There are a lot of foolish ideas about ways to avoid the employer mandate of the Affordable Care Act (ACA). One of the worst I have heard is to make your company “small” by separating it into several smaller ones. The thought is that each entity will be treated as a separate small employer and therefore will not be subject to the ACA employer mandate. That mandate requires employers with 50 or more full-time equivalent employees to offer health insurance coverage to all full-time employees working 30 hours or more per week or pay a fine.
There are several legitimate reasons to separate a company into different units or subsidiaries including for credit, liability and corporate governance purposes. It is also not unusual for a company to use different federal tax ID numbers for different units, locations or subsidiaries, and in some cases, that is required by law. However, such arrangements will not absolve you of responsibility for compliance with the ACA.
Long before the ACA, the Employee Retirement Income Security Act of 1974 (ERISA) established minimum standards and protections for employees enrolled in private employer “welfare” plans. Health insurance offered by an employer is an employer welfare plan. Internal Revenue Code (IRC) sections 414 and 1563 specifically address “controlled groups” of companies. The gist of these laws is that companies with “common ownership” are treated as one employer in order to determine if a plan maintained by any of the commonly-owned companies meets the requirements of the ACA. Common ownership rules may apply even if the related companies don’t have the exact same ownership structures.
While I’m at it, let me address another somewhat related idea: separating a family-owned business into several “companies” with each company owned by a different family member. IRC section 1563(e) deems shares owned by your immediate family to be constructively owned by you, and if you own more than 50% of the stock or have more than 50% of the voting power, you also constructively own the shares of your parents, grandparents and adult children. This is true even if there are other legitimate reasons for such an arrangement.
My favorite dumb idea is the ostrich approach: If I ignore it, it will go away. The law will be changed or repealed by the current Congress, and I’ll be saved. No. Remember that the healthcare mandate is considered a tax, and, like all taxes, the mandate could be repealed, but that is not going to happen before 2017. There simply aren’t enough votes in Congress to override a Presidential veto. All Applicable Large Employers (ALEs) are required to file informational returns with the IRS about offers of coverage to their employees, so it isn’t a matter of “if” you get caught but rather “when” you get caught. You’ll not only pay the fines for not offering coverage, but you’ll also pay fines for not filing the required returns, late penalties and interest.
The IRS is not subject to the same legal process that private parties must follow to place a lien on or confiscate your assets, and they usually go after your cash first. So will the attorney, the good one with extensive ERISA and tax experience that you’ll have to hire to represent you and negotiate on your behalf. Good ERISA and tax attorneys may charge up to $1,500 per hour, but hiring one doesn’t guarantee you won’t pay the fines and penalties.
The alternative is to comply with the ACA employer mandate. It’s a lot less risky and in the end will be a lot less costly. If you have a corporate structure like I described, I encourage you to review it with an ERISA attorney or a tax professional to make sure you are in compliance. If you would like to discuss compliance with the ACA and learn about the legitimate ways we’re helping our clients to minimize the impact of the ACA, please email me at mdmowski@comprehensivebenefitservices.com or call me at (877) 256-0800.