Determining Large Employer Status under the PPACA

Legal Obligations under the Patient Protection and Affordable Care Act

Ill piggy bank with bandages
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The economy is changing, and much has been written about wage stagnation and rising health care costs. As a result, we’ve seen worker protests for minimum wage increases, regulatory changes increasing the minimum salary threshold for salaried employees, and statutory penalties designed to ensure that affordable minimum health care coverage is available in the workplace.

Regarding healthcare specifically, the United States is somewhat unique in terms of its reliance on employer-sponsored health care plans.

This is largely due to wage freezes and other inflationary measures implemented during World War II, which prompted employers to offer non-wage benefits as employee retention incentives. Since then, employer-sponsored insurance has been the leading source of health insurance in the United States, covering about 159 million nonelderly people. From 1999 to 2011, however, increases in average health insurance premiums and workers’ contributions to health care premiums significantly outpaced increases in both workers’ wages and inflation.

This paper focuses on an employer’s obligation to offer health care coverage and, more specifically, when separate organizations will be considered a “single employer” for purposes of the PPACA.

The PPACA

Enacted in 2010, the Patient Protection and Affordable Care Act (PPACA) focuses on reducing the uninsured population and decreasing health care costs. Among other things, it(i) requires most U.S. citizens and legal residents to have health insurance,(ii) creates state-based health benefit “Exchanges” (also called the “Health Insurance Marketplace”) through which individuals can purchase coverage,(iii) creates separate Exchanges through which small businesses can purchase coverage, (iv) imposes new regulations on health plans in the Exchanges and in the individual and small group markets, and(v) expands Medicaid to 133% of the federal poverty level.

With respect to employers, the PPACA imposes an “assessable payment” (termed an “Employer Shared Responsibility Payment”) on large employers that fail to offer affordable minimum health care coverage if a“full-time employee”receives a premium tax credit for purchasing individual coverage on one of the Exchanges.

A “full-time employee” is an employee who is employed on average at least 30 hours of service per week. A large employer, generally, is an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year. For purposes of determining whether an employer is a “large employer,” in the first instance, however, full-time equivalent employees (FTEs) as well as full-time employees count toward the threshold.

On February 14, 2014, the IRS and U.S. Treasury issued final regulations on the Employer Shared Responsibility provisions under the PPACA. According to the regulations, large employers can be liable for an “Employer Shared Responsibility payment” in either of two ways:

  • The employer does not offer health coverage or offers coverage to fewer than 95% of its full-time employees and the dependents of those employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an Exchange (§ 4980H(a)), or
  • The employer offers health coverage to all or at least 95% of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable or did not provide minimum value. If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee. A plan provides minimum value if it covers at least 60 percent of the total allowed the cost of benefits that are expected to be incurred under the plan (§ 4980H(b)).

    See “Focus on Health Reform, Summary of the Affordable Care Act, The Henry J. Kaiser Family Foundation.” 

    Who is Considered a Single Employer?

    How full-time employees and full-time equivalents are calculated and counted has been the subject of much discussion, and is beyond the scope of this paper. This paper focuses on when separate businesses entities may be considered a “single employer” for purposes of the PPACA.

    The answer to this lies with Section 414 of the Internal Revenue Code. According to IRC §414(b) “all employees of all corporations which are members of a “controlled group of corporations” … shall be treated as employed by a single employer,” and under IRC §414(m), “all employees of the members of an affiliated service group [essentially, a group of businesses working together to provide services to each other or jointly to customers] shall be treated as employed by a single member.” 

    According to §1.414(c)-2(a) of the Treasury Regulations, ’two or more trades or businesses under common control’ means any group of trades or businesses which is either (i) a “parent-subsidiary group of trades or businesses under common control,” (ii) a “brother-sister group of trades or businesses under common control,” or (iii) a “combined group of trades or businesses under common control.”

    A parent-subsidiary group, generally, is comprised of organizations with a common parent possessing at least 80 percent of the stock of a corporation or 80 percent of the profits interest or capital interest of a partnership.

    A brother-sister controlled group is a group of two or more organizations conducting trades or businesses if (i) the same five or fewer persons who are individuals, estates, or trusts, own directly or indirectly a controlling interest in each organization and (ii) have “effective control.” Thus, it employs a two-part test, using the following definitions:

    • Controlling interest – 1.414(c)-2(b)(2) – the phrase “controlling interest” means, with respect to a corporation, ownership of stock possessing at least 80 of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of the corporation or, with respect to a partnership, an 80 percent profits interest or capital interest of the partnership; and
    • Effective control – 1.414(c)-2(c)(2) – persons are in “effective control” of an organization that is a corporation if they possess more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock, or if they own an aggregate of more than 50 percent of the profits interest or capital interests of an organization that is a partnership.

    The IRS provides the following example of the brother-sister two-part ownership test:

    Adams and Bell Corp are owned by four shareholders, in the following percentages:

    Step One – Controlling Interest Test

    Shareholder

    Adams Corp

    Bell Corp

    A

    80%

    20%

    B

    10%

    50%

    C

    5%

    15%

    D

    5%

    15%

    TOTAL

    100%

    100%

    To meet the first part of the test, the same five or fewer common owners must own more than 80% of the stock or some interest in all members of the controlled group.

    In this example, the four shareholders together own 80% or more of the stock of each corporation, the first test is met since the shareholders own 100% of the stock.

    Step Two – Effective Control Test

    Shareholder

    Adams Corp

    Bell Corp

    Identical Ownership % in both Corporations

    A

    80%

    20%

    20%

    B

    10%

    50%

    10%

    C

    5%

    15%

    5%

    D

    5%

    15%

    5%

    TOTAL

    100%

    100%

    40%

    To meet the second part of the test, the same five or fewer common owners (i.e., the control group) must own more than 50% of each corporation, taking into account the stock ownership of each person only to the extent such stock ownership is identical with respect to each such corporation.

    In this example, although the four shareholders together own 80% or more of the stock of each corporation, they do not own more than 50% of the stock of each corporation (they only have a 40% common interest), taking into account only the identical ownership in each corporation as demonstrated above.

    In determining who “owns” an interest, IRS attribution rules apply. “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 or business relationships.

    Conclusion

    Whether or not it’s fair to require employers to shoulder the burden of uncontrolled health care costs is a policy question. In structuring multiple businesses, however, franchisees and other small business owners need to keep in mind that although pieces of the business or separate locations may operate through separate business organizations for general liability purposes, they may still be considered a “single employer” for employment and healthcare purposes.

    Mullin Law, PC is a full-service commercial law firm founded in 2003. The firm is nationally recognized in the area of franchise law and provides legal services in the areas of corporate, tax, employment, trademark, technology, and commercial litigation. Cheryl Mullin holds a JD from Widener University School of Law and an LL.M in Taxation from Southern Methodist University Dedman School of Law. Cheryl can be reached at (972) 852-1703 or cheryl.mullin@mrkpc.com.

    Justin Ford Kimball, a Baylor University administrator, is credited with organizing the first hospital prepayment plan for Dallas teachers in 1929 which was the pre-cursor to Blue Cross. Later, the Stabilization Act of 1942 directed President Roosevelt to freeze wages and salaries in an effort to thwart post-war inflation. Consequently, employers began offering a range of fringe benefits, such as pensions, medical insurance, and paid holidays and vacations to attract and retain talent. These were not cash payments and, therefore, did not violate the wage ceiling. This is how employer-sponsored insurance and other fringe benefits became ingrained in American society and the U.S. economy.