Do you know who is in your controlled group? Employers need to know for purposes of the large employer shared responsibility penalties

Most employee benefit plans are subject to nondiscrimination rules.  In order to prevent employers from breaking apart companies in order to avoid these nondiscrimination rules, most employee benefit plans, in performing nondiscrimination testing, must take into account related businesses (i.e., controlled groups and affiliated service groups).

I’ve been blogging recently about the large employer shared responsibility penalties.  A big gotcha is that many employers do not know that the same related business rules apply in determining whether an employer is large.

Related companies are combined when determining whether an employer is large:  In determining whether an employer is “large” and is subject to the large employer shared responsibility penalties, employers must include all related businesses (each referred to as a “company”) under Internal Revenue Code Sections 414(b), (c), (m), and (o).

• This means employers have to count all full-time and full-time equivalent employees in the group.
• If the combined total meets the threshold, each separate company is subject to the employer shared responsibility provisions, even those companies that individually do not employ enough employees to meet the threshold.
• Example:  Parent Company A has 50 full-time employees, Subsidiary B has 25 full-time employees, and Subsidiary C has 25 full-time employees.  The three members of the controlled group have 100 full-time employees.  Therefore, even Subsidiaries B and C, who each have only 25 full-time employees are potentially subject to the large employer shared responsibility penalties.
• Employers who file as qualified separate lines of business (“QSLOBs”) for other employee benefit purposes (such as 401(k) testing) cannot rely on the QSLOB rules for this purpose.

Related companies are not combined when determining penalties:  Although the related business rules apply for determining whether an employer is “large,” the determination of whether a penalty applies is determined on a company-by-company basis, based on that company’s offer of coverage (or lack thereof) and that company’s number of full-time employees.

• Example:  Parent A does not offer minimum essential coverage to its full-time employees.  As a result, Parent A is subject to the subsection (a) penalty.  Subsidiary B offers minimum essential coverage to all of its full-time employees and their dependents.  Although the coverage is minimum value, it is not affordable.  Subsidiary B may have to pay a subsection (b) penalty.  Subsidiary C, offers minimum essential coverage to all of its full-time employees and their dependents.  The coverage is both minimum value and affordable.  Subsidiary C will not be subject to any large employer penalties.

Offer of coverage by one company on behalf of a related company:  The final regulations clarify that an offer of coverage by one company to an employee is treated as an offer of coverage by all related companies.

One of the first steps to complying with these new rules is analyzing who is in the employer’s controlled group or affiliated service group.  For more information on the large employer shared responsibility penalties, please see my Checklist for Employers, the final regulations, and the IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act.