By Kelline R. Linton,
On February 10, 2014, the IRS and Treasury issued the final regulations on the Employer Shared Responsibility provisions under Section 4980H of the Internal Revenue Code. These regulations explain how to determine a large employer for the Affordable Care Act (“ACA”) employer mandate when multiple companies are involved. The short answer is that if the companies are in the same control group for tax purposes, then they are combined for the ACA’s employer mandate.
1. If companies are a control group for tax purposes, then they are considered one employer for the ACA employer mandate.
Section 4980H includes a provision under which companies that are combined and treated as a single employer for tax purposes also are combined for purposes of the ACA employer mandate. The IRS defines and provides examples of three controlled groups in IRS Code § 414(b) and 414(c). The three types of control groups are parent-subsidiary, brother-sister, and combined. If companies fall within one of these controlled groups, then they also are combined to determine whether or not they collectively employ at least 50 full-time employees (including full-time equivalents) for the ACA employer mandate. If the combined total meets the threshold, then 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: If a large employer composed of a parent corporation and 10 wholly owned subsidiary corporations has, on a controlled group basis, 50 or more full-time equivalent employees, each corporation, regardless of the number of its employees, is treated as a large employer under the employer mandate.
2. Even if each corporation is treated as a large employer under the employer mandate, the tax penalties are applied separately.
For purposes of assessing liability, Section 4980H tax penalties are applied separately to each member of the controlled group. Each member of the controlled group is liable for its own tax penalties and is not liable for the tax penalties of any member of the controlled group that makes up the large employer.
Example: In the case of a parent-subsidiary relationship of two businesses, if a parent corporation has 30 FT/FTE equivalent employees and its wholly-owned subsidiary corporation has 30 FT/FTE employees, both entities will be subject to the employer mandate since the entities on a combined basis have at least 50 FT/FTE employees. However, if the parent provides the requisite health insurance coverage and the subsidiary does not, the parent will not be subject to a penalty and the penalty assessed on the subsidiary will be calculated by counting only the subsidiary’s employees (less 15 employees, i.e., the subsidiary’s share of the 30-employee reduction).