Control groups and the ACA — you need to be cautious

Control groups and affiliated groups are certainly not new terms for any benefits industry professional, but they may trigger fresh issues and confusion for small business owners and brokers alike now that the Affordable Care Act’s employer shared responsibility final rule has been issued. 

In a nutshell — control groups never used to govern the requirement to offer medical coverage. But because the concept states that a group of companies may be considered one under a single owner, a count of full-time equivalent employees could make the group subject to the pay-or-play and other ACA provisions.

Control group, also known as a brother/sister group, refers to a collection of companies commonly owned by the same person or persons (five or fewer) that “collectively own 80% or more of the equity in two separate trades or businesses” or “taking into account the level of ownership each of those five persons holds in each of the two organizations … collectively own more than 50% of the equity in both of the trades or businesses,” according to the BakerHostetler law firm. An affiliated group exists when several organizations regularly collaborate in services they provide to the public and they’re linked by cross ownership, the firm writes.

Craig Davidson, a broker coach at Milwaukee-based Davidson Marketing Group and EBA columnist, says he’s received an increase in calls from brokers wanting to understand control groups as the concept relates to the ACA and continues to be applied to ERISA and COBRA, self-funded plans and more.

“The control group rules are extremely difficult to understand,” he says. “It is a big deal and I don’t think brokers fully understand it because I don’t think they’re asking the right questions.” He adds that before the ACA, the carriers would often handle control group issues and questions. Now, a benefit adviser has to be aware of these rules to correctly steer an employer in the direction of providing medical coverage to their group of companies if either is in the 50-99 employee range or 100 employee or larger range. Different transition relief rules also apply to each employer category size.

Industry experts expect a few problems could occur as a result of control groups and the ACA.

The counting problem

Davidson says one example of where the ACA can cause a sticky situation with a control group is for employers in the local franchise business — those who own several Dunkin Donuts or Subways, anything that can be franchised. “I go to the Subway down the block, there are about 15 employees. The owners say, well I own this Subway and one a couple miles away. Some [people] have a lot of franchises and some have only a few,” he says. “If you have a controlled group then you have to count all the full-time employees plus fractional employees every time you get to 40 hours.”

Thanks to the employer shared responsibility rule, a broker has to have an accurate count of not one business, but all businesses under controlled ownership, in order to properly advise an employer if they’re subject to providing coverage.

“That number has so much riding on it — fines and penalties,” Davidson says about the full-time equivalent count. “If you have more than one owner of a business and if you have more than one owner of a business plus other businesses, you really have to look at the rules.” He says the rules are too complex to memorize; advisers have to be familiar enough with them to have conversations with clients and then go back to the rules and look up what they say on a case-by-case basis.

“You need to be aware of the entire business structure … Make sure everyone’s been taken into account and make sure they’re getting the proper advice,” says Keith Mong, a partner and employee benefits attorney at Venable LLP in Washington. “You need to know how the control group rules apply in retirement and the ACA context. It should be another area of questioning that advisers should be asking their employers” and new prospects.

The lack-of-knowledge problem

Frances Maane says she’s definitely a broker who understands control groups, so much so that she’s worried other brokers may miss what she’s starting to see.

The Bethesda, Md.-based adviser has experienced a few instances where an owner of multiple companies is offering medical coverage to only one. If the employer is only consulting with an adviser on the medical benefits of that one company, a few issues could occur:

• The employer has never told an adviser about their other businesses because they never wanted to offer benefits to those employees; thus, the benefit adviser is in the dark about the need to count more employees from those other businesses in order to determine their applicability to the employer shared responsibility rules.
• The employer has told the adviser about their other businesses but the adviser doesn’t understand that control group rules are subject here and thus leaves the employer in the dark about the need to count more employees from those other businesses in order to determine their applicability to the employer shared responsibility rules.

“If an employer is part of a control group (and now 50-99 full-time employees [as a result]), and only offers insurance to one company that is part of the control group, are we potentially causing ACA and ERISA violations and now play-or-pay rule violations for 2015?” Maane wrote in an email to EBA.

She thinks there are a few ways benefit advisers can protect themselves from this potential liability. First, they need to be aware of this possible issue. Second, she thinks benefit advisers should start requiring small business employers to sign a document declaring all of the companies they own or partly own as a fact-finding guide for the broker.

Venable’s Mong thinks it’s safe to be prepared. “If advisers put [employers] in an improper structure that triggers some adverse consequences, there could be a potential malpractice claim and, depending what their [E&O] insurance covers, people obviously want to avoid that,” he says. “I would think under general policy, an adviser would be covered, but you want to avoid any type of claim and you don’t want to be in that context.”

The why

Advisers may be wondering if there’s another way to approach thinking about this very complicated subject. Jim Napoli, partner and ERISA practice group co-chair at Constangy, Brooks & Smith, LLP in Fairfax, Va., suggests thinking about it from the regulators’ point of view.

“Think about the goal they’re trying to accomplish,” he says. “That goal is to put as many employers as possible under the Affordable Care Act’s employer responsibility. So, for that purpose the final regulations provide that you — for purposes of determining whether an employer is an applicable large employer — look at the controlled group of companies. So you’re looking at common ownership. You could have that situation where you have two unrelated businesses in terms of the area of business, the laundromat and the restaurant, but they’re commonly owned by the same family, those two employers are likely to be part of the same control group.”