We’ve all been to a party or have hosted a party where either you or someone else brings a pizza. It makes sense: pizza is an easy food to split amongst a group of people, and, generally, it typically isn’t that expensive to get a large amount of it in the case that you’re feeding a larger group. Of course, the only drawback comes at the end of the party when it’s time for someone to take the leftovers. Who actually gets them? Maybe you brought the pizza, but it was for someone else’s birthday party—should you get first dibs at the pizza since, well, you bought it after all, or should the birthday person be allowed to take it? Or maybe it’s your birthday and, if you’re being honest, you kinda really want that pizza but you didn’t pay for it—can you take it? Or maybe you’re just that person at the party, for which it is neither your birthday nor did you buy the pizza, but you’re grabbing some anyway. This is kind of what it can feel like when businesses are determining common ownership and controlled groups as defined by the Affordable Care Act.
At Payday HCM, we understand this predicament, not only because we’re always hosting pizza parties, but because we are constantly answering questions from our clients about ACA compliance. Understanding all the little nuances and details of how the ACA works is no easy feat—even still, it’s crucial that businesses know where they fall within the framework of the ACA and how they can stay compliant. A big chunk (or, perhaps, slice) of this knowledge involves understanding how the ACA determines an applicable large employer and the different rules contained therein.
So, in this article, we’ll be breaking down one of the key components of the ACA and the applicable large employer framework—controlled groups and common ownership—to gain a better understanding of how businesses should approach ACA compliance. We’ll briefly go over the general rules of what makes up an applicable large employer before diving deeper into the nuts and bolts of common ownership and controlled groups.
In this article, you will learn:
- ACA Compliance: What Is An Applicable Large Employer?
- Understanding Common Ownership: What Are Controlled Groups?
- What Are The Different Types Of Controlled Groups?
ACA Compliance: What Is An Applicable Large Employer?
Before we dive into what common ownership is and what controlled groups are, we’ll first start by briefly defining how the ACA determines who is an applicable large employer.
Determining Status For ACA’s Required Reporting
Alongside establishing the Health Insurance Marketplace, the Affordable Care Act also put in place certain reporting requirements for employers to ensure that they are offering their employees health insurance. While the ACA doesn’t necessarily require employers to offer employees health insurance, it does establish certain penalties if they don’t, and an employee receives certain federal or state tax credits.
So, who actually has to report whether they offered their employees health insurance? Only applicable large employers are required to report information about the kind of health care coverage they offered, if any. An applicable large employer is an employer that has 50 full-time or full-time equivalent employees during the prior year.
Applicable Large Employers And Common Ownership
On paper, this seems pretty straightforward: if you have more than 50 full-time employees, then you’ll have to follow the IRS’s mandatory reporting requirements. However, in some circumstances, it isn’t so easy to determine whether a business has 50 employees or not.
A common practice within business is something called common ownership, or when one person owns multiple companies (but they exist under the branch of one larger company) or if multiple investors all own a certain percentage of one company. Under this model, if the smaller companies would make up an ALE in number of employees under the IRS’s employer aggregation rules, then the combined companies would be considered one ALE.
Understanding Common Ownership: What Are Controlled Groups?
Now that we have a better understanding of where common ownership fits into the large ACA picture, we’ll dive a bit deeper into the intricacies of common ownership and controlled groups.
Defining Controlled Groups
When looking at common ownership rules and controlled groups, you’ll often hear these two terms used somewhat interchangeably. Generally speaking, they mean the same thing, but controlled groups is the term that is used throughout the IRS’s guidelines, specifically within U.S. Code 414.
Under this code, employers that exist within this model will be treated as one employer as it regards the IRS. However, this does not mean one corporation will be responsible for reporting the entire controlled group’s health insurance requirements—each member is considered an ALE and is still responsible for their own individual reporting.
