Are You Sure You Are Not An Applicable Large Employer? The Impact of the Controlled Group Rules On ALE Determination – by Kristi R. Gauthier, Clark Hill PLC

As we approach the end of 2014, employers are gearing up for the impact of the Patient Protection and Affordable Care Act’s (“PPACA”) employer shared responsibility provisions on their organizations which take effect as early as January 1, 2015 for some employers.  The employer shared responsibility provisions, and the related penalties, only apply to “Applicable Large Employers” or “ALEs.”  Therefore, the first step in determining the impact of these dreaded provisions is to determine whether your organization is an ALE. 

Generally speaking, an “ALE” is an employer that averages 50 or more full-time and/or full-time equivalent employees in the previous calendar year.  In making this determination, employers need to take into consideration the IRS’ controlled group rules.  Unfortunately, with the application of these long standing rules, many “small” employers are considered to be ALEs and subject to the employer share responsibility provisions.
 
Pursuant to the controlled group rules found in Internal Revenue Code sections 414(b), (c) and (m), the IRS will treat two or more employers as a single employer if there is sufficient common ownership or a combination of joint ownership and common activity.  A controlled group of organizations may be composed of:

•    Parent-Subsidiary Group: one or more businesses that are connected through ownership with a common parent corporation;
•    Brother-Sister Group:  a group of two or more businesses where five or fewer common owners own directly or indirectly a “controlling interest” (together own 80% or more of each entity) and have “effective control” (takes into account identical ownership with each corporation); or
•    Combined Group:  three or more organizations with combined parent-subsidiary and brother-sister controlled group structures.

The controlled group rules also take into consideration many factors including family attribution rules and ownership rights, and vary depending on the business structure and for non-profit entities.

For purposes of ALE determination, all members of the controlled group are counted together when determining if there are more than 50 full-time and/or full-time equivalents.  If the controlled group consists of more than 50 full-time and/or full-time equivalent employees, all members of the controlled group will be considered an ALE and subject the employer shared responsibility provisions.  This means, for example, that an employer with only 20 full-time employees would be considered an ALE and subject to these provisions, if the employer is part of a larger controlled group of employers that together exceed the 50 full-time employee threshold.  This is a rule that has caught many smaller employers by surprise.

Given the complexity of the IRS’ controlled group rules, and the fast approaching deadline for compliance with the employer shared responsibility provisions, you should consult with your legal counsel to conduct a detailed controlled group analysis so that you are able to determine next steps for PPACA compliance.

*This article is not intended to give legal advice. It is comprised of general information. Employers facing specific issues should seek the assistance of legal counsel.