Last month we reviewed the new requirements under the Patient Protection and Affordable Care Act (“Obamacare”) for an applicable large employer to offer health insurance coverage to its employees. An applicable large employer is one with more than fifty full time employees or full time equivalent employees. This article will expand on that discussion with a focus on the restructuring of businesses to allocate to separate companies employees so that an employer’s number of full time employees in each company is less than fifty.
Some business owners have made statements that they will create separate companies so that their number of full time employees in each company will be less than fifty so that they are not mandated to offer health insurance coverage. Unfortunately, this strategy may prove difficult and likely run such employers into trouble.
Internal Revenue Code (“IRC”) section 4980H(c)(2)(C) provides that in determining the employer’s size, all persons treated as a single employer under the aggregation rules of IRC section 414(b), (c), (m), or (o) are treated as one employer. These include controlled groups of corporations, partnerships and proprietorships under common control, and affiliated service groups.
IRC section 414(b) provides that all employees of corporations that are members of a controlled group of corporations are treated as employed by a single employer. A controlled group of corporations consists of corporations related through certain stock ownership. Controlled groups of corporations generally include a parent-subsidiary controlled group, a brother-sister controlled group and a combined group.
A parent-subsidiary controlled group exists when one or more chains of corporations are controlled through stock ownership with a common parent corporation and 80% or more of the stock of each corporation (except the common parent) is owned by one or more corporations in the group and the parent corporation must own 80% of at least one other corporation.
A brother-sister controlled group is a controlled group of two or more corporations in which five or fewer common owners (a common owner must be an individual, trust or estate) own directly or indirectly a controlling interest in each group and have effective control. Controlling interest means 80% or more of the stock of each corporation (but only if such common owner owns stock in each corporation) and effective control generally means more than 50% of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.
A combined group of corporations consists of three or more organizations that are organized where each organization is a member of either a parent-subsidiary or a brother-sister group and at least one corporation is the common parent of a parent-subsidiary and is also a member of a brother-sister group.
The rules are similar for partnerships and other unincorporated organizations under IRC section 414(c).
To complicate the above rules further, the above rules include various attribution rules for determining ownership. Attribution is the concept of treating a person as owning an interest in a business that is not actually owned by that person. Attribution may result from family, business relationships and other situations. For example, assume that Dad owns 50% of a corporation, and Sons A and B each own 25%. For purposes of the attribution rules, Dad would be deemed to own 100% of the corporation and each son would be deemed to own 75% of the corporation. The siblings would not be deemed to own each other’s stock in a brother-sister controlled group or a parent-subsidiary controlled group situation.
As can be seen from the above, simply setting up separate companies with common ownership will not be an effective way for an employer to reduce their number of full time employees because all of the common companies will be deemed to be a single company and all of the employees of the common companies will be aggregated together.
Unfortunately, there are additional rules to complicate these issues further. There are additional rules relating to affiliated service groups and leased employees. Next month I will explore those issues.
If you are considering creating separate companies to reduce your number of full time employees make sure you consult an attorney and an accountant that are knowledgeable in tax and the attribution rules. Creating multiple companies to lower the number of full time employees that runs afoul of the above rules will result in your business having wasted the money on the creation of the business structures, penalties for failing to offer coverage and interest, and additional income tax since the penalties for failing to offer health insurance are non-deductible. Accordingly, make sure you are properly advised.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or jwh@caloneandharrel.com.