Types Of Controlled Groups
Now, not all controlled groups are the same. The IRS outlines three different types of controlled groups:
- Parent-subsidiary
- Brother-sister
- A combination of the two, sometimes called a combined group
What’s important to note here is that these different distinctions are only important insofar as they explain the different kinds of controlled groups that can exist. The reporting obligations for all three of these controlled groups are the same, but whether a group of businesses under common ownership is part of a controlled group is what’s different.
What Are The Different Types Of Controlled Groups?
Now that we understand a bit more of what common ownership is and how it relates to controlled groups and the ACA, we can break down different types of controlled groups as defined by the IRS.
Parent-Subsidiary
A parent-subsidiary controlled group exists when you have one corporation, the parent corporation, that owns or is connected to one or more other subsidiary corporations through stock ownership. The parent corporation must then own at least 80 percent of the subsidiary corporations for the controlled group to be considered a parent-subsidiary group.
Let’s break this down. Let’s say that Payday owns 80 percent of ADP as well as 85 percent of Paychex and 60 percent of Gusto (not sure how we swung that deal, but good for us). Payday would then be in a parent-subsidiary relationship with ADP and Paychex since we own 80 percent of them, meaning their employees would contribute toward our total for determining if all three companies—Payday, ADP, and Paychex—are an ALE.
In this example, Gusto is not part of the parent-subsidiary relationship even though Payday owns a good chunk of their stock. Since it isn’t 80 percent, it doesn’t count, so Gusto would only need to look at just Gusto employees to determine if they’re an ALE.
Brother-Sister
This one is slightly more confusing. The IRS defines a brother-sister controlled group as one where five or fewer owners (an individual, trust, or estate) own a controlling interest in two or more corporations and have effective control.
The IRS has two tests for determining controlling interest and effective control:
- Controlling interest: the five or fewer owners own at least 80 percent of stock in two or more corporations
- Effective control: the identical stock owned by each owner between the two or more corporations adds up to more than 50 percent.
Identical stock is the minimum percentage of stock that is identical between each company: for example, if you owned 80 percent of stock in Payday and 10 percent of stock in ADP, the identical stock would be 10 percent, since that’s the minimum percentage they both share. Both of these conditions must be met for a brother-sister controlled group to exist.
Combined Group
A combined group is, as the name suggests, a combination of both a parent-subsidiary and brother-sister controlled group. Firstly, there must be a group of at least three or more corporations. From there, the other requirements are:
- Each corporation must be a member of a parent-subsidiary or brother-sister controlled group
- One corporation is a common parent in a parent-subsidiary controlled group, on top of being in a brother-sister controlled group.
The most common formulation for this would be the three corporations existing as such in a way where their relationship satisfies all three of these requirements. So, if one individual owns 90 percent of Company A and 85 percent of Company B, and Company A (not the individual) owns 80 percent of Company C, these three companies would be in a combined controlled group.
Attribution Rules
Now, since determining controlled groups is heavily dependent on understanding who owns what company or stocks in a company, the IRS has also outlined a set of attribution rules that apply to family members of those who own stock in a company. Luckily, the IRS has a handy table for its attribution rules.
A table of attribution relationships. Table courtesy of the IRS.
What’s important to note here is that these attribution rules only apply to brother-sister controlled groups and not parent-subsidiary controlled groups. This is because, unlike a parent-subsidiary group that is based on a company’s ownership of another company, a brother-sister group is dependent on an individual’s ownership stake in multiple companies.
Take Control Of Your ACA Compliance
As if starting and running a business weren’t difficult enough. Making sure that you’re compliant with all the various rules and regulations is not an easy task. It can be easy to get lost in the weeds, especially when tax season comes around and you have to determine whether or not your business has to comply with the ACA’s reporting requirements. Of course, not knowing can be extremely costly, so it’s important that you have a good grasp of the ins and outs of these kinds of things. Luckily, with the information provided in this article, you’ll be one step closer to becoming a compliance expert for your business.
But maybe you don’t have the time to be an expert—after all, running a business is more than a full-time job. Sometimes, the best thing you can do for yourself and your business is ask for help. And, with Payday’s talented and experienced team, you can bet we can handle any ACA compliance issues your business may be facing.
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