Beware Common Control Issues

With the current focus on ACA reporting, we are observing[1] more employers giving close attention to common control issues and discovering that indeed they are members of an aggregated group of applicable large employers and must report such on their 1094-C filing. We see employers with less than 50 full-time employees and full-time equivalents who assumed they were exempt from the employer mandate and exempt from reporting requirements learning with consternation that because they are a member of a group of businesses under common control, ACA and ACA reporting is in fact required of them. Such can be a rude awakening.

Why Does Common Control Matter?

Several provisions of PPACA employ the concept of common control; or to use PPACA nomenclature, “aggregated group of applicable large employers.” Some examples….

  • For purposes of determining if a business is an applicable large employer[2], all employees of all trades and businesses under control are considered to be employed by one employer. For example, if Company A has 23 employees, Company B has 34, and Company C has 19, each by themselves is under 50. But if they are under common control, the grouping itself is an aggregated applicable large employer with 76 EE’s. As such, each business is subject to the employer mandate.
  • Similarly, only applicable large employers are required to comply with ACA filing requirements. In the above scenario, all three businesses must distribute and file 1095-C’s with the 1094-C Transmittal under each businesses EIN, even though separately, each is under 50.
  • Common control is invoked for purposes of the small business premium tax credit. Therefore Company A and C have fewer than 25 employees and by themselves should be able to take this tax credit; but the fact that they are members of a controlled group prevents such.
  • All companies will be viewed as one for purposes of non-discrimination testing.[3]
  • And, so forth and so forth….

How Do I determine if My Business is a Member of a Controlled Group?

The quick, acid test of common control is your 401(k) or other qualified retirement plan. You see, the common control rules of ACA are the same rules used for qualified retirement plans. Thus, if you have been told in years past that your 401(k) plan must be offered to the employees of the other business(s) you might be involved with, then do not pass Go; do not collect $200. You are under common control for ACA purposes and need investigate no further. If you are not sure, then read on.

CAUTION – These rules can be inordinately complex and only your CPA or attorney can make this determination. This is a tax and legal opinion that we cannot render. But for general information purposes only, there are three general categories of common control testing.

The Parent-Subsidiary Group. In most cases this is pretty simple. If one business owns at least 80% of the voting control of another – directly or indirectly – those businesses represent a controlled group. Assume Apples, Inc. owns 100% of Bananas, Inc. and 50% of Carrots, Inc.; but Apples is actually owned 80% by Grapes, Inc. Grapes, Apples, and Bananas are aggregated; under common control. Why? Grapes owns 80% of Apples and indirectly owns 100% of Bananas via Apples interest in that business. Carrots would not be a member of the controlled group. Resultantly, if collectively the three have more than 50 full-time EE’s, each must offer coverage to 95% of those EE’s and each must comply with ACA filing.

The Brother-Sister Group – This test is more complicated. The rule is that if five or fewer individuals (or trusts for individuals or estates) own 80% of voting control of two or more businesses and collectively have common interests in those businesses totaling 50%, then you have an aggregated group of applicable large employers. Suppose we have three brothers who are involved in three businesses and the ownership schematic is thusly….

ABC, Inc. MNO, Inc. XYZ, LLC
Tom 33% 20% 0%
Dick 25% 40% 10%
Harry 30% 20% 90%

Are the three businesses under common control? They are not, because while the three brothers own at least 80% of all three (the first part of the test), Tom has no common interest in all three…Dick’s common interest is only 10%…and Harry’s common interest is 20%. Thus, the test fails the second requirement that there be total common interests of at least 50% à

ABC, Inc. MNO, Inc. XYZ, LLC Common Interests
Tom 33% 20% 0% 0%
Dick 25% 40% 10% 10%
Harry 30% 20% 90% 20%
ü88% ü80% ü100% û30%

But, guess what? You can’t quit here – not yet. Look what happens if you take XYZ out of the picture and examine just ABC and MNO….

