ACA Employer Mandate and Rules for Controlled Groups

The Affordable Care Act (ACA) requires large employers (with 50+ full time equivalent employees) to either offer minimum value and affordable health insurance coverage to full time employees, or pay an employer health insurance tax penalty based on full-time employees. This requirement is also commonly referred to as the ACA employer mandate, "play or pay" or employer shared responsibility.

An employer might be thinking:

• "If I divide my company into several smaller companies can I avoid the employer mandate?" 

  Or,

• "I own several businesses under the same parent company; how do I determine if I'm an applicable large employer?"

The short answer is: When a business entity is considered a controlled group (as defined below), the business is considered a single employer under the ACA employer mandate. 

So, employees of companies within the same controlled group must be aggregated to determine whether the commonly-owned companies are subject to the employer mandate.

3 Types of Controlled Groups

There are three types of controlled groups that are considered one employer for the purposes of the ACA employer mandate. The IRS defines, and provides example of, these three controlled groups in IRS Code § 414 (b) and 414 (c).

1.Parent-Subsidy Group: When one or more businesses are connected through stock ownership with a common parent corporation (such as a chain); and 

• 80% of the stock of each corporation (except the common parent) is owned by one or more corporations in the group, and 

• Parent Corporation must own 80% of at least one other corporation. 

2. Brother-Sister Group: A group of two or more corporations, where five or fewer common owners own directly or indirectly a "controlling interest" of each group and have “effective control”.  A common owner must be an individual, a trust, or an estate.

• Controlling interest: Generally means 80% or more of the stock of each corporation (but only if such common owner own stock in each corporation); and 

• Effective control: Generally more than 50% of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.

• Each organization is a member of either a parent-subsidiary or brother-sister group, and 

• At least one corporation is the common parent of a parent-subsidiary, and is also a member of a brother-sister group

Click here to view the IRS source and examples of these types of controlled groups.

To summarize, if the business entity falls under one of these three types of controlled groups, then for the purposes of the employer mandate the entity is considered one employer.

How Controlled Groups Calculate the Health Insurance Tax Penalty

Once the business determines if they are a controlled group under the IRS definition, they then need to determine:

1. Is the business an "applicable large employer” (50+ FTE employees)? Again, the controlled group is considered one employer.

2. What is the penalty if I do not offer “minimum essential coverage”?

3. What is the penalty if I offer “minimum essential coverage,” but it is not “affordable” for some of my employees?

For details on each of these steps see: Quick Guide to Calculating the Business Health Insurance Tax Penalty.