On August 5, 2026, the Fifth Circuit Court of Appeals heard oral arguments in Faulk Company v. Kennedy, a case challenging how federal agencies administer ACA employer shared responsibility penalties under Code Section 4980H. Although the dispute centers on a technical question of agency authority and statutory procedure, the practical issue for employer plan sponsors is more straightforward: whether employers receive timely notice that an employee has obtained subsidized Marketplace coverage and that the employer may face a penalty. For applicable large employers (ALEs), that timing can matter because potential exposure may build over several years before the employer receives an IRS penalty notice.
Background
Under the ACA, ALEs (i.e., employers with 50 or more full-time or equivalent employees in the prior year) generally must offer minimum essential coverage to substantially all full-time employees and their dependents or risk an employer shared responsibility payment (ESRP). An ESRP may also apply if offered coverage is unaffordable or does not provide minimum value and at least one full-time employee receives a premium tax credit for Marketplace coverage. In practice, the IRS typically initiates the penalty process through Letter 226-J, which notifies an employer of a proposed ESRP and provides an opportunity to respond.
Faulk Company challenged a 2019 ESRP after receiving an IRS Letter 226-J and paying the assessed amount under protest. The company argued that the ACA requires a certification and related notice process involving HHS before the IRS can assess the penalty. The district court agreed with Faulk, ordered a refund, and invalidated an HHS regulation that the court viewed as improperly assigning the certification function to the IRS. Please see our prior article on the district court ruling. The government appealed to the Fifth Circuit.
The Oral Arguments
The Government’s Position
The government argued that the IRS, not HHS, is responsible for making the certification that can support an ESRP. In its view, the relevant facts – whether a premium tax credit was actually allowed or paid, whether the employer was an applicable large employer, and whether the employee was full-time – depend on tax information available to the IRS. The government also argued that HHS Marketplace determinations are preliminary and may change when the employee files a tax return.
The government further maintained that the ACA’s exchange notice process and the IRS certification requirement serve different purposes. Exchange notices address preliminary eligibility for subsidized coverage, while the IRS certification addresses whether the credit was ultimately allowed or paid. The government warned that requiring HHS to make the certification could undermine ESRP enforcement in cases where HHS lacks the necessary tax information.
Faulk Company’s Position
Faulk asserted that the IRS violated Faulk’s statutory due process rights by improperly categorizing the Letter 226-J as a “certification” to Faulk prior to the assessment of an ESRP, and that HHS, not the IRS, was required to provide the certification. Faulk argued that Congress created a two-step process: first, an HHS notice and appeal process tied to Marketplace subsidy eligibility, and second, IRS calculation and assessment of any resulting tax. In Faulk’s view, HHS improperly separated those steps, leaving employers without the real-time notice and appeal rights Congress intended.
Faulk emphasized the practical impact of delayed notice. If an employer learns during open enrollment that an employee is seeking subsidized Marketplace coverage, the employer may be able to review affordability, minimum value, or offer-of-coverage issues prospectively. If notice first arrives years later through an IRS Letter 226-J, multiple years of potential liability may already have accumulated.
The Fifth Circuit’s Approach
The judges’ questions focused on jurisdiction, the proper remedy, and the statutory mechanics. The panel asked whether the case was effectively a challenge to a tax assessment, whether vacating the HHS regulation was appropriate, and whether the identity of the certifying agency matters if the employer ultimately receives notice. The case is now under consideration, so employer plan sponsors should watch for the Fifth Circuit’s decision before assuming any broader change to the IRS ESRP process.
Employer Takeaway
For ALEs, Faulk is a reminder that ACA employer mandate exposure can develop quietly if their full-time employees are not offered affordable, minimum value coverage and instead obtain subsidized Marketplace coverage. Employers that do offer affordable, minimum value coverage should communicate this information to employees, so they understand they are not eligible for a Marketplace subsidy. Even though the case involves a procedural question about which agency must issue a certification, the underlying compliance issue is practical: employers should not wait for a Letter 226-J to evaluate whether their coverage offers, affordability calculations, employee classifications, and Forms 1094-C and 1095-C reporting are accurate.
ALEs should continue to respond promptly to any IRS Letter 226-J and consult with qualified legal or tax advisors regarding available response and appeal rights. Employers should also review ACA reporting processes, affordability safe harbor calculations, employee measurement-period administration, and vendor support for identifying potential Marketplace subsidy issues. The Fifth Circuit’s decision could affect procedural arguments available in ESRP disputes, but it does not eliminate the need for ongoing ACA compliance oversight.
NFP will monitor developments in this case and provide updates in Compliance Corner. Access the recording of the oral arguments in Faulk Company v. Kennedy.