As the IRS continues to actively enforce the employer shared responsibility payments and associated employer reporting requirements, a recent federal court decision found in favor of an applicable large employer who challenged the current IRS enforcement process. It’s unclear what this may mean for §4980H enforcement procedures going forward, but in the meantime, applicable large employers (50 or more FTEs) should continue to offer minimum value, affordable coverage to full-time employees and their dependent children and report on such offers of coverage using Forms 1094-C and 1095-C.
§4980H of the Internal Revenue Code, introduced under the Affordable Care Act (ACA), outlines the employer shared responsibility provisions. These provisions mandate that applicable large employers (ALEs) with 50 or more full-time equivalent employees offer minimum essential coverage that is affordable and provides minimum value to full-time employees and their dependents. Failure to comply with these requirements can result in significant penalties.
The offer of coverage requirements and potential penalties for ALEs under §4980H are as follows:
§4980H(a)
ALEs must offer minimum essential coverage (MEC) to at least 95% (or all but 5, if greater) of full-time employees and their dependent children each month. An offer of coverage is not required for spouses.
If the employer fails to offer MEC to at least 95% (or all but 5, if greater) of full-time employees and their dependent children in any given month, a penalty will apply if any full-time employee enrolls through a public Marketplace and qualifies for a premium tax credit (or tax subsidy). The monthly penalty is multiplied by the total full-time employee count, minus the first 30, regardless of how many employees were offered coverage. However, if the employer is part of an aggregated ALE group, the 30-employee reduction is spread across the controlled group.
§4980H(b)
ALEs must offer coverage that provides minimum value AND is affordable to all full-time employees each month. There is not a 5% “margin of error” for §4980H(b) requirements like there is under §4980H(a).
If the employer satisfies §4980H(a) requirements, the employer may still owe a penalty for any full-time employee who is not offered minimum value, affordable coverage if that employee enrolls through a public Marketplace and qualifies for a premium tax credit. This penalty applies on a per-employee basis rather than against the total full-time employee count.
ALEs are required to self-report to the IRS whether §4980H requirements were met for the calendar year using Forms 1094-C and 1095-C. Employers that fail to report timely, correct information to the IRS and provide copies of Forms 1095-C to employees may face information return penalties of up to $330/form (in 2025), in addition to any §4980H penalties that may apply.
The IRS reconciles employer Forms 1094-C and 1095-C they receive with personal tax returns and data from the public Marketplaces to determine which ALEs may owe penalties. If it appears that an ALE owes penalties, the ALE will receive a Letter 226J from the IRS outlining a proposed employer shared responsibility payment.
An ALE (Faulk Company, Inc.) that did not offer medical coverage to full-time employees received an IRS Letter 226J proposing an employer shared responsibility payment of approximately $200,000 for the 2019 tax year. The employer responded to the IRS Letter 226J and paid the penalty under protest, later requested a refund that was ignored (not granted) by the IRS, and then filed a claim challenging the IRS’ ability to collect such penalty payment. The employer claimed that the IRS should not have been able to collect the penalty because the employer never received Marketplace certifications notifying the employer of employees who enrolled in subsidized Marketplace coverage. A federal court in the Northern District of Texas found in favor of the employer, indicating that the failure of the Department of Health & Human Services (HHS) to send Marketplace certifications to the employer did not provide the employer with the required notice and opportunity to appeal, so the IRS penalties were not enforceable. The employer received a refund of the full 2019 penalty amount they paid.
The ACA appears to require a two-step process for assessing §4980H penalties:
First, 42 U.S. Code §18081(e) requires the Department of Health and Human Services (HHS) to notify the employer that their employee(s) enrolled in the Marketplace, qualified for a premium tax credit, and that the employer has a right to appeal. This process is assumed by the court to refer to the “certification” requirement set forth in 26 U.S. Code §4980H.
Then, as expressed under 26 U.S. Code §4980H, if the ALE fails to offer coverage as required and one or more full-time employees are certified to the employer as having enrolled in subsidized Marketplace coverage, the IRS may enforce §4980H penalties.
Some state Marketplaces (e.g., MN and WA) regularly send out certifications to the employers that employees list on their Marketplace applications. However, many Marketplaces, especially the federally-run Marketplaces, do not. Therefore, the employer argued that the IRS should not be able to enforce §4980H penalties on ALEs that have not received such notifications/certifications from applicable Marketplaces.
In 45 CFR §155.310(i), HHS delegated power to the IRS to handle the notification/certification process explained above. The agencies argued that the IRS Letter 226J should serve as certification that one or more of the ALE’s full-time employees enrolled in the Marketplace and qualified for a premium tax credit. The court found that the statute requires HHS to provide the notice/certification and that HHS overstepped by delegating its responsibilities to the IRS. Because of this, the court found the §4980H(a) penalties imposed on and paid by the employer to be unenforceable and found 45 CFR §155.310(i) void and unenforceable.
Despite the court's decision, ALEs should continue to comply with §4980H requirements by offering affordable, minimum value coverage to full-time employees and their dependents and reporting those offers to the IRS. Failing to do so can still result in significant §4980H and IRS information return penalties. The risk of penalty exposure for ALEs that do not comply with the ACA’s employer mandate and that have employees residing in states that already regularly issue Marketplace certifications remains unchanged by this court ruling. It’s possible that the federal agencies will appeal this court decision or that HHS and the IRS will adjust the current enforcement procedures. We are carefully monitoring any changes to the certification process or further legal developments and will keep you informed of how these things may impact enforcement of §4980H.
