provide the certification?
Faulk: HHS or the Exchanges must certify.
Supreme Linen: The IRS may provide certification as part of its administration of Section 4980H.
2. Is an employer notice the same as certification?
Faulk: Yes, the statutory notice-and-certification framework should be treated as a meaningful procedural requirement.
Supreme Linen: No, notice to the employer is not the same thing as certification.
3. Is Letter 226-J enough?
Faulk: No, the IRS cannot replace the HHS/Exchange certification process with its own proposed assessment letter.
Supreme Linen: Yes, the IRS's 226-J process can satisfy the certification requirement.
Practical Takeaways
For employers, HR teams, payroll professionals, and advisors, the message is straightforward.
First, do not ignore Letter 226-J. Even with this procedural split, the IRS continues to use that process to propose ESRP assessments.
Second, preserve both factual and procedural defenses. That means checking affordability, full-time employee counts, reporting accuracy, and offer-of-coverage data, as well as considering whether certification and notice arguments may be available.
Third, watch the appellate courts. If appeals move forward, they could determine whether this becomes a broader and more durable split. Until then, employers should assume ESRP enforcement remains very real and that process-based arguments are important, but not a complete substitute for a strong substantive response.
