ACA Common Ownership Rules – Don’t be guilty by association
Just the other day, I had to speak with one of my kids about getting in trouble at school for talking when he wasn’t supposed to be. According to him, “I wasn’t doing anything wrong!” Of course, I can relate to that. There were many times in my childhood that I got in trouble for “not doing anything wrong!” Now that I’m older, and hopefully more mature, I understand that “not doing anything wrong” was really a terrible excuse for talking with my friends when I wasn’t supposed to and expecting them to get in trouble but not me.
I think many of us have experienced a similar thing. Have you ever been in a situation, especially as a kid, where you were singled out among a group and got in trouble? Maybe as an adult, you were pulled over for speeding even though everyone around you was doing the same thing? Or perhaps you have been a part of a group project where you did your part but everyone else tanked and you felt the weight of that bad result? There are many times in life when we are guilty by association, sometimes justly and sometimes unjustly, simply because of the group we were a part of.
In business, there is one area where being guilty by association can lead to a lot of pain and headache if you aren’t familiar with the rules: ACA Common Ownership. The Affordable Care Act states that if multiple companies have common ownership, the employees within those companies are combined together to determine if the group as a whole is considered an Applicable Large Employer (ALE)– a company with 50+ employees. You can read more about what it means to be an ALE here or here. There are two main relationships that exist to determine common ownership: the first is the parent-subsidiary relationship and the second is the brother-sister relationship. We will provide an overview of each of these types of relationships below so that you can determine if this applies to your situation.
The parent-subsidiary relationship
In a parent-subsidiary group, a group of companies are connected through common stock ownership where 80% of the stock of each company is owned by one or more companies within the group.
For example, ABC Inc owns 90% of Black Inc, 80% of White Inc, and 65% of Blue Inc. Because ABC Inc owns 80% or more of Black Inc and White Inc, ABC Inc, Black Inc, and White Inc are part of a Parent-Subsidiary Group. Blue Inc is not part of this group because the controlling parent, ABC Inc, does not own at least 80% of the stock.
The brother-sister relationship
A brother-sister group is a little bit different than a parent-subsidiary group because more than just common stock ownership is examined. In a brother-sister group, a group of two or more companies in which five or fewer common owners directly or indirectly own a controlling interest of each company AND have effective control. A controlling interest is generally established by the five or fewer owners having at least 80% of the common stock and effective control is created when identical ownership (identical ownership refers to the lowest ownership percentage a person has in a group) of each company is more than 50%.
Let’s look at another example to see what this looks like.
|Controlling Interest||Effective Control|
|Payroll Inc||Insurance Inc||% of ownership considered for effective control|
In this example, a controlled group is not created because effective control is not established. While all four individuals own more than 80% of the interest in both companies, they do not own more than 50% of the companies when considering only the identical level of ownership each has in the business. As you can see, the brother-sister relationship can get complicated pretty quickly!
So what does this mean for ACA? According to the IRS, when a controlled group is identified, the entire group is considered to determine if the group is an applicable large employer with 50 or more full time equivalent employees and if so, an affordable offer of health insurance coverage must be made to all eligible employees within the group. Beyond ACA, the IRS also applies ERISA regulations to the controlled group as the entire group is treated as a single employer.
Anytime you have a group of entities that share any common ownership, it is important to take the time to evaluate the parent-subsidiary and brother-sister relationships to make sure all compliance is being handled appropriately. This is something to keep in mind as your business grows and you consider having a separate legal entity for your business (which you can learn more about here), At Whirks, we help our clients stay compliant with the ever-changing regulations every day. Reach out to us if you need help or check out our article “The 3 Common Payroll Mistakes Small Business Owners Make” to keep learning more!