The Affordable Care Act enacted the Employer Shared Responsibility provisions under Section 4980H of the Internal Revenue Code (Code) which assesses a tax penalty to Applicable Large Employers (ALEs) who either (1) fail to offer coverage to a certain number of its employees or (2) fail to offer coverage that is affordable or provides minimum value.
An ALE is an employer who employed an average of at least 50 fulltime employees (including full-time equivalent employees (FTEs)) on business days during the preceding calendar year. Code Section 4980H also includes a provision under which companies that have a common owner (or are otherwise generally related) are combined and treated as a single employer.1 This “controlled group” of companies must be combined for purposes of determining whether they collectively employ at least 50 FTEs (for the remainder of this page, the term FTE will refer to the sum of full-time employees and full-time equivalent employees). If the combined total meets the 50 FTE thresholds, then each separate company shall be considered an ALE subject to the ACA’s Employer Shared Responsibility provisions, even those companies that individually do not employ enough employees to meet the ALE threshold on their own.
Therefore, if your company is commonly owned with other entities, you will need to first determine if your company is part of a controlled group before you can properly assess whether your company would be subject to the Employer Shared Responsibility provisions. Determining whether a controlled group exists is typically a complicated analysis and usually requires the expert advice of a tax and/or legal advisor. Note that a controlled group may include TriNet clients as well as companies that do not use TriNet services.
Although TriNet strongly recommends that you consult with an attorney or tax advisor to determine if your company is part of a controlled group, we have prepared the following summary of the controlled group rules below for your general reference.
There are three primary types of controlled groups:
(1) Parent-subsidiary controlled group. When one or more companies are connected through stock ownership with a common parent corporation, and:
(A) 80% of the stock of each company (except the common parent) is owned by one or more corporations in the group, and
(B) The common parent company owns 80% of at least one other company.
(2) Brother-sister controlled group. A group of two or more companies where five or fewer common owners (including individuals, estates, or trusts) own directly or indirectly2 (through the attribution rules under the Code) a controlling interest of each group and have “effective control”:
(A) Controlling interest: generally means at least 80% of each company (but only if such common owner owns stock in each company), and
(B) Effective control: generally means more than 50% of the stock of each company, taking into account the ownership only to the extent such ownership is identical with respect to each company.
For example, two of the shareholders of Company A also own a percentage of Company B:
|Company A||Company B|
Company A and Company B are a brother-sister controlled group because 1) five or fewer shareholders own more than 80% of each corporation (85% of Company A and 90% of Company B), and 2) the same five or fewer shareholders own more than 50% of both corporations, taking into account identical ownership.
(3) Combined group. A group of three or more corporations, each of which is a member of a group of corporations described in paragraph (1) or (2) above, and:
(A) Each company is a member of either a parent-subsidiary or brother-sister group, and
(B) At least one company is the common parent of a parent-subsidiary and is also a member of a brother-sister group.
Note that employers who file as qualified separate lines of business (QSLOBs) for other employee benefit purposes (such as nondiscrimination testing) cannot rely on the QSLOB rules for purposes of the ACA Employer Shared Responsibility provisions. This general summary overview of the controlled group rules is intended for informational purposes only, and is not and shall not be construed as providing legal, tax or accounting advice. The controlled group rules are complex and clients are advised to consult with a tax or legal professional for a determination of their control group status (if applicable).
1 All entities under Code section 414(b), (c), (m) or (o) are treated as a single employer for purposes of calculating whether each entity is an ALE.
2 Attribution is the concept of treating a person as owning an interest in a business that is not actually owned by that person. When there is a brother-sister controlled group, the various attribution rules apply with certain family and business relationships under certain circumstances, e.g. spouse, child, parent and grandparent.