From the Hotline: Controlled Group Rules and Health Care Reform

Question: We would like to better understand the controlled group rules as it relates to health care reform (we know the IRS controlled group rules for business transactions).  Let’s assume that a company has common ownership of two businesses.  Company 1 has 100 employees and Company 2 has 200 employees.  They decide NOT of offer health insurance and pay the penalty.  Would each business calculate the penalty separately and each have the first 30 employees “free” in the calculation?

 Answer: As we understand it, two determinations under the regulations are made on an aggregate controlled group basis:

1.   The large employer determination, and

2.   How the penalties may be assessed.  A large employer is permitted a reduction of 30 full-time employees per month for purposes of calculating penalties due for failing to offer coverage under 4980H(a).  This 30-employee reduction is done proportionately across all members of a controlled group based on each company’s number of full-time employees, so employers can’t chose which companies will benefit from the reduction.  However, if the controlled group has more than 30 employees and the proportionate allocation is greater than zero but less than one, the proposed regulations allow rounding up to one employee for that company—which could result in an overall reduction to all members of more than 30 employees.

Compliance with and liability under 4980H is otherwise determined separately for each company of the controlled group.  In your example, there are 300 employees in total in the controlled group, with 33.33% in Company 1 and 66.67 in Company 2.  Company 1 would have a deduction for the first 10 employees and Company 2 would have a deduction for the first 20 employees.  Any penalties would only be assessed for a company’s own full-time employees, and each controlled group member would be liable for only for its own separate 4980H payment.

Here are a few other items to be aware of:

  • The regulations provide for a “de minimis” rule, which treats an employer as offering coverage to all full-time employees if it offers coverage to all but 5% (or, if greater, 5) of its full-time employees.  It appears this rule applies on a company basis as well, and would not be applied by looking at whether the controlled group as a whole offers coverage to 95% of full-time employees.
  • If an employee is employed by more than one of the controlled group companies during a month, the liability for penalties under 4980H(b) is allocated among the companies in accordance with the hours of service that the employee had with each company.

The rules governing compliance with controlled groups are complex and we encourage you to work with your benefits attorney and tax advisor.