In my last article I noted that the Affordable Care Act’s insurance mandate applies to an employer with 50 or more full-time and full-time equivalent employees (called an “applicable large employer” under the Act). This article will discuss the attribution of employees of one employer to another employer.
Assume that John Doe owns a construction business with 49 full-time employees. John Doe also owns a farm and employs a farmhand who is considered a full-time employee. John Doe’s common ownership means that the employees of both the construction businesses and the farm are counted together in determining whether the construction business or the farm is an applicable large employer subject to the Act. Because the construction business has 49 employees and the farm has one employee both businesses are subject to the Act.
Now assume that John Doe owns a construction business with 48 full-time employees. Assume that John Doe’s wife, Jane Doe, owns a women’s clothing boutique with 2 full-time employees. The boutique is organized as a limited liability company (LLC). John Doe is not a member of the LLC and has no ownership in it. However, he is named as a co-manager of the LLC along with Jane Doe. Jane Doe’s ownership interest in the LLC is attributed to John Doe for purposes of determining whether the construction business is subject to the act.
Where two or more businesses are under common ownership or control they are part of a controlled group. The employees of each member of a controlled group are added together to determine whether each of the employer-members of the controlled group is an applicable large employer. If the full-time and full-time equivalent employees of all employer-members of a controlled group are equal to or greater than 50, each employer-member of the control group is an applicable large employer.
Any business can be a member of a controlled group, whether the business is organized as a corporation, limited liability company, partnership or sole proprietorship. There are three types of controlled groups, the parent-subsidiary group, the brother-sister group and the combined group.
A parent-subsidiary controlled group exists where one business (the parent) owns stock, distribution rights or voting interests in another (the subsidiary). In order for a parent and its subsidiary to be in a parent-subsidiary controlled group, the parent must own 80 percent of the value or voting interests in the subsidiary. If X Corporation owns 80 percent of the stock of Y Corporation, X and Y are members of a parent-subsidiary controlled group. If X Corporation only owns 60 percent of the stock in Y Corporation, X and Y are not members of a parent-subsidiary controlled group.
A parent-subsidiary controlled group also includes any business that is connected to the parent by a string of parent-subsidiary relationships as long as each parent-subsidiary relationship meets the 80 percent ownership or voting requirement. If X Corporation owns 80 percent of the stock in Y Corporation, which owns 80 percent of the stock in Z Corporation, then X, Y and Z are all members of a parent-subsidiary controlled group. If Y owned only 40 percent of the voting stock in Z, Z would not be a member of the parent-subsidiary controlled group with X and Y.
A brother-sister controlled group exists where two businesses are owned by fi ve or fewer common owners. There are two tests to determinewhether any business will be included in a brother-sister controlled group, the 80 percent test and the 50 percent test. The 80 percent test requires that the five or fewer owners own a combined 80 percent of the value or voting interests in the business. The 50 percent test requires that the same owners who are considered for the 80 percent test own 50 percent of the value or voting interests in the business, with a critical limitation that distinguishes the 50 percent test from the 80 percent test. For the 50 percent test, any common owner’s ownership percentage is only taken into account to the extent identical in each business included in the brother-sister group. This means that, for purposesof the 50 percent test, if one common owner has an interest in three businesses, his interest is onlytaken into account to the extent of his smallest ownership interest in any of the three businesses. For example, if John Doe owns 80 percent of X Corporation, 50 percent of Y Corporation and 20 percent of Z Corporation, for purposes of the 50 percent test, his interest in X Corporation is only considered to be 20 percent. The interplay between the 80 percent test and the 50 percent test is about as clear as mud until you roll up your sleeves and work through some examples. The table below provides the ownership percentages of four individuals, A, B, C and D, in five corporations, U, W, X, Y and Z
|Individuals||W Corp.||X Corp.||Y Corp.||Z Corp.|
Corporations W and X are members of a brother-sister group.
Five or fewer persons (A and B) own 80 percent of both W and
X. For purposes of the 50 percent test, A’s ownership in W
and X is identical to the extent of 51 percent. B’s ownership in
W and X is identical to the extent of 45 percent. Thus, for
purposes of the 50 percent test, A and B own 96 percent of W
and 96 percent of X.
Y did not pass the 50 percent test with respect to W and X because both C’s identical ownership and D’s identical ownership in W, X and Y are 0 percent (because neither C nor D own any interest in W or X). A’s and B’s ownership in Y only totals 30%, not the required 50 percent.
Z would pass the 50 percent test with respect to W and X except the same individuals cannot be used to pass the 50% tests as must be used to pass the 80 percent test. A’s common ownership between W, X and Z is 51 percent. However, A’s ownership alone does not pass the 80 percent test with respect to Z. A’s and D’s ownership would pass the 80 percent test. However, since D’s ownership was not included in the 50 percent test it can’t be included in the 80 percent test. D’s ownership couldn’t be included in the 50 percent test since D’s identical ownership amongst W, X and Z is 0 percent (D’s ownership in W and X is 0 percent).
A combined consists of a parent subsidiary group and a brother-sister group with one member in common. For example, assume that John Doe owns 100 percent of X Corporation and 100 percent of Y Corporation. Also assume that Y Corporation owns 80 percent of Z Corporation. X and Y are members of a brother-sister controlled group due to John Doe’s common ownership. Y and Z are part of a parent-subsidiary controlled group due to Y’s 80 percent ownership of Z. Y is the common member between the two controlled groups. Thus, X, Y and Z are all members of a combined group.
For purposes of determining the membership in controlled groups, an ownership interest held by one person will be attributed to another person based upon the relationship between the two persons. An ownership interest owned by a partnership or corporation is attributed to those persons who own 5 percent or more of the partnership or corporation. An ownership interest owned by an estate will be attributed to any benefi ciary with a 5 percent or greater actuarial interest. An ownership interest owned by a trust will be attributed to a person who is treated as the owner of the trust. Persons or entities that have stock options will be attributed the stock subject to the options.
A married person is attributed with his or her spouse’s ownership interest unless all of the following are present:
(1) the married person does not otherwise have any ownership interest in the business during the taxable year;
(2) the married person is not a director or employee of the business or participate in management of the business;
(3) not more than 50 percent of the business’s gross income is derived from royalties, rents, dividends, interest and annuities; and
(4) the ownership interest is not subject to conditions that substantially restrict the spouse’s right to dispose of it, which restrictions are in favor of the married person or any children of the married person under age 21. Unless all four conditions are satisfi ed the married person will be attributed any ownership interest held by his or her spouse.
A parent is attributed any ownership interest held by the parent’s children who are under age 21. Any individual who owns more than 50 percent of a business will be attributed with the ownership interest held by his or her parents, grandparents, grandchildren and children who are 21 or over.
For purposes of determining the membership in controlled groups, ownership interests held by certain persons or entities is excluded from consideration, resulting in larger ownership percentages for other owners and a greater likelihood of inclusion in a controlled group. For example, preferred stock, treasury stock and stock or ownership interests held in an employee deferred compensation trust will be excluded. For purposes of determining membership in a parent-subsidiary controlled group, an ownership interest in the subsidiary held by a person with 5 percent or greater ownership in the parent will be excluded.
Lastly, employees of two businesses can be attributed to each other if the businesses are members of an affiliated service group.
An affiliated service group may exist where one business regularly performs services or management functions for another business or the two businesses are regularly associated in performing services the third persons.
Do your homework with respect to your business’s possible status as an applicable large employer. Don’t be left wondering how your farmhand caused your construction company to be an applicable large employer.
“Four Rivers Business Journal,” October 2013