The US District Court for the Southern District of Florida has recently decided the case of Supreme Linen Services, Inc. v. United States. This case deals with the IRS processes of levying penalties against Applicable Large Employers (ALEs) for violations of the Affordable Care Act (the so-called “pay-or-play” penalties). As a reminder:

- The “pay” penalty is triggered when an Applicable Large Employer does not offer “substantially” all of its full-time employees Minimum Essential Coverage AND at least one employee receives a government subsidy to purchase health insurance on the individual exchange. This penalty is multiplied by the number of full-time employees an employer has (minus the first 30).

- The “play” penalty is triggered when an Applicable Large Employer offers Minimum Essential Coverage to substantially all full-time employees, but that coverage is either unaffordable (exceeds the 2027 affordability percentage) or does not provide a minimum value (60%), and one employee receives a subsidy in the Exchange. This penalty is multiplied by the number of employees who receive a subsidy to purchase health insurance on the individual exchange.

The employer in this case argued that the IRS attempts at enforcement of its pay-or-play penalties were unlawful because the ACA requires that the Department of Health and Human Services (HHS) first provide a certification of non-compliance to the employer and an opportunity to appeal the decision. The court ruled that the IRS could certify pay-or-play penalties without the interference of HHS and the ACA’s certification requirement was met by the IRS 226-J letter that it provides to delinquent employers.

Notably, this is the opposite conclusion that was come to in the case Faulk Company Inc. v. Kennedy et. al. In this case, the US District Court for the Northern District of Texas ruled that the IRS cannot properly assess penalties without the HHS first providing the offending employer with a certification of its own (the 226-J letter was not sufficient).

These disparate rulings create a circuit split that will eventually be resolved in the higher courts through appeal. Until this question is definitively decided, employers should continue to treat the IRS 226-J letters as legitimate certification and follow its decisions as if it had the force of law.