Under the Affordable Care Act, if an employer has more than 50 full-time employees for more than 120 days of the year, it is required to provide health insurance to its employees.[i] The Obama administration postponed the effective date of this employer mandate, but most business must comply within the next couple of years.[ii] This creates some difficult choices for business that are just over the 50-employee threshold. It also creates an interesting question about whether an employer can split its business into two or more entities to avoid the employer mandate. Unfortunately for most business owners, the answer is no.
The Affordable Care Act treats two or more related businesses - or "business clusters" - as a single employer for purposes of determining whether a business cluster meets the 50-employee threshold. This is the same method that is already used in the Internal Revenue Code for other employee benefits such as pensions, profit-sharing plans, and stock bonus plans.[iii] There are four types of business clusters: a parent-subsidiary controlled group, a brother-sister controlled group, a family controlled group (combination of the parent-subsidiary and brother-sister), and an "affiliated service group."
A parent-subsidiary controlled group exists if the parent business entity owns at least an 80 percent controlling interest in the subsidiary business entities.[iv] For example, Smith owns all of Parent, Inc., which has 25 employees, and Parent, Inc., owns at least 80 percent of Subsidiary, LLC, which has 26 employees. Parent, Inc., and Subsidiary, LLC, are a part of a parent-subsidiary controlled group and their employees are added together for purposes of the employer mandate.
A brother-sister controlled group exists if five or fewer persons own an 80 percent controlling interest in two or more business entities and have 50 percent "effective control" of the controlled group.[v] Effective control is calculated by adding together each owner's greatest percentage interest in each entity in the controlled group.[vi] For example, John and Jane each own 45 percent of Brother, Inc., and 40 percent of Sister, Inc. Together, John and Jane have a controlling interest of at least 80 percent for both Brother, Inc., and Sister, Inc. In addition, Black's and White's greatest interest in each company is 40 percent, which gives them an effective control of 80 percent over the controlled group. This makes Brother, Inc., and Sister, Inc., a business cluster under the Affordable Care Act.
A family controlled group exists if there are three or more business entities existing in any combination of both a parent-subsidiary controlled group and a brother-sister controlled group.[vii]
An affiliated service group exists based on several different factors, including whether one entity performs services for another and the extent of those services, whether a "highly compensated employee" owns 10 percent of one of the entities, and whether one of the entities performs management functions of another.
Although it is theoretically possible to adjust the ownership of a business cluster to avoid the control group distinction, such adjustments would necessarily require owners to give up a great deal of control over their businesses. Even less can be done to avoid the affiliated service group distinction. However, it is important to stay current with news regarding the Affordable Care Act as it continues to evolve. What is true today may not be true tomorrow.
If you want further information or legal advice relating to your particular business situation, please call our office.
[i] 26 U.S.C.A. § 4980H.
[ii] Tami Luhby, The Future of Health Care: Obamacare employer mandate eased (Feb. 10, 2014) <http://money.cnn.com/2014/02/10/news/economy/obamacare-employer/index.html> (as of Sept. 3, 2014).
[iii] 26 U.S.C.A. § 4980H(c)(2)(C).
[iv] 26 U.S.C.A. § 1563(a)(1); 26 C.F.R. § 1.414(c)-2(b).
[v] 26 U.S.C.A. § 1563(a)(2); 26 C.F.R. § 1.414(c)-2(c).
[vi] 26 C.F.R. § 1.414(c)-2.
[vii] 26 U.S.C.A. § 1563(a)(3) (West); 26 C.F.R. § 1.414(c)-2(d).