Affordable Anxiety and Controlled Groups: You Can Run, but You Can’t Hide

Part 2: Brother-Sister Groups and Constructive Ownership

By William Johnson- President and CEO

CIBC of Illinois, Inc.

www.cibcinc.com

In the first part of this series, we discussed how a parent-subsidiary controlled group was being defined by The Affordable Care Act and the IRS. Basically, this type of controlled group exists when a parent organization has a controlling interest in each of the chain organizations it owns. Also, it exists when a common parent organization holds controlling interest in at least one of the organizations in the chain or companies.

I have had business owners who hold multiple businesses and operate them independently come to me and ask if their collective number of employees from all businesses would put them into the pay or play processes of the Shared Responsibility part of the ACA. They wonder if putting the businesses in family member’s hands would help mitigate their exposure or if they will have to pay or play regardless of how they shift around their ownership.  “Can I give my wife 20%, and my kids 5%, and then set up a trust to control x%.” Believe me, business owners are savvy and will look to control costs where necessary. Most would gladly provide benefits if it were within the scope of a sound business decision. For many, however, the profits margins are slim, especially considering the ‘affordability’ portion of the ACA.

So let’s l;ook at the Brother/Sister Controlled Group scenario, and how it is defined by the IRS.

Brother-Sister Controlled Group

A brother-sister controlled group exists when five or fewer individuals, estates or trusts own a controlling interest (80 percent or more) in each organization and have effective control. “Effective control” generally means more than 50 percent of the organization’s stock or profits, but only to the extent the ownership is identical with respect to each such organization.

Here’s an Example –

Family Corporation and Cousins Corporation are owned by four shareholders in the following percentages:

Shareholder

Family Corporation

Cousins Corporation

1

80%

20%

2

10%

50%

3

5%

15%

4

5%

15%

TOTAL

100%

100%

In this example, the four shareholders together own 80 percent or more of the stock of each corporation. However, under the second component, the shareholders do not own more than 50 percent of the stock of each corporation, taking into account only the identical ownership in each corporation as demonstrated below:

Shareholder

Identical Ownership in Both Corporations

1

20%

2

10%

3

5%

4

5%

TOTAL

40%

So, as it is laid out in the graph above, there is no Brother-Sister controlled group scenario and the owner is NOT subject to the pay or play mandate (unless other ACA criterion apply). 

Combined Controlled Group

A combined controlled group exists when:

  • Each organization is a member of either a parent-subsidiary or brother-sister controlled group; and
  • At least one organization is the common parent organization of a parent-subsidiary controlled group and is also a member of a brother-sister controlled group.

For Example

Joe Owner is an individual owning 80 percent of the profits in Parrott Co. and 90 percent of the stock in Sassy Corporation. Parrott Co. owns 85 percent of the stock of Stark Corporation.

 Image

It is important to note that Constructive ownership principles apply to the controlled group rules that treat an individual as owning an interest in an organization based on a family or business relationship.

For example, an individual will be considered to own an interest, owned directly or indirectly, by his or her children under age 21 or by his or her spouse, unless legally separated or divorced. An exception applies if there is no direct ownership, no participation in the organization (for example, as a director, officer or employee) and if no more than 50 percent of the organization’s gross income is from passive investments.

In addition, an interest owned by or for a partnership, corporation or trust is treated as owned by any individual having an interest of five percent or more in the organization, in proportion to the individual’s interest in the organization. For example, if an individual owns 60 percent of the stock of Hello Corporation, and Goodbye Corporation owns 50 shares of Hey Now Corporation, the individual is considered to own 30 shares of Hey Now Corporation (60 percent x 50).

Next week we will get into a common type of controlled group, the ASO (Affiliated Service Organization). Doctors, lawyers, accountants, and PEO’s should take special note of this area of the ACA.

This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.

 To get more information on CIBC of Illinois, visit us at www.CIBCINC.Com or call toll free 877-936-3580.

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About CIBCsolutions

CIBC is a leader in the development and implementation of innovative employee benefits plans. Headquartered an hour south of Chicago in Kankakee, CIBC has branch offices throughout Illinois serving private sector clients, non-profit organizations, governmental agencies and Taft-Hartley health and welfare funds across the Midwest. Over the past two decades, we have creatively addressed the employee benefits needs of hundreds of organizations — some with as few as two employees and others with as many as 25,000 employees around the globe. A relationship with CIBC gives you access to a team of employee benefits experts who are among the most knowledgeable consultants, analysts and account managers in the industry. With more than 75 years of experience, our team commands the respect of insurers and health care providers nationwide.

Posted on March 26, 2013, in Case Studies, Health Care Reform and tagged , , , , , , , , , , , , , , , , , , . Bookmark the permalink. Leave a comment.

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