Question: Can you provide me with general guidelines regarding how controlled groups and affiliated services groups are considered under ACA for the employer mandate? My company has a number of affiliated companies and we need to start thinking about compliance. Does having separate EINs matter?
Answer: “Controlled group” is not a new concept just for the Affordable Care Act (ACA) and the ACA does not establish definitions. Rather, “controlled group” is a long-established concept under federal tax law that refers to corporations, trades or businesses considered a single entity due to some degree of common ownership or control. The entity’s employer identification number (EIN), or whether entities use different EINs for payroll reporting purposes, does not determine whether the entities are members of the same “controlled group”.
An entity’s tax preparers, legal counsel and/or financial officer will know which entities are members of the same controlled group since the definition is used for a variety of business and tax law requirements. Internal Revenue Code §1563(a) provides definitions and ownership tests to determine if a controlled group exists. IRC §414(m) addresses employees of an affiliated service group, which is a similar concept to a controlled group. (As a very loose rule of thumb, entities with 80% or more common ownership or control typically are a controlled group; entities with less than 50% common ownership or control typically are not a controlled group; and entities in the 50%-80% corridor are examined case-by-case.)
Many federal benefits-related laws, such as COBRA, determine “employer size” based on the controlled group and not separately for each member of the controlled group. The Affordable Care Act (ACA) also takes this approach for various provisions. Starting in 2014, the ACA’s “employer shared responsibility” provision (often called “play or pay”) takes effect, however it applies only to “large employers”. A large employer is defined as one with 50 or more full-time-equivalent employees. If the employer is a member of a controlled group, the entire controlled group is counted together to determine the number of full-time-equivalent employees.
For instance, let’s assume that A and B each have 30 employees and A and B are members of the same controlled group. Therefore, both A and B are “large employers” under the ACA. Note, however, that each member of the “controlled group” will stand on its own for purposes of any potential penalty under the play or pay rules. If A fails to offer affordable minimum value health coverage to its full-time workers AND if one of A’s employees receives subsidized coverage from an Exchange, A may be subject to a penalty. A’s failure, however, would not impact B.