How Controlled Group Rules Under ACA Impact Smaller Employers

Under regulations recently proposed by the IRS, employers with less than 50 full-time-equivalent employees (FTEs) that are part of a “controlled group” may also be subject to the “pay or play” penalties under the Affordable Care Act, since the entire “controlled group” is considered a single employer for purposes of determining whether the 50-employee threshold is met. The “shared responsibility” requirements would then apply to each individual employer in the controlled group, regardless of whether or not a particular employer within the controlled group has 50 FTEs. Note that for 2015 only, the FTE threshold is temporarily raised to 100.

Under §414(c) of the Internal Revenue Code, a controlled group exists when any two or more entities are connected through ownership in a parent-subsidiary controlled group, a brother-sister controlled group, or a combination of the two. Any type of business entity can be a member of a controlled group for benefit plan purposes (i.e. a corporation, partnership, sole proprietorship or limited liability company). In general, there are three types of controlled groups: parent-subsidiary, brother-sister, and combined controlled groups.

In these cases, an employer is treated as offering coverage to all full-time employees if it covers all but 5% of its employees, or five full-time employees, whichever is greater. Because of this five-employee minimum, a very small employer that is part of a larger controlled group may be required to provide coverage to all of its full-time employees, and penalties for non-compliance could be substantial depending on the size of the group. For this reason, it’s important that controlled groups and their subsidiaries understand their status as a group as well as assess their obligations with respect to ACA compliance, both from a tracking and reporting and “shared responsibility” standpoint.

Exploring Controlled Group Types

Parent-Subsidiary

The “parent-subsidiary” controlled group exists when one or more chains of corporations are connected through stock ownership with a common parent corporation, with 80 percent of the stock of each corporation (except the common parent) being jointly owned by one or more corporations in the group, and the parent corporation must own 80 percent of at least one other corporation.

Brother-Sister

A “brother-sister” controlled group consists of two or more corporations, in which five or fewer common owners (a common owner must be an individual, trust, or estate) jointly own directly or indirectly a “controlling interest” of all corporations in the group, as well as have “effective control” of said corporations. Controlling interest generally means jointly owning 80 percent or more of the stock of all corporations in the group (but only if said common owners individually own stock in each corporation). Effective control generally means jointly owning more than 50 percent of the stock of all corporations in the group, but only to the extent that the individual stock ownership of each common owner is identical with respect to each corporation in the controlled group).

Combined

A “combined” controlled group consists of three or more organizations where each organization is a member of either a parent-subsidiary or brother-sister group, and at least one corporation is the common parent of a parent-subsidiary and is also a member of a brother-sister group.

Companies that are part of the same controlled group generally must be combined for the purpose of determining whether they collectively employ 50 (100 for 2015) or more full-time or full-time equivalent employees under the ACA. Where the combined total of full-time or full-time equivalent employees in a controlled group is at least 50 (100 for 2015), each individual employer is subject to the employer mandate, even if that employer itself does not employ enough employees to meet the threshold.

Employers outside of the U.S.

These rules also apply regardless of whether or not the parent or owner is located in the United States. For example, a foreign-based company with several subsidiaries in the United States must aggregate the employees of the parent and all subsidiaries who work in the United States for purposes of complying with the ACA. This requirement may be problematic for foreign-owned subsidiaries operating in separate lines of business that may or may not know of the existence of the other related companies, but it is the responsibility of the individual employers to adequately assess their exposure under the ACA, and assess whether they may be subject to the “pay or play” penalties as members of a controlled group.

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