The Affordable Care Act (the "ACA") imposes several responsibilities on employers which vary depending on the employer's size. Two important provisions of the ACA are now in effect and apply only to "applicable large employers" ("ALEs"), namely the employer shared responsibility mandate under Section 4980H of the Internal Revenue Code (the "Code") and the information reporting requirements implementing the employer shared responsibility mandate under Section 6056 of the Code. The first reports under Section 6056 are due in 2016. The due dates are the same as the due dates for the Form W-2; namely, January 31, 2016 for the employee statement (Form 1095-C), and February 29, 2016 (or March 31, 2016, if filed electronically) for the transmittal form (Form 1094-C) that must be filed with the IRS, along with copies of each employee statement (Form 1095-C).
ALE's have been working feverishly to prepare for the new reporting requirements. However, in speaking with clients, we are still concerned that there is a lack of understanding regarding the application of the controlled group rules under Section 414(c) of the Code in determining an employer's status as an ALE.
An ALE, with respect to a calendar year, is an employer that employed an average of at least 50 full-time employees (including full-time employee equivalents) or more full-time and full-time equivalent employees on business days during the preceding calendar year. The determination of whether an employer is an ALE is made on a "controlled group" basis. In other words, the entire "controlled group" is considered a single employer for purposes of determining whether the 50 full-time employee threshold is met. If the threshold is met, both the employer shared responsibility mandate and the reporting requirements apply to each member in the controlled group, regardless of whether the member itself has 50 full-time employees.
A detailed discussion of the rules for determining whether a company is part of a controlled group is beyond the scope of this newsletter. However, a brief summary is as follows:
There are three types of controlled groups.
- Parent-Subsidiary Controlled Group. A parent-subsidiary controlled group exists when one or more companies are connected through stock ownership with a common parent corporation, and
- 80% of the stock of each company (except the common parent) is owned by one or more corporations in the group, and
- the common parent company owns 80% of at least one other company.
- Brother-sister controlled group. A group of two or more companies where five or fewer common owners (including individuals, estates, or trusts) own directly or indirectly (through the attribution rules under the Code) a controlling interest of each group and have "effective control":
- Controlling interest: generally means at least 80% of each company (but only if such common owner owns stock in each company), and
- Effective control: generally means more than 50% of the stock of each company, taking into account the ownership only to the extent such ownership is identical with respect to each company.
- Combined group. A group of three or more corporations, each of which is a member of a group of corporations described in paragraph (1) or (2) above, and:
- Each company is a member of either a parent-subsidiary or brother-sister group, and
- At least one company is the common parent of a parent-subsidiary and is also a member of a brother-sister group.
It is important to note that the controlled group rules apply regardless of whether or not the common parent or owner is located outside of the U.S. For example, if a foreign company has several U.S. subsidiaries and the parent and the subsidiaries meet the definition of a controlled group, the U.S. subsidiaries must aggregate their U.S. based employees in order to determine whether the U.S. employers meet the definition of an ALE. If yes, then each U.S. based employer will be subject to the reporting requirements. This may be problematic for some companies that are part of a large and diverse foreign-owned group and who have limited knowledge of the group's corporate structure, as well as smaller group companies which individually do not meet the threshold but, in the aggregate, surpass the 50 employee threshold.