Controlled Groups: Understanding Common Ownership and ACA Compliance
When businesses share a common owner or have intertwined ownership, they may be grouped together under the IRS’s “controlled group” rules. This has significant implications for determining employer size under the Affordable Care Act, as well as for compliance with other federal regulations, including COBRA and Medicare. It’s crucial for brokers and their clients to understand how these rules could impact them, especially if their business operates across multiple entities or industries.
What Is a Controlled Group?
Under IRS regulations, businesses that are commonly owned may be considered a single group for the purposes of determining their ACA group size and whether they qualify as an Applicable Large Employer (ALE). This group is referred to as a “controlled group” or “aggregate group.” Even if the individual businesses have:
- Separate tax identification numbers (Tax IDs),
- Different types of employees,
- Varied locations,
- Or operate in entirely different industries,
They may still be combined into a single entity for compliance purposes if they share ownership.
This has a direct impact on responsibilities like:
- ACA employer mandate: Whether the business is required to offer health coverage.
- COBRA: Which applies to employers with 20 or more employees.
- Medicare Primary/Secondary payer rules: Which dictate how Medicare coordinates with employer coverage.
For example, if a business owner has several different companies, and each of those companies has its own employees and Tax ID, they might assume that each business is small enough to avoid the requirements of the ACA’s Employer Mandate. However, the IRS looks at the combined size of all businesses under common control. This means that employees from each business might be grouped together to determine the total size of the employer, and this could push the business into ALE status, even if each individual business would not qualify on its own.
Note: Groups with common ownership are not usually required to have the same health plan, but doing so often simplifies ACA reporting.
Simple Ownership vs. Complex Ownership
In some cases, determining whether businesses form a controlled group is straightforward. For example, if a person or entity owns 100% of multiple businesses, those businesses are generally considered part of a controlled group. In this situation, a tax professional may not be required to confirm controlled group status, as it is clear under IRS rules that common ownership exists.
Example of Simple Ownership:
- Bob owns 100% of three businesses: a fine dining restaurant, a taco shop, and a pizza parlor. These businesses have separate Tax IDs, different locations, and distinct employee groups. Each has an average of 20 employees in 2023.
- Although it may seem that none of the businesses are large enough to meet the ACA’s 50-employee threshold, IRS rules state that since Bob owns 100% of all three businesses, they are considered part of a controlled group. This means their employee counts are combined, and Bob’s businesses together have 60 employees, making them an ALE for 2024. Therefore, Bob would need to offer affordable health coverage to his full-time employees or face penalties under the ACA.
However, when ownership is spread across multiple individuals or entities, determining controlled group status becomes more complex. For instance, if Bob owns 15% of one company, 5% of another, and 100% of a third business, a tax professional or CPA would need to evaluate whether the businesses are part of a controlled group under IRS rules. The IRS uses intricate guidelines to assess partial ownership and control, which can be difficult to interpret without professional expertise.
Who Determines Controlled Group Status?
Determining whether businesses are considered a controlled group under IRS guidelines is a complex task. It must be performed by a qualified tax professional, CPA, or legal counsel who is familiar with the regulations outlined in Internal Revenue Code Section 414 (which covers controlled groups under subsections (b), (c), (m), and (o)).
Businesses should not rely on guesswork or casual estimates of whether they are part of a controlled group. Instead, they need a formal determination from a professional who can assess:
- The nature of the ownership structure,
- The control of stock or other forms of ownership interest, and
- Other factors specified in IRS guidance.
Note: Not all tax professionals specialize in this area, so it’s critical to seek out someone with the right expertise.
ACA Compliance and Reporting for ALEs
If a controlled group is classified as an ALE, the businesses within that group must comply with the ACA’s Employer Mandate. This requires them to:
- Offer affordable health coverage that meets the minimum value requirement to full-time employees and their dependents.
- File Forms 1094-C and 1095-C with the IRS and provide them to employees to report the health coverage offered.
Failing to meet these requirements could result in penalties under the ACA’s Employer Shared Responsibility Provisions.
Even though controlled groups are often viewed as a single entity for ACA purposes, it’s important to note that businesses within the group are not required to use the same health plan. However, many businesses find that using a single plan across all entities simplifies ACA reporting and administration.
Key Considerations for Brokers
Brokers should exercise caution when advising on controlled group status , as this falls into the realm of tax advice. It’s important to remind your clients that controlled group determinations require professional tax or legal guidance. Brokers should avoid offering specific tax advice unless they are qualified to do so, and it’s wise to ensure they have proper Errors & Omissions (E&O) insurance coverage in place to protect against potential liabilities.
While brokers should inform their clients about controlled group rules and their implications, the ultimate determination of controlled group status should be left to tax professionals. Most employers are likely to be aware of their controlled group classification, as this extends beyond just health benefits—it affects HR laws, business taxes, and overall company structure. However, some employers may not fully understand how these rules apply to their specific situation.
Practical Example: Complex Ownership
To illustrate how complex ownership structures can impact controlled group determinations, consider this:
Example of Complex Ownership:
- Bob owns 15% of a paper company, 5% of a drugstore, and 100% of a pizza parlor.
- The businesses have different Tax IDs and different employees. Determining whether these businesses are part of a controlled group is more complicated because ownership is split across multiple entities.
In this scenario, a tax professional would need to evaluate whether Bob’s combined ownership percentages and control meet the IRS’s standards for a controlled group. Without professional guidance, Bob’s businesses could inadvertently fall into ALE status, triggering ACA requirements that he wasn’t prepared to meet.
The Importance of Professional Guidance
Controlled group rules are complex, and making an accurate determination is critical for ACA compliance and other regulatory requirements. Brokers should encourage their clients to work with qualified tax professionals or CPAs to assess their ownership structures and determine whether they are part of a controlled group. By doing so, businesses can avoid potential penalties and ensure they are meeting their legal obligations.
Remember, brokers should refrain from offering tax advice unless they are qualified and properly insured, and instead focus on guiding clients toward the right professional resources.
Key Takeaways
- Controlled Group Classification: This can combine separate businesses under common ownership for the purposes of ACA compliance, COBRA, and Medicare coordination.
- Seek Professional Guidance: Controlled group determinations should only be made by a CPA, tax professional, or legal expert familiar with IRS regulations.
- Compliance Implications: Once classified as an ALE, businesses are required to offer compliant health coverage or face penalties.
- Health Plan Flexibility: While controlled groups can use different health plans for different entities, a unified plan often simplifies compliance and reporting.
- Consult the Experts: It’s essential to work with tax professionals or CPAs experienced in this area to ensure businesses meet their compliance obligations.