PPACA imposes a penalty on “large” employers that either do not offer “minimum essential” (basic medical) coverage, or who offer coverage that is not affordable (the employee’s cost for single coverage is greater than 9.5 percent of income) or it does not provide minimum value (the plan is not designed to pay at least 60 percent of claims costs). A large employer is one that employed at least 50 full-time or full-time equivalent employees during the prior calendar year. To discourage employers from breaking into small entities to avoid the penalty, PPACA provides that, for purposes of the 50-employee threshold, the controlled group and affiliated service group aggregation rules will apply to health plans. Essentially, this means that the employees of business with common owners or that perform services for each other may need to be combined when determining if the employer is “large.”
The aggregation rules are very complicated and may require a large amount of information to do an accurate analysis. This article does not address all of the possible considerations or all of the intricacies of the rules, and assumes that the regulations that apply to retirement plans will also apply to health plans. We strongly encourage clients with complex arrangements to consult with their attorney or accountant.
Controlled Group
When one business owns a significant part of another business, there may be a “controlled group.” There are three types of controlled groups — parent-subsidiary, brother-sister and combined.
Ownership includes:
- Stock ownership in a corporation
- Capital interest or profits in a partnership
- Membership interest in an LLC
- A sole proprietorship
- Actuarial interest in a trust or estate
- A controlling interest in a tax-exempt organization (80 percent of the trustees or directors are also trustees, directors, agents or employees of the other organization or the other organization has the power to remove a trustee or director)
Parent-Subsidiary
A parent-child subsidiary controlled group occurs when one business owns 80 percent or more of another business or businesses.
- The parent might own multiple subsidiaries
- Example 1: P Corp. owns 85 percent of J Co. and 80 percent of K Co. P has 30 full-time employees, J has 15 full-time employees and K has 12 full-time employees. P, J and K are all part of a parent-sub controlled group with 57 full-time employees, so all three companies must offer affordable, minimum value coverage or pay a penalty.
- Example 2: N Corp. owns 80 percent of A Co. and 75 percent of B Co. N has 27 full-time employees, A has 23 full-time employees and B has 28 full-time employees. N and A are part of a parent-sub controlled group with 50 full-time employees, so these two companies must offer affordable, minimum value coverage or pay a penalty. B is not part of the group because N owns less than 80 percent of B. Since B has fewer than 50 full-time employees, B does not have to offer coverage.
- The parent might own multiple tiers of subsidiaries
- Example 3: Z Corp. owns 100 percent of Q Co. Q has a 90 percent interest in R Partnership. Z has 35 full-time employees, R has 18 full-time employees and Q has 10 full-time employees. Z, Q and R are all part of a parent-sub controlled group with 63 full-time employees, so all three companies must offer affordable, minimum value coverage or pay a penalty.
Brother-Sister Group
A brother-sister controlled group is a group of two or more entities that meet all of these requirements:
- There must be five or fewer common owners
- Each owner must be an individual, a trust or an estate
- Ownership can be direct or by attribution
- Interests of spouse are attributed to the owner (with limited exception
- For children under age 21, the ownership interests of the parent (no matter how large or small) are attributed to the minor child, and the ownership interests of the minor child (no matter how large or small) are attributed to the parent
- For children age 21 or older, the ownership interests of the parent or grandparent are attributed to the adult child only if the child owns more than 50 percent of the business, and the ownership interests of the adult child are attributed to the parent or grandparent only if the parent or grandparent owns more than 50 percent of the business
- Partnership and corporate ownership interests are attributed proportionately to owners of more than 5 percent of the interest or stock.
Example 4: Mary owns 100 percent of Ajax Corp. and 51 percent of Best Corp. Mary has two children. William is age 28 and he owns 30 percent of Best Corp. Rebecca is age 20 and she owns nothing. Since Mary owns more than 50 percent of Best, Williams’s 30 percent is attributed to her. Rebecca will be considered to own 100 percent of Ajax and 51 percent of Best because those are Mary’s holdings and Rebecca is a minor.
- The common owners must own at least 80 percent of each business
- The combined identical ownership must be 50 percent or more
- Use the lowest percentage ownership of each person when determining identical ownership
Example 5: Ann, Bill, Carl and Dee own Adams Corp. and Bell Corp. in these percentages:
|
Shareholder |
Adams Corp. |
Bell Corp. |
Identical Ownership |
|
Ann |
80% |
20% |
20% |
|
Bill |
10 |
50 |
10 |
|
Carl |
5 |
15 |
5 |
|
Dee |
5 |
15 |
5 |
|
Total |
100 |
100 |
40 |
This group:
- Meets test No. 1 because there are fewer than five common owners
- Meets test No. 2 because the four common owners own 100 per cent of the corporations, and 100 percent is at least 80 percent of the stock
- Does not meet test No. 3 because “identical” means lowest interest in the entities, which is:
- Ann – 20%
- Bill – 10%
- Carl – 5%
- Dee – 5%
- Total – 40%
Example 6: Jane, Jack and Jim own parts of Wright Co., Hill Corp. and Smith Co. in these percentages:
|
Shareholder |
Wright Co. |
Hill Corp. |
Smith Co. |
Identical Ownership |
|
Jane |
100% |
15% |
15% |
15% |
|
Jack |
0 |
40 |
50 |
0 |
|
Jim |
0 |
40 |
20 |
0 |
|
Total |
100 |
95 |
85 |
15 |
There is no controlled group among Wright, Hill and Smith because their identical ownership is less than 50 percent.
