The Internal Revenue Service (IRS) has specific rules that controlled groups of corporations must follow. The rules can be found in Code Section 414 and are used for many purposes, with a principal focus on determining whether multiple entities have enough common ownership to require trading as a single entity for purposes of federal taxes.
Understanding common ownership and its rules are imperative for companies who are part of a controlled group. When you partner with a Professional Employer Organization (PEO) like America’s Back Office, you can focus on growing your business while we handle administrative tasks and ensure proper processes are in place to remain compliant with federal laws and regulations.
Learn more about what a PEO is and how we can help your business here.
What is Common Ownership?
Common ownership, also referred to as a “controlled group,” is a term to define greater than 50% ownership by the same related party interests.
Common Ownership Rules
The primary controlled group rules are set forth under Code Sections 414(b) and 414(c). They provide “all employees of all corporations that are members of controlled groups” and “all employees of trades or businesses (incorporated or not) that are under common control” should be treated as if they were employed by a single employer.
Trades or businesses that meet the definition of a controlled group should also be treated as single employers under the Affordable Care Act (ACA).
It’s imperative to understand whether an employer is part of a controlled group because if that’s the case, all employees in the whole controlled group should be considered for:
- Health and welfare plans — There are certain provisions in the code that prohibit discrimination that favor highly compensated employees in health and welfare plans, such as self-funded medical, group term life insurance, flexible spending plans, and dependent care reimbursement plans. These rules typically require controlled group members to be treated as a single employer.
- COBRA — All controlled group employees are counted in order to determine if an employer is subject to Continuation of Health Coverage (COBRA) rules. COBRA liability can flow to controlled group members.
- Affordable Care Act (ACA) — Determining whether an employer is a large employer that is subject to the Affordable Care Act’s pay-or-play mandate includes employees of all controlled groups. Whether a company will be subject to the employer mandate is based on its size. When counting employers’ full-time equivalent employees (FTEs) to figure out whether pay-or-play provisions apply, the employer must include its own employees and the employees of each member of the controlled group. If an employer fails to count all FTEs, including those of its controlled group members, the system may erroneously determine it is exempt from play-or-play provisions, which would result in massive compliance issues.
- Parent-Subsidiary Controlled Group —This is any entity that’s higher up the ladder, like a “parent company” that owns a controlling interest in a subsidiary.
- Affiliated Service Group —This organization’s main business functions include management functions for another organization. These management functions are typically performed by employees in the same field of business. This type of group most applies to service entities like law firms, medical practices, and investment management companies.
How America’s Back Office Can Help
Staying in compliance with federal laws and guidelines is a full-time job. It’s not something that you should put on ht e back burner while you juggle all of the other responsibilities of running a company. This approach can land you in serious legal hot water. Instead, partner with a PEO — a team of compliance experts who will take care of all compliance matters so you can work on what you came to do, grow your business, and take care of your employees! What’s more, America’s Back office is a CPEO (IRS-certified PEO), which only 3% of PEO companies are! This distinction sets us apart from the competition because we only offer the very best to our clients. Are you ready to start reaping the benefits of working with a CPEO? Contact us today and let’s get started.
