Groups that share common ownership may be considered one employer by the Internal Revenue Service (IRS) for purposes of determining group size/status. This can often result in added compliance responsibilities. These groups are called “controlled groups,” and are sometimes referred to as “aggregate groups.”
This aggregation heavily affects entrepreneurial employers who own multiple businesses, or portions of multiple businesses. Groups with separate tax IDs, different groups of employees, different locations, and even different industries can be combined if common ownership is a factor between the groups.
Simply put by the IRS, “a controlled group of businesses is a group of related businesses that have common ownership.” Of course, determining whether a group of employers is a “controlled group” is not always a simple task. Certain aggregation rules apply in making this determination, and this is not a “do-it-yourself” project for health insurance brokers. The IRS has written and released a 108-page guide for CPAs to aid them in determining controlled-group status. Furthermore, it is not likely a health insurance broker’s Errors & Omissions (E&O) Insurance covers IRS-related matters, including giving guidance to an employer on controlled-group status.
Brokers should always refer clients with common ownership to a trusted CPA or tax advisor(s) for help when making this determination in accordance with Internal Revenue Code (IRC) Sections 414 (b) (c) (m) or (o). It must be made correctly, because incorrect determinations have grave ramifications.
Controlled Groups and the ACA
Aggregate rules apply to the Applicable Large Employer (ALE) determination calculation of the Affordable Care Act (ACA). Per ACA rules, ALEs average 50 or more Full Time (FT) plus Full Time Equivalent (FTE) employees for the 12 months of the preceding tax year. ALEs are required to comply with the ACA’s employer mandate and employer reporting responsibilities.
For example, two separate companies of 35 FT and FTE employees would normally not be considered ALEs by the IRS. However, if they share common ownership, they could be combined – bringing their total count to 70 FT plus FTE employees – making them one ALE because of their controlled-group status. The two companies in this situation are called “ALE members” and must offer all eligible FT employees affordable Minimum Essential Coverage (MEC), which provides Minimum Value (MV); otherwise, they may face an ACA employer mandate penalty.
The IRS is sending 5699 letters to employers thought to have been ALE members for the 2015 tax year, but did not report on their offers of coverage as required by the ACA. We anticipate the IRS will be sending 5699 letters to employers for 2016 and 2017 in the future.
Controlled Groups and COBRA
Aggregate rules apply to COBRA status. In order for an employer to be subject to federal COBRA, it must have averaged at least 20 employees on 50% or more of the typical working days in the preceding calendar year. In a COBRA count example, two companies with fewer than 20 employees that share common ownership may be combined, bringing the employee total to more than 19, making them subject to federal COBRA.
If the group is domiciled in California, groups with fewer than 20 employees are subject to Cal-COBRA. Cal-COBRA participants are charged 110% of their applicable premiums to continue coverage via Cal-COBRA. Federal COBRA participants are charged 102% of their applicable premiums to continue coverage under COBRA. This makes calculation of group size especially important, because the two types of COBRA come with an 8% difference in premium.
Controlled Groups and Medicare Primary/Secondary Payer Status
Aggregate rules also apply to the determination of Medicare primary payer or Medicare secondary payer status. Employers with Medicare as a primary payer (on claims for working employees age 65+) are employers that have employed fewer than 20 employees for each working day across each of 20+ calendar weeks in the current year or preceding year. Employers with Medicare as a secondary payer are the opposite – they have employed 20 or more employees for each working day across the same timeframe. Again, groups with common ownership may be combined here.
For help understanding what an employer’s group size count means for ACA ALE status, federal COBRA/state COBRA, and Medicare Primary/Secondary status, check out Word & Brown’s Employee Count Reference; it explains all calculations in detail.
For all compliance-related matters, please contact your WBCompliance Team via email at ComplianceSupport@wordandbrown.com or call 866-375-2039. We love helping you!