Federal District Court Upholds Process for Assessing ACA Pay-or-Play Penalties

A federal district court recently upheld the current process for assessing employer shared responsibility (or “pay-or-play”) penalties under the Affordable Care Act (ACA). The U.S. District Court for the Southern District of Florida ruled that the Internal Revenue Service (IRS) may assess pay-or-play penalties without the U.S. Department of Health and Human Services (HHS) first providing the employer with a certification (Supreme Linen Services Inc. v. United States). Currently, the IRS uses Letter 226-J to notify employers that they may be liable for a pay-or-play penalty without prior certification from HHS.

In April 2025, the U.S. District Court for the Northern District of Texas came to the opposite conclusion and held that the IRS cannot assess pay-or-play penalties without HHS first providing the employer with a certification (Faulk Company Inc. v. Kennedy et al.). These rulings have created a split at the District Court level regarding which agency (i.e., the IRS or HHS) has the authority to issue the penalty certification. Both decisions have been appealed to higher courts.

Pay-or-Play Penalties

The ACA requires applicable large employers (ALEs) to offer affordable, minimum-value health coverage to their full-time employees or potentially pay a penalty to the IRS. ALEs are employers that employ, on average, at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year.

An ALE will face a penalty if one or more full-time employees obtain a subsidy for health insurance coverage purchased through an ACA Exchange. An individual may be eligible for a subsidy either because the ALE does not offer coverage or offers coverage that is unaffordable or does not provide minimum value. Under the ACA, penalties may be assessed after the ALE has received a certification that at least one full-time employee has enrolled in subsidized Exchange coverage.

Southern District of Florida Court Ruling

The plaintiff, Supreme Linen, sought a refund of the pay-or-play penalty it paid to the IRS for failing to offer health coverage to its full-time employees for the first seven months of 2018. Supreme Linen argued that the penalty collection process was flawed because the ACA’s statutory text requires HHS to provide ALEs with a certification as to their potential liability and a notice of appeal rights. The court disagreed and denied the plaintiff’s refund claim, holding that the IRS has the authority to issue the penalty certification. In doing so, the court reasoned that the IRS is responsible for the administration and enforcement of federal tax laws absent an express delegation to another agency, which did not exist in this circumstance. Also, the court concluded that Letter 226-J satisfies the ACA’s certification requirement.

Employer Takeaway

ALEs should maintain their compliance strategies with the ACA’s pay-or-play rules while watching how these cases develop.

If you have questions, please reach out to your Hylant representative for further information. Don’t have one? Contact us here.

The above information does not constitute advice. Always contact your employee benefits broker or trusted advisor for insurance-related questions.