The role of broker often means the client is looking for consultation on issues far beyond what is the best choice of plan design or coverage available for their employees.
When an employer approaches the benefit broker for guidance on their responsibility under the Affordable Care Act, the brokers typical response to that question is something along the lines of: Well, it depends on how many employees you have. How many do you have?
The general rules
Not to sound too Clintonesque, but the answer to the brokers question depends on whether you means you (as in the client company sitting in the brokers office) or you (as in the client and its parent, brother-sister or other commonly owned or operated business). For purposes of the ACA, only an applicable large employer or a member of an applicable large employer group needs to meet the employer shared responsibility mandate. That means, you for purposes of determining whether the client is subject to the employer mandate under the ACA includes the client and its controlled or affiliated service group members.
See related: Control groups and the ACA you need to be cautious
Lets break that down. An employer is an applicable large employer for a calendar year if the employer employed an average of at least 50 full-time employees, including full-time equivalent employees (FTEs). For this purpose, generally, an employer includes the client business as well as all the members of the clients controlled group of entities and any affiliated service group as those terms are defined under ERISA. Thus, all of the full-time employees (including FTEs) of a controlled group of entities or an affiliated service group are taken into account in determining whether the members of the controlled group or affiliated service group are together an applicable large employer.
How about an example of the math before breaking down what constitutes a controlled group? Assume the client employs 30 full-time employees, and that client is a member of a controlled group of entities that includes the following: (1) Company A, a barber shop that employs seven full-time employees; (2) Company B, an Italian restaurant that employs 15 full-time employees; and Company C, a diving school that employs three full-time employees. Collectively, the clients controlled group employs 55 full-time employees (30+7+15+3), and is therefore an applicable large employer group. Significantly, each member of the applicable large employer group is treated as applicable large employer that is subject to the employer shared responsibility payment with respect to its own employees. That means, for example, that Company A must make an offer of ACA-compliant coverage to each of its seven full-time employees in order to avoid penalty under ACA. On the flip side, this means that, if Company B were to fail to provide its 15 full-time employees an offer of ACA-compliant coverage, Company A would not be penalized with respect to Company Bs failure. Of course, Company B would be subject to penalty for its own failure to make an offer of ACA-compliant coverage to its own employees. As confusing and intertwined as a bowl of spaghetti, right?
When one steps into the shoes of the regulators, these rules make some sense. The primary goal is to place as many employers under ACAs employer mandate as possible. Thus, this is the reason theres aggregation of controlled group member and affiliated service group member employees for the purposes of determining applicable large employer status. Once found to be an applicable large employer group, the controlled group or affiliated service group members are disaggregated for purposes of application of the mandate (i.e., every employer stands on its own).
What exactly is a controlled group or an affiliated service group? The answer to that question is found within the numerous pages of very complicated regulations that set forth attribution, disqualification and exclusionary rules all aimed at a finding that a controlled group exists. That said, very generally, there are two general types of controlled groups, and we will not even touch affiliated service groups in this post.
A parent-subsidiary controlled group exists when:
- One or more chains of corporations are connected through stock ownership with a common parent corporation;
- 80% of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and
- The parent corporation owns 80% of at least one other corporation.
A brother-sister controlled group exists when the same five or fewer owners own collectively or individually 80% or more with effective control of 50% or more of two or more companies. For purposes of the 50% effective control test, the smallest percentage of ownership in any of the suspect companies is counted.
What this all means to the broker
What does all this mean from a practical perspective? It means that a benefit broker must either: (1) understand the controlled and affiliated-service group rules in order to effectively consult with his or her client on the application of the employer shared responsibility provisions of ACA to the client or (b) align himself or herself with legal counsel or an accountant who both understands the controlled and affiliated service group rules and how those rules relate to ACA.
Either way, the best practice is for the broker to have an engagement letter with their client spelling out in no uncertain terms what issues the broker will be consulting on and what issues the broker will not be consulting on. As can be seen, this area is very complicated and a broker must assume that the client is wholly dependent on the broker, unless otherwise stated in a written agreement between the broker and its client. My strong inclination is to believe that is how a court will see the issue should the broker be unfortunate enough to be sued for malpractice after missing an issue that the broker never intended to address. Actually, the number of malpractice claims against brokers is growing and, being a litigator as well as a substantive ERISA attorney, I have seen first hand how a broker/consultant can find itself liable for errors that would not have been viewed as within the scope of the broker/consultants services had an appropriate engagement letter been entered into between the parties.
Again, the broker is the clients trusted adviser and will be held to that standard. In coming weeks, I will blog on other issues facing brokers and best practices for dealing with those issues.
James Napoli is a partner and ERISA practice group co-chair for Constangy, Brooks & Smith; he can be reached at firstname.lastname@example.org or (571) 522-6114.
Legal disclaimer: This blog entry is not intended to be, nor does it constitute legal advice. The above summary is not meant to be an exhaustive treatment of the subject matter and should not be relied on as such. Rather, this blog is meant to highlight a few standout issues and the related provisions of the ACA. You are encouraged to seek legal counsel to the extent necessary to assist you in understanding the legal issues raised in this blog or otherwise facing you in your practice.
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