First, assess if an employer is an ALE, or the new provisions may not affect them directly. An employer has an ALE status, Yes or No, each calendar year. The determination for the current year is based on the prior calendar year. For example, Company ABC is an Applicable Large Employer in the year 2016 based off of the determination looking back at January 1, 2015 through December 31, 2015.
However, this determination isn’t quite so easy, as it is possible for an employer to not be considered an ALE by their calculations, but cross the threshold because of the employer’s corporate ownership. This relationship is known as a “Controlled Group,” IRS Code 4980H includes a caveat where this Controlled Group is considered a single entity for purposes of ALE Determination. The employees from each member of the group are summed into the Full Time & Full-Time Equivalent Analysis for ALE Determination and each individual employer is then labeled as the group is labeled, an Applicable Large Employer or not.
How does an employer figure out whether they are part of a Controlled Group? Section 414(c) of the Internal Revenue Code explains that a Control Group exists when any two or more business entities are connected through common ownership in one of three methods:
⦁ Parent-Subsidiary Group
⦁ Brother-Sister Group
⦁ Combination of the two
Cimplx strongly urges you to consult with an attorney or tax advisor to determine Controlled Group eligibility; however, the following is a breakdown of the basic rules:
⦁ Parent-subsidiary controlled group
⦁ Exist when one or more chains of corporations are connected through stock ownership with a common parent corporation, where both:
⦁ 80% of the individual employer’s stock is owned by one or more corporations in the group
⦁ The parent corporation must own 80% of at least one other corporation
⦁ Brother-sister controlled group
⦁ Consisting of two or more corporations, where five or less common owners (an owner is an individual, an estate, or a trust) jointly own, directly or indirectly, a controlling interest of all corporations in the group
⦁ These common owners have “effective control,” where:
⦁ Effective Control explicitly means jointly owning more than 50% of the stock of all entities in a group, but only where the individual stock ownership of each common owner is identical to each entity in the control group
⦁ Combined Group
⦁ Consisting of three or more organizations where each is a member of either a parent-subsidiary or brother-sister group if:
⦁ At least one corporation is the common parent of a parent-subsidiary