By - December 13, 2019

How Controlled Group Rules Under ACA Impact Smaller Employers

How Controlled Group Rules Under ACA Impact Smaller Employers

How Common Ownership Affects ACA Compliance Requirements

Under IRS regulations, employers with less than 50 full-time-equivalent employees (FTEs) that are part of a “controlled group” may be subject to “pay or play” penalties under the Affordable Care Act. The entire “controlled group” is considered a single employer for purposes of determining whether the 50-employee threshold is met. The “shared responsibility” requirements apply to each individual employer in the controlled group, regardless if the employer has 50 FTEs. 

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

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 the five-employee minimum, a small employer that is part of a larger controlled group under common ownership may be required to provide coverage to all its full-time employees. Penalties for non-compliance could be substantial depending on the size of the group. It’s important that controlled groups and their subsidiaries understand their status as a group. They also need to assess their obligations with respect to ACA compliance, both from a tracking and reporting, and “shared responsibility” standpoint.

Exploring Controlled Group Types


According to the IRS, “A parent-subsidiary controlled group exists when one or more chains of corporations are connected through stock ownership with a common parent corporation; and

  • 80 percent of the stock of each corporation, (except the common parent)
  • is owned by one or more corporations in the group; and
  • parent corporation must own 80 percent of at least one other corporation.”


The IRS defines a brother-sister controlled group as “two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest of each group and have “effective control”.

  • Controlling interest – 1.414(c)-2(b)(2) – generally means 80 percent or more of the stock of each corporation (but only if such common owner own stock in each corporation); and
  • Effective control – 1.414(c)-2(c)(2) – generally more than 50 percent of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.”


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 a member of a brother-sister group.

Companies part of the same controlled group generally must be combined for the purpose of determining whether they collectively employ 50 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, 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 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.


Need help with ACA Compliance?  Visit our ACA Compliance Solution page to learn more.


Original post May 5, 2014; updated Dec 13, 2019


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