Question: How do the ACA employer mandate and ACA reporting rules apply to an employer with multiple entities (EINs) in the same controlled group?
Short Answer: ALE status is an aggregated count among all members of the controlled group. However, the A Penalty 95% offer calculation is siloed to each specific member, and each member must complete separate ACA reporting via Forms 1094-C and 1095-C.
ALE Status: Employers Subject to the ACA Employer Mandate
The ACA employer mandate pay or play rules apply to employers that are “Applicable Large Employers,” or “ALEs.” In general, an employer is an ALE if it (along with all members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.
ALEs are subject to both the ACA employer mandate under §4980H as well as the ACA reporting requirements under §6056 via Forms 1094-C and 1095-C.
Important Note: The IRS recently proposed new ACA reporting regulations that make permanent the 30-day automatic extension from prior years for employers to furnish the Form 1095-C to individuals. The rules apply to the current season of ACA reporting, thereby extending the deadline to provide the 2021 Forms 1095-C to March 2, 2022 (confirmed in the Form 1095-C instructions). The proposed regulations also confirm the end of the IRS good faith enforcement safe harbor, which was previously available as transitional relief to avoid penalties for incorrect or incomplete information on the ACA reporting forms.
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ALE Status: Employers with Multiple Entities in a Controlled Group
Where an employer has multiple entities within its controlled group, the ACA (as well as most other tax and employee benefits laws) treat the entire controlled group as a single employer for purposes of determining whether the employer is an ALE. Controlled group status is determined under IRC §414.
Subsidiaries and related entities with different EINs in an ALE’s controlled group are referred to as “Applicable Large Employer Members” (ALEMs), and the controlled group itself is referred to as the “Aggregated ALE Group”.
This is also the case where an ALE acquires a small non-ALE company that retains its EIN after closing. The small company acquired by an employer becomes subject to the ACA employer mandate pay or play rules and the associated ACA reporting requirements upon the acquisition. The small seller company is referred to as an ALEM of the broader Aggregated ALE Group because it is preserving its EIN as a member of the buyer’s controlled group.
Summary: An ALE with multiple EINs in its controlled group is an Aggregated ALE Group consisting of multiple Applicable Large Employer Members (ALEMs).
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ACA Employer Mandate: The A Penalty
The §4980H(a) penalty is frequently referred to as the “A Penalty,” or the “Sledge Hammer Penalty” because of its large multiplier. This penalty may apply where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees (and their children to age 26) in any given calendar month.
The 2022 A Penalty is anticipated to increase to $229.17/month ($2,750 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange. The IRS posts the annual increases to the employer mandate penalties on its ACA employer mandate FAQ website.
The IRS informs employers of a proposed ACA employer mandate penalty assessment via Letter 226J. Employers disagreeing with the assessment can engage with the IRS in a process designed to determine whether the assessment is appropriate. Depending on the circumstances, ALEs may be able to reduce or eliminate the initial penalty assessment.
ACA Employer Mandate: The A Penalty for Aggregated ALE Groups (Controlled Groups)
There are two special A Penalty provisions that apply to Aggregated ALE Groups with multiple entities (EINs) within the same controlled group. Each entity is referred to as an Applicable Large Employer Member (ALEM).
- The 95% Test Applies to Each ALEM Independently
Although ALE status is an aggregated count among all members of the controlled group, A Penalty calculations are siloed to each specific ALEM. When an employer has multiple entities with different EINs within the controlled group, the A Penalty 95% test applies to each ALEM independently.
In other words, if any ALEM fails to offer coverage to at least 95% of that particular ALEM’s full-time employees (and their children to age 26), the A Penalty applies to that particular ALEM. The A Penalty analysis is not applied over the full controlled group of full-time employees.
- The 30-Full-Time Employee Reduction Applies Proportionately
If the ALEM is subject to the A Penalty, the 30-full-time employee reduction is adjusted to a proportional amount based on the ALEM’s size in relation to the number of employees in the entire Aggregated ALE Group (controlled group).
- ALE Big Co. (1,000 full-time employees) has a wholly-owned subsidiary Lil’ Co (40 full-time employees).
- Big Co. and Lil’ Co. keep separate EINs and separate corporate entities but are members of the same controlled group.
- Lil’ Co. is an ALEM subject to the ACA employer mandate.
- If Lil’ Co. fails to offer medical coverage to at least 95% of Lil’ Co.’s full-time employees (and their children to age 26) in any month, Lil’ Co. will be subject to the A Penalty based only on the number of Lil’ Co.’s full-time employees (Big Co.’s full-time employees are not part of the calculation).
- The 30-full-time employee reduction will be reduced to a small proportional amount (two full-time employees) in relation to the overall controlled group of full-time employees that is dominated by Big Co. ((40/1,040 x 30 = 1.15, rounded to the next highest whole number = 2).
