We have a large farm that operates in Salinas, California, and Yuma, Arizona. We have employees working for us during part of the year in Salinas from May through October and in Yuma from November through April. The Salinas and Yuma operations are different companies, but they are owned by the same small group of individuals. How does this affect our health benefit plan requirements and our IRS reporting requirements? We currently offer a health benefit plan to all full-time employees.
Going Loco about Separate Locations in Yuma and Salinas
Dear Going Loco,
Controlled Group or Affiliated Service Group
Your first step will be to identify whether the two different companies are considered a controlled group or affiliated service group under the Internal Revenue Code (“IRC” or “Code”). I recommend you obtain assistance from a tax attorney or a certified public accountant regarding this issue to get a definitive answer; the following is a brief summary (non-exhaustive) of the controlled and affiliated service group rules.
There are three types of control group relationships under Code § 414:
1. Parent-Subsidiary: Parent corporation owns 80 percent of each subsidiary or subsidiaries.
2. Brother-Sister: A group of two or more corporations with five or fewer common owners that own directly or indirectly a “controlling interest” of the group and have “effective control.”
a. Controlling interest generally means 80 percent or more of the stock of each corporation;
b. Effective control generally means more than 50 percent of the stock of each corporation;
3. Combination of the above.
Please note, even where a controlled group does not exist an “affiliated service group” may exist under Code Section 414(m). Affiliated service group rules are quite complex and in general apply to two or more entities connected by the provision of management or other services. The affiliated service group rules may cause entities that are not members of the same controlled group to be combined for health plan purposes. For more on controlled group and affiliated service group rules and examples, see http://bit.ly/irscontrolledgrouprules.
Large Employer Mandate & Penalties
If your entities are part of a controlled group they must aggregate the number of full-time employees and full-time equivalents working for the entire group to determine the employer size of the controlled group. If the controlled group has 50 or more full-time employees and equivalents in the prior calendar year, it is a large employer.
Large employers with 100 or more full-time employees and equivalents were required to comply with the large employer mandate in 2015. Large employers with 50-99 full-time employees and equivalents caught a break—they must comply with the large employer mandate starting in 2016.
Each member of the controlled group has an obligation to offer qualifying health benefits coverage or it may be subject to tax penalty. Remember tax penalties are not automatic; rather they are triggered when a full-time employee obtains subsidized health insurance coverage at a health insurance exchange.
If a controlled group is a large employer and subject to penalty for failing to offer coverage (or offering coverage that is either unaffordable or does not meet minimum value) each member has its own obligation to offer (as explained above) and each is also subject to penalty individually (one member won’t be subject to penalty for another’s failure).
Nondiscrimination Across the Group
The nondiscrimination regulations and rules relating to fully-insured plans have not been finalized and are not yet in effect. Self-insured plans—on the other hand—must comply with IRC Section 105(h) relating to nondiscrimination. These nondiscrimination rules apply across controlled groups. If a controlled groups operates a self-insured plan, it must comply with the nondiscrimination requirements of § 105(h) across its entities. Generally, self-insured plans must be nondiscriminatory (not favor highly compensated employees) with respect to the benefits offered, eligibility requirements and waiting periods (note, some employees are excludable from a 105(h) nondiscrimination analysis).
Identifying Full-time Employees
As explained above, under the large employer mandate paragraph, hours of service performed by full-time employees and equivalents are combined. That is, the hours of service for one member of a controlled group is treated as an hour of service for another member of the controlled group for whom the individual is also an employee.
Additional complexity comes into play this year (2015) because large employers (those with 50 or more full-time employees and equivalents) will be required to track employee hours of service and report information to the IRS and furnish similar reports to full-time employees about whether or not an offer of coverage was made to full-time employees and any covered dependents.
Large employers (and self-insured employers of all sizes) will be required to file reports with IRS annually beginning in early 2016. The information collected is from data year 2015. Each employer that is a member of a controlled group that has 50 or more full-time employees and equivalents (or is self-insured) will have an independent obligation to file. Each member of a large controlled group is liable for its own reporting requirements, but is not liable for the information reporting requirements of any other entity in the controlled group.
If you are interested in learning more about the Affordable Care Act, I recommend downloading the Ag Employer’s Guide to Health Care Reform available to all WGA members through our store. You can find it here: www.bitly.com/aghcrguide. For more information about this article or if you have other questions about health care reform contact our Health Care Reform team today at [email protected] or 800-333-4WGA. Write to Dear Jon at [email protected]. For more information and resources on Health Care Reform, visit www.wgat.com/health-care-reform.