CWA HEALTH CARE REFORM UPDATE: Treatment of subsidiaries and multiple locations

How are employers with different subsidiaries or locations counted for the purposes of ACA requirements and penalties?

Under the ACA, employers with over 50 full-time equivalent employees must offer health care coverage to 95% of their full-time employees and dependents. If they do not, and at least one employee purchases coverage through a state-based exchange and receives a Federal subsidy, the employer is assessed a penalty of $2,000 per employee, across all employees minus the first 30.

For an employer of multiple entities (e.g. subsidiaries, franchises), the ACA follows IRS aggregation rules governing controlled groups. Specifically, if one individual or entity owns several franchises, all those franchises are essentially considered one entity. In this case, for purposes of the 50 employee rule, the employees in each of the locations must be aggregated to determine the number of total employees. This calculation only determines if an employer is considered “large” for purposes of potentially being subject to the penalties.

If an employer with multiple entities is subject to the penalties, for the purposes of applying a penalty, each separate business entity is liable for its own penalty, and is not liable for penalties of any other entities comprising the large employer. Payment and reporting requirements are also imposed on each individual entity. These rules also apply to a qualified subchapter S subsidiary.

For example, Employer X is comprised of three subsidiaries. Each subsidiary has 40 full-time employees. Subsidiaries 1 and 2 offer a health care plan, but Subsidiary 3 does not. As a result:

• Employer X is subject to the penalty provisions, because it employs a total of 120 workers across all subsidiaries. (120 > 50)
• Because Employer X only offers coverage to 67% of its workforce (80 / 120), it does not meet the 95% threshold, and will be assessed the penalty.
• However, the penalty is only assessed on the subsidiary that doesn’t provide coverage, Subsidiary 3. The penalty for Subsidiary 3 would be $20,000 ($2,000 x 10 employees [40 - 30]).

For more information, see Federal Register, January 2, 2013 and Business entities; definitions.