For more details: Newfront Office Hours Webinar: M&A for H&W Employee Benefit Plans
ACA Reporting: The Form 1094-C for Aggregated ALE Groups (Controlled Groups)
Where an Applicable Large Employer (ALE) subject to the ACA employer mandate has multiple corporate entities in the controlled group (an Aggregated ALE Group), each subsidiary or related entity in the controlled group must file a separate Form 1094-C. Each entity (EIN) is referred to as an Applicable Large Employer Member (ALEM) for these purposes.
The Form 1094-C for each ALEM will contain the following:
- Part II, Line 21: Each ALEM will answer “Yes” to question “Is ALE Member a member of an Aggregated ALE Group?”
- Part III, Column (d): For each month in which the controlled group existed, this “Aggregated Group Indicator” box will be checked.
- Part IV: This “Other ALE Members of Aggregated ALE Group” section will be completed listing the names of the other related entities in the controlled group (the other ALEMs) and their EINs.
For more details: Newfront Office Hours Webinar: M&A for H&W Employee Benefit Plans
ACA Reporting: The Form 1095-C for Aggregated ALE Groups (Controlled Groups)
The full-time employees of each EIN (i.e., each ALEM) must receive a Form 1095-C with that ALEM’s corporate name and EIN. The employer cannot simply use the parent EIN for all Forms 1095-C in an Aggregated ALE Group.
If an employee works for more than one ALEM in the Aggregated ALE Group in any calendar month, the ALEM for whom the employee worked the most hours of service in that calendar month is responsible for the employee’s Form 1095-C ACA reporting for that month.
ACA Reporting: Failure to Comply
The general 2022 potential late/incorrect ACA reporting penalties are $280 for the late/incorrect Forms 1095-C furnished to employees, and $280 for the late/incorrect Forms 1094-C and copies of the Forms 1095-C filed with the IRS. The amounts increase to $290 for forms required to be furnished/filed in 2023.
That comes to a total potential general ACA reporting penalty of $560 per employee ($580 in 2023) when factoring in both the late/incorrect Form 1095-C furnished to the employee and the late/incorrect copy of that Form 1095-C filed with the IRS.
The 2022 maximum penalty for a calendar year will not exceed $3,426,000 for late/incorrect furnishing or filing ($3,532,500 in 2023). Note that the employer is subject to a penalty of at least $570 per form—with no maximum penalty—if the IRS finds that it intentionally disregarded the filing or furnishing of the correct Forms 1094-C and 1095-C in 2022 (increasing to $580 in 2023).
The IRS reduces that general penalty if the late/corrected forms are furnished/filed in certain time periods:
- 30-Day Correction: If corrected within 30 days of the due date, the per-return penalty is $50 (capped at $571,000 in 2022, $588,500 in 2023).
- August 1 Correction: If corrected by August 1, the per-return penalty is $110 (capped at $1,713,000 in 2022, $1,766,000 in 2023).
There is also “reasonable cause” relief available that could potentially reduce or eliminate these ACA reporting penalties if the employer can show no willful neglect, that it acted in a responsible manner both before and after the failure occurred, and there were significant mitigating factors or events beyond its control. Those requirements are set forth in Treas. Reg. §301.6724-1. IRS Publication 1586 includes a useful summary of the conditions to qualify for reasonable cause relief.
Treas. Reg. §54.4980H-1(a):
(4) Applicable large employer. The term applicable large employer means, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. For rules relating to the determination of applicable large employer status, see §54.4980H-2.
(16) Employer. The term employer means the person that is the employer of an employee under the common-law standard. See § 31.3121(d)-1(c). For purposes of determining whether an employer is an applicable large employer, all persons treated as a single employer under section 414(b), (c), (m), or (o) are treated as a single employer. Thus, all employees of a controlled group of entities under section 414(b) or (c), an affiliated service group under section 414(m), or an entity in an arrangement described under section 414(o), are taken into account in determining whether the members of the controlled group or affiliated service group together are an applicable large employer. For purposes of determining applicable large employer status, the term employer also includes a predecessor employer (see paragraph (a)(36) of this section) and a successor employer.
Treas. Reg. §54.4980H-2(d), Example 1:
Example (1). (Applicable large employer/controlled group).
(i) Facts. For all of 2015 and 2016, Corporation Z owns 100 percent of all classes of stock of Corporation Y and Corporation X. Corporation Z has no employees at any time in 2015. For every calendar month in 2015, Corporation Y has 40 full-time employees and Corporation X has 60 full-time employees. Corporations Z, Y, and X are a controlled group of corporations under section 414(b).
(ii) Conclusion. Because Corporations Z, Y and X have a combined total of 100 full-time employees during 2015, Corporations Z, Y, and X together are an applicable large employer for 2016. Each of Corporations Z, Y and X is an applicable large employer member for 2016.
