One of the vagaries of the Affordable Care Act is the notion of common ownership, or “controlled group” – a group of companies considered as one under a single owner.
The rules on common ownership were created specifically to keep businesses from splitting up their employees into different organizations in order to evade the mandate that employers provide health insurance coverage to their employees.
Under the ACA, if a company has 50 or more full-time employees it will be required to provide health insurance to its employees. If there is collective ownership or an individual or individuals own multiple companies with an aggregate total of 50 or more employees, they would still be required to provide coverage.
A controlled group refers to a collection of companies owned by the same person or persons (five or fewer) that collectively own 80% or more of the equity in two separate trades or businesses. Or, taking into account the level of ownership each of those five persons holds in each of the two organizations, they must collectively own more than 50% of the equity in both of the trades or businesses.
As an employer if you own or are a partner in multiple businesses (including multiple franchise outlets), you need to be aware of this part of the law as it relates to your obligation to secure coverage for your employees.
Companies that have between 50 and 99 employees will not be required to provide coverage to their employees until 2016, while those with more than 100 will need to cover up to 70% of their workers starting 2015.
You’ll have to count up your full-time employees at each entity in addition to fractional employees. A full-time employee under the law is one who works 30 hours or more per week.
If you don’t tally them up properly, you could be subject to fines and penalties.
The definition of “controlled group” is contained in IRS Code Sections 414(b) and (c). A controlled group exists if two or more corporations, trades or businesses (including partnerships and proprietorships) have one of the following relationships:
- Brother-sister organizations; or
- A combination of parent-subsidiary and brother-sister.
In addition, constructive ownership, or attribution, rules apply for purposes of determining whether a group of organizations is a controlled group. These rules treat a person as owning an interest in an organization that is not actually owned by that person. Attribution may result from family or business relationships.
Parent-subsidiary controlled group
A parent-subsidiary controlled group exists when one or more chains of organizations are connected through ownership of a “controlling interest” with a common parent organization if:
- A controlling interest in each of the organizations (except the common parent) is owned by one or more of the other organizations in the group; and
- The common parent organization owns a controlling interest in at least one of the other organizations.
For a corporation, a controlling interest means ownership of stock having at least 80% of total combined voting power of all classes of stock entitled to vote, or at least 80% of the total value of shares of all classes of stock.
For a partnership, a controlling interest means ownership of at least 80% of the profits interest or capital interest of the partnership.
Here is a good example: Ess Corp. owns 90% of the stock of Dee Corp and 80 % of the stock of Cee Corp. Dee Corp. owns 85% of the profits of Em Partnership.
In this case, Ess Corp. is the common parent of a parent-subsidiary controlled group consisting of Ess Corp., Dee Corp., Cee Corp and Em Partnership.
Brother-sister controlled group
A brother-sister controlled group exists when five or fewer individuals, estates or trusts own a controlling interest (80%) in each organization and have effective control.
“Effective control” generally means more than 50% of the organization’s stock or profits, but only to the extent the ownership is identical with respect to each such organization.
Combined controlled group
A combined controlled group exists of three or more organizations that are structured in the following way:
- Each organization is a member of either a parent-subsidiary or brother-sister controlled group; and
- At least one organization is the common parent organization of a parent-subsidiary controlled group and is also a member of a brother-sister controlled group.
Constructive ownership principles apply to the controlled group rules that treat an individual as owning an interest in an organization based on a family or business relationship. These rules are complex.
For example, an individual will be considered to own an interest, owned directly or indirectly, by his or her children under age 21 or by his or her spouse, unless legally separated or divorced.
An exception applies if there is no direct ownership, no participation in the organization (for example, as a director, officer or employee) and if no more than 50% of the organization’s gross income is from passive investments.
In addition, an interest owned, directly or indirectly, by or for a partnership, corporation or trust is treated as owned by any individual having an interest of 5% or more in the organization, in proportion to the individual’s interest in the organization.
For example, if an individual owns 60% of the stock of ABC Corp. and ABC Corp. owns 50 shares of XYZ Corp., the individual is considered to own 30 shares of XYZ Corp. (60% x 50).
We’ve thrown a lot of numbers at you in this article and, if you are still confused, you are not alone. Fortunately, we are here to help.
To make sure you are accounting for all of your employees in your various entities, don’t go it alone. Schedule a meeting with us so we can review your businesses and make sure that you aren’t making any mistakes.