ACA Reporting for Controlled Groups

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ACA Reporting for Controlled Groups

By Brian Gilmore | Published December 16, 2021

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.

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).

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).

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.

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).

Example:

Result:

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:

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:

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.

Regulations

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.

IRS Forms 1094-C and 1095-C Instructions:

https://www.irs.gov/instructions/i109495c

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).

Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.