Treas. Reg. §54.4980H-4(a):
(a) In general. If an applicable large employer member fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for any calendar month, and the applicable large employer member has received a Section 1411 Certification with respect to at least one full-time employee, an assessable payment is imposed…For purposes of this paragraph (a), an applicable large employer member is treated as offering such coverage to its full-time employees (and their dependents) for a calendar month if, for that month, it offers such coverage to all but five percent (or, if greater, five) of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also offers coverage to that employee’s dependents). For purposes of the preceding sentence, an employee in a limited non-assessment period for certain employees is not included in the calculation.
Treas. Reg. §54.4980H-4(e):
(e) Allocated reduction of 30 full-time employees. For purposes of the liability calculation under paragraph (a) of this section, with respect to each calendar month, an applicable large employer member’s number of full-time employees is reduced by that member’s allocable share of 30. The applicable large employer member’s allocation is equal to 30 allocated ratably among all members of the applicable large employer on the basis of the number of full-time employees employed by each applicable large employer member during the calendar month (after application of the rules of paragraph (d) of this section addressing employees who work for more than one applicable large employer member during a calendar month). If an applicable large employer member’s total allocation is not a whole number, the allocation is rounded to the next highest whole number. This rounding rule may result in the aggregate reduction for the entire group of applicable large employer members exceeding 30.
Treas. Reg. §54.4980H-4(f):
(i) Facts. Applicable large employer member Z and applicable large employer member Y are the two members of an applicable large employer. Applicable large employer member Z employs 40 fulltime employees in each calendar month of 2017. Applicable large employer member Y employs 35 full-time employees in each calendar month of 2017. Assume that for 2017, the applicable payment amount for a calendar month is ,000 divided by 12. Applicable large employer member Z does not sponsor an eligible employer-sponsored plan for any calendar month of 2017, and receives a Section 1411 Certification for 2017 with respect to at least one of its full-time employees. Applicable large employer member Y sponsors an eligible employer-sponsored plan under which all of its fulltime employees are eligible for minimum essential coverage.
(ii) Conclusion. Pursuant to section 4980H(a) and this section, applicable large employer member Z is subject to an assessable payment under section 4980H(a) for 2017 of $48,000, which is equal to 24 × $2,000 (40 full-time employees reduced by 16 (its allocable share of the 30-employee offset ((40/75) × 30 = 16)) and then multiplied by $2,000). Applicable large employer member Y is not subject to an assessable payment under section 4980H(a) for 2017.
IRS Forms 1094-C and 1095-C Instructions:
Who Must File
An ALE Member must file one or more Forms 1094-C (including a Form 1094-C designated as the Authoritative Transmittal, whether or not filing multiple Forms 1094-C), and must file a Form 1095-C for each employee who was a full-time employee of the ALE Member for any month of the calendar year. Generally, the ALE Member is required to furnish a copy of the Form 1095-C (or a substitute form) to the employee.
An ALE Member is, generally, a single person or entity that is an Applicable Large Employer, or if applicable, each person or entity that is a member of an Aggregated ALE Group. An Applicable Large Employer, generally, is an employer with 50 or more full-time employees (including full-time equivalent employees) in the previous year. For purposes of determining if an employer or group of employers is an Applicable Large Employer, all ALE Members under common control (an Aggregated ALE Group) are aggregated together. If the Aggregated ALE Group, taking into account the employees of all ALE Members in the group, employed on average 50 or more full-time employees (including full-time equivalent employees) on business days during the preceding calendar year, then the Aggregated ALE Group is an Applicable Large Employer and each separate employer within the group is an ALE Member. Each ALE Member is required to file Forms 1094-C and 1095-C reporting offers of coverage to its full-time employees (even if the ALE Member has fewer than 50 full-time employees of its own).
One Form 1095-C for Each Employee of ALE Member
For each full-time employee of an ALE Member, there must be only one Form 1095-C filed for employment with that ALE Member. For example, if an ALE Member separately reports for each of its two divisions, the ALE Member must combine the offer and coverage information for any employee who worked at both divisions during the calendar year so that a single Form 1095-C is filed for the calendar year for that employee, which reports information for all 12 months of the calendar year from that ALE Member.
In contrast, a full-time employee who works for more than one ALE Member that is a member of the same Aggregated ALE Group must receive a separate Form 1095-C from each ALE Member. For any calendar month in which a full-time employee works for more than one ALE Member of an Aggregated ALE Group, only one ALE Member is treated as the employer of that employee for reporting purposes (generally, the ALE Member for whom the employee worked the greatest number of hours of service), and only that ALE Member reports for that employee for that calendar month. The other ALE Member is not required to report for that employee for that calendar month, unless the other ALE Member is otherwise required to file Form 1095-C for that employee because the individual was a full-time employee of that ALE Member for a different month of the same calendar year. In this case, the individual may be treated as not employed by that ALE Member for that calendar month.
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