Example 7: There is a controlled group among Hill and Smith, because Jane, Jack and Jim own more than 80 percent of those two companies and their identical ownership is 75 percent:
|
Shareholder |
Hill Corp. |
Smith Co. |
Identical Ownership |
|
Jane |
15 |
15 |
15 |
|
Jack |
40 |
50 |
40 |
|
Jim |
40 |
20 |
20 |
|
Total |
95 |
85 |
75 |
Combined Group
A combined group consists of three or more entities that meet all of these requirements:
- Each organization is a member of either a parent-subsidiary or brother-sister group
- At least one corporation is:
- The common parent of a parent-subsidiary and
- A member of a brother-sister group
Example 8:
- Mary owns 80 percent of York’s stock and 85 percent of Zest Partnership
- York and Zest are a brother-sister group
- York owns 90 percent of Sharp Corporation
- York and Sharp are a parent-sub group
- York, Zest and Sharp are part of a combined group, with York as the common entity
Affiliated Service Groups
If the company regularly performs certain types of personal services or management functions with or for related entities it may be part of an “affiliated service group” even if there is not common ownership. An affiliated service group is basically a group of businesses working together to provide services to each other or jointly to customers, and can be one of three types:
- A-Organization (A-Org), which consists of a First Service Organization (FSO) and at least one A-Org
- B-Organization (B-Org) which consists of an FSO and at least one B-Org
- Management groups.
Only entities that provide personal services are subject to the affiliated service group rules. Attribution rules similar to those that apply to controlled groups apply to affiliated service groups.
To be an FSO, the performance of personal services must be the principal business of the organization (corporation, partnership, sole proprietorship or not-for-profit). Compensation must be through commissions, fees or similar compensation based upon providing services (as opposed to having profits based at least in part on inventories, equipment, or manufacturing). These services are always considered covered services when deciding if an organization is an
FSO:
- Accounting
- Actuarial science
- Architecture
- Consulting
- Engineering
- Health (including chiropodists, chiropractors, dentists, medical doctors, optometrists, osteopaths, podiatrists, psychologists, veterinarians)
- Insurance
- Law
- Performing arts
Professional service corporations are always FSOs.
If the entity is an FSO, you need to determine if there is also an A-Org or a B-Org group that will create an affiliated services group.
A-Org
To be an A-Org group, all of these criteria must be met:
- The FSO must be a professional service corporation (this often means their name includes “P.C.”), a sole proprietorship or a partnership
- The other organization must be a service organization, too
- The other organization must have an ownership interest in the FSO
- The other organization must regularly perform services for the FSO, or the other organization and the FSO must work together to perform services for third parties
Example 9: Dr. Johnson owns 100 percent of his medical corporation (James Johnson, MD, PC) and 20 percent of JB Diagnostics, Inc. Dr. Johnson regularly refers patients to JB. There is an affiliated service group; JB is the FSO and James Johnson, MD, PC is the A-Org.
B-Org
To be a B-Org group, all of these criteria must be met:
- The FSO must be a service organization, but it can be any kind of entity
- The other organization must derive a significant portion of its business (generally 10 percent or more) from the performance of services for the FSO or for an A-Org related to the FSO
- The other organization must perform services that are the type historically performed in the field of the FSO or by employees
- The other organization must be at least 10 per cent owned by persons who are highly compensated employees of the FSO or the related A-Org (attribution rules apply)
- The other organization does not need to be a service organization
Example 10: Jordan is a CPA He is a 15 percent owner in an accounting firm and a 20 percent owner in a secretarial firm. The accounting firm engages the services of the secretarial firm which derives at least 10 percent of its gross receipts from this relationship. The accounting firm and the secretarial firm are an affiliated service group.
If an organization is an FSO with respect to two or more A-Orgs and/or B-Orgs, all will be combined into an affiliated service group.
Management Group
- To be a Management Group:
There are no ownership requirements
- One organization must regularly perform management functions for the other
- Management functions include daily operations, management of personnel, employee compensation and/or benefits, business planning and other standard management activities
- The managing firm generally must receive over half its income from managing the other organization
Example 11: A landscape design and maintenance company splits into two companies. One company, W, was established to employ the workers who perform work in the field, and a second company, M, was established to employ the management and design team. M performs management responsibilities for W, and W is the only client of M. W and M are an affiliated service group.
In summary:
- These rules are complicated, and include additional requirements and exceptions not covered in this piece
- If a business isn’t wholly owned by an individual or other entity, it’s important to know who owns the rest of the business and what else the other owners have an interest in
- It’s important to know what an individual owner’s family situation is
- It’s important to know if a business owns other businesses
- The affiliated service group rules apply only if the entity is providing personal services
- If personal services are the entity’s main “product,” it’s important to know if it provides or receives services to or from other businesses
