Federal Court Upholds ACA Employer Penalty Process: What Employers Need to Know

The Affordable Care Act (ACA) continues to generate important legal developments for employers, particularly those subject to the employer shared responsibility, or “pay-or-play,” rules. A recent federal court decision has provided additional clarity regarding how ACA penalties are assessed, but the issue is far from settled.

A Split in the Courts

In a recent case, a federal court in Florida upheld the IRS’s current process for assessing ACA pay-or-play penalties against Applicable Large Employers (ALEs). The court ruled that the IRS can continue using its existing notification process, including Letter 226-J, to inform employers of potential penalties without first receiving a certification from the Department of Health and Human Services (HHS).

This decision directly conflicts with a 2025 ruling from a federal court in Texas, which found that HHS must first provide certification before the IRS can assess these penalties. As a result, there is now a disagreement between federal courts regarding which agency has the authority to initiate the penalty process. Both cases are currently being appealed to higher courts.

Understanding ACA Pay-or-Play Penalties

Under the ACA, employers with 50 or more full-time employees (including full-time equivalents) are considered Applicable Large Employers. These employers are generally required to offer affordable health coverage that provides minimum value to eligible full-time employees.

If an ALE fails to offer compliant coverage and one or more full-time employees receive subsidized coverage through a Health Insurance Marketplace, the employer may face significant penalties.

What the Florida Court Decided

The case involved an employer that sought a refund of ACA penalties paid for a period during which health coverage was not offered to full-time employees. The employer argued that the IRS lacked authority to assess the penalty because HHS had not first issued a formal certification regarding potential liability.

The court disagreed, concluding that:

• The IRS has authority to administer and enforce federal tax laws.
• Congress did not explicitly assign the certification responsibility exclusively to HHS.
• IRS Letter 226-J satisfies the ACA’s certification requirement.

As a result, the court upheld the IRS’s current assessment process.

What This Means for Employers

While the legal challenge continues through the appeals process, employers should not assume ACA penalties will disappear or become unenforceable. The IRS continues to assess employer shared responsibility penalties using its existing procedures.

For employers, the safest approach remains:

• Track full-time employee eligibility accurately.
• Ensure affordable coverage is offered when required.
• Maintain proper ACA reporting and documentation.
• Respond promptly to any IRS Letter 226-J notices.
• Continue monitoring developments in these court cases.

The Bottom Line

Although the courts are currently divided on the technical process used to assess ACA pay-or-play penalties, employers should not view these rulings as a reason to relax compliance efforts. Until higher courts provide a final resolution, the IRS’s existing enforcement process remains in place, and Applicable Large Employers should continue focusing on ACA compliance to minimize risk and avoid costly penalties.

This article is intended for informational purposes only and should not be considered legal advice. Employers should consult legal counsel or a qualified benefits advisor regarding their specific ACA compliance obligations.