ABC, Inc. MNO, Inc. XYZ, LLC Common Interests
Tom 33% 20% 0% 20%
Dick 25% 40% 10% 25%
Harry 30% 20% 90% 20%
ü88% ü80% 100% ü65%

Ah!! ABC and MNO are aggregated under the brother-sister test because the brothers own (i) at least 80% of each business and (ii) the sum of their common interests are at least 50%.

BUT WATCH THIS – There is family attribution to consider. Basically, these rules prevent the sprinkling of ownership among lineal dependents to avoid common control. As examples:

  • Stock owned by minor children (under age 21) is treated as if owned by the parent.
  • But stock owned by adult children is only attributable to the parent if the parent already owns controlling interest.
  • Stock owned by a spouse is attributed to the other spouse with limited exception.
  • Stock owned by grandchildren is the same as owned by the grandparent.

Crazy Example: Mom owns 40% of RST, Inc. Her 25-year old Daughter owns 25%. There is no attribution of Daughter’s stock to Mom because she is an adult; “adult” as defined in this code section. But upon investigation, the CPA uncovers that a grantor trust Mom established for the benefit of minor Son owns 25%. Now the game changes. That trust stock is attributed to Mom because the trust beneficiary is a minor child; and as such Mom’s interest is over 50% via attribution of the trust stock. So now Daughter’s stock gets attributed as well. Thus, due to family attribution, Mom is treated as owning 90% of RST when she actually only has 40% in her name. It is kind of like having ghost runners on base when playing sand lot baseball with just a handful of players on a team. To coin the classic Abbot and Costello comedy routine, the job of your CPA or attorney is to figure out who’s on first and what’s on second.

Affiliated Service Groups – Under this facts-and-circumstances category, ownership is not paramount. Instead IRS is directed to look at command and control. For example, Dad owns Business P and then opens Business Q with his three adult children as the stockholders of Q. There is no attribution, so no common control. But, if Dad is actually running Q from business P, particularly if those children are passive owners, then the fact that there is a management company controlling the operating company could cause IRS to judge these businesses to be a controlled group. IRS has an article at their web site, the purpose of which is to “explain” the common control rules. The section on affiliated service groups is 29 pages long! This fact should say enough by itself of how open ended this determination can be.

When you look back, the intent of Congress adding affiliated service groups to the tax code decades ago was to stem a tide of professional service firms from installing pensions and such just for the highly-compensated professionals and excluding the rank-and-file employees. For example, five dentists might each open a practice and concurrently establish a dental service company that would employ the dentists and provide professional dental services (the dentists) to each practice for a fee. Since the brother-sister test would fail, the dentists would install a retirement plan for themselves at the service company and not be required to cover the staffs at their respective practices. Many in personal services businesses (medical, law, accounting, consulting, engineering, insurance, etc.) were using similar techniques. This type of end run around the pension coverage rules angered Congress; thus, the affiliated service group rules were born. Again, the rules and tests are nauseatingly complex, but any arrangement similar to this should raise the proverbial red flag. In the normal sense of business, if one business is providing management services to another – particularly exclusively; and/or where there is some common ownership or common executive staffs; and/or in a family business environment – just be on alert. There may be common control as per the affiliated service group doctrine; irrespective of the ownership tests we have discussed.

Common Control Reported on your 1094-C

For Obamacare purposes, how will IRS know that your business is a member of a controlled group? Well, you are going to tell them. Line # 21 of the Transmittal (1094-C) asks: “Is ALE Member (sic., your company) a member of an Aggregated ALE Group? You check either the “yes” or “no” box. If you check “yes”, you must complete Part IV, which is a schedule of the other members of that controlled group by company name and EIN.

In Conclusion…

Common control can be a tax trap in the waiting with regards to qualified retirement plans and/or Obamacare. If you have any suspicion that you might be a member of a controlled group, consult your CPA or attorney post haste. But remember our opening rule of thumb: If you already are a member of a controlled group for 401(k) purposes, then ditto for ACA purposes.


[1] And, as that noted American philosopher, Yogi Berra, once said: “You can observe a lot just by watching.”

[2] 50 or more full-time employees and full-time equivalents

[3] Enforcement of discrimination penalties for insured group plans only is suspended pending issuance of regulations.


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