Controlled group attributions are a tricky subject for even seasoned HR pros, which can make it tempting to skip over understanding the rules and hope for the best. However, changes in the Affordable Care Act affect controlled groups perhaps more than any other type of business. This webinar is your one-hour complete guide to the three types of groups, how they interact, and the types of relationships that most affect your compliance strategy.

1. • Awesome Content
 Supporting material
 Supporting material
• Awesome Content
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2. Family Ties: Unknotting
Controlled Group Attributions
Larry Grudzien
Attorney at Law

3. • Common Control Terminology
• Parent-Subsidiary Controlled Groups
• Brother-Sister Controlled Groups
• MEWA Risk
• Affiliated Service Groups
• Additional Considerations
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Agenda

4. Importance of Knowing these Concepts:
Affordable Care Act (ACA) rules consider “the employer” to include related
entities
• “Applicable large employer” (ALE) for shared responsibility
• Determining employer size to identify if in large or small employer market
 Impacts eligibility for small business exchanges (SHOP)
 Impacts application of small group market restrictions
• Eligibility for small business health insurance tax credit
• Cadillac tax computations
• Annual ACA reporting under Forms 1094 and 1095
• “Aggregated ALE group”
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Controlled & Affiliated Service Groups

5. The same ACA “employer aggregation” rules are widely used elsewhere
in benefit rules under the Internal Revenue Code
• §105(h) & ACA nondiscrimination for health plans
• §125 cafeteria plan nondiscrimination
• §79 group term life insurance nondiscrimination
• Dependent care benefits nondiscrimination
• Fringe benefit and other nondiscrimination rules
• Qualified retirement plan rules
Source of the primary controlled & affiliated service group rules:
• Internal Revenue Code §§414(b), (c), (m), (o) & (t)
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Controlled & Affiliated Service Groups

6. Terminology:
• Controlled Group of Corporations
• Trades or Businesses Under Common Control
• Affiliated Service Group
• Aggregated ALE Group
Separate tax ID numbers (EIN, or FEIN)
• For many purposes: Separate EIN ≠ separate employers
• 1094/1095 reporting: Separate EIN requires separate report
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Aggregated Employer Group

7. • Aggregated employer group rules are complex
• Some arrangements not difficult to identify
• Others can be complicated, for example
 Multiple family or friends sharing ownership
 Diverse businesses independently operated
• Learn the “yellow flags” that suggest a closer look is
needed
• Know when to recommend expert assistance
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What to Look For

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Example:
Company A –
Parent Company
Company B –
Subsidiary Company
Company C –
Subsidiary Company
General Test: “Parent” company directly owns at least 80% of one or more
other companies in the group. Simplest arrangement is a “core group.”
80%
100%
Company A –
Parent Company
Company B –
Subsidiary
Company
Company C –
Subsidiary
Company
80% 80%
Shaded entities = “core group” in a parent-
subsidiary group; i.e., parent and each
entity 80% owned by parent
“Parent-Subsidiary” Controlled Group

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“Parent-Subsidy” Controlled Group
Example:
Company A –
Parent Company
Company B –
Subsidiary Company
Company C –
Subsidiary Company
80%
80%
Expanding Parent-Subsidiary Controlled Group: Include entities
directly 80% owned by one or more other entities in the group. The shaded
entities below are the added entities.
Company A –
Parent Company
Company B –
Subsidiary
Company
Company C –
Subsidiary
Company
80% 80%
Company D –
Subsidiary Company
40%40%

10. Example:
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“Parent-Subsidy” Controlled Group
Company A –
Parent Company
Company B –
Subsidiary Company
Company C –
Subsidiary Company
Ask about ownership of and
by any particular business.
? %
? %
Red Flag Test: One company directly owns
at least 80% of another company

11. • Corporations
 Voting power of all classes of voting stock , or
 Value of all classes of stock
• Partnerships
 Profits interest or capital interest
• Sole Proprietorship
 The proprietor as legal owner
• Trust or Estate
 Actuarial interest of grantor, beneficiaries, heirs, etc.
• Certain Exclusions for Treasury Stock & other Situations
 e.g., subsidiary stock held by officer of parent company that already owns 50% of the
subsidiary
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Ownership

12. • Limited Liability Companies (LLC)
 Follow the ownership rules for partnerships unless entity has elected to be treated as
a corporation for federal tax purposes
• Tax Exempt Organizations
 Special rules apply to determine “common control” generally based on whether at
least 80% of the directors or trustees are either representatives of or directly or
indirectly controlled by another organization
 Significant facts & circumstances analysis (control, agent, etc.)
 “Permitted aggregation” if regularly coordinating daily exempt activity
 Church-controlled organizations excluded from these regulations
• Public Sector Employers
 Reasonable good faith interpretation (for Form 1094/1095, may want to use
“Designated Government Entity” option)
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Other Ownership Issues

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“Brother-Sister” Controlled Group Structures
Example:
General Test: 5 or fewer individuals, estates or trusts together own,
directly or by attribution at least 80% in each of two or more companies.
John Smith
Jim’s Family Trust
Mary Smart
Restaurant A
25%
Restaurant B
Other unrelated
persons or entities
own remaining %
20%
15%
50%40%
15%

14. Key Principles
• “General Control Test”
 At least 80% control by the “5 or fewer”
• “Effective Control Test”
 The common % that each of the “5 or fewer” individually has across
all companies
 Added to the common % of each of the other “5 or fewer”
 Exceeds 50%
 Counting only those with ownership in all companies
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“Brother-Sister” Controlled Group Structures

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“Brother-Sister” Controlled Group Structures
Example:
Effective Control Test: Considering only the smallest % each of the 5
or fewer owns in any company, the total % of all owners exceeds 50%.
John Smith
Jim’s Family Trust
Mary Smart
Restaurant A
25%
Restaurant B
Other unrelated
persons or entities
own remaining %
20%
15%
40%
50%
15%

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Brother-Sister Example

17. • To and from parents, children, grandchildren
• To and from spouses (includes same sex spouses)
• To grantors and beneficiaries of trusts
• To beneficiaries of estates
• From companies to individuals with 5% ownership
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Ownership Attribution

18. To and from parents, children:
• There is absolute attribution between parent, and child if the child is under age
21.
• If the child is 21 or older, then:
 The parent is deemed to own the child's shares only if the parent already owns (or
is deemed to own) more than 50% of the company.
 The child is deemed to own the parent's shares only if the child already owns (or is
deemed to own) more than 50% of the company.
Example:
• Ownership of Corp A
 Kelsey owns one-third of Corp A
 Nicole, Kelsey’s 19 year-old child, owns one-third
 Will, Kelsey’s 25 year-old child, owns one-third
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Ownership Attribution

19. To and from grandparents and grandchildren:
• Grandparents to grandchildren
 Only if grandchild owns more than 50% of the business
• Grandchildren to grandparents
 Only if grandparent owns more than 50% of the business
• Siblings – No attribution
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Ownership Attribution

20. To and from spouses (includes same sex spouses)
• Spouse will be treated as owning interest of the other spouse unless
these conditions are satisfied:
 Each spouse has no ownership in the other’s business
 Neither spouse is a director or employee or manager of the other’s
business
 Not more than 50% of either business entity’s gross income was derived
from royalties, rents, dividends, interest, and annuities
 The spouse that owns the business can dispose of the stock at any time,
without restrictions
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Ownership Attribution

21. To and from spouses:
• Includes same-sex spouses
• Kelsey and Dennis are married
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Ownership Attribution Example

22. • To grantors and beneficiaries of trusts:
 Whether or not a trust is a grantor trust, beneficiaries of that trust are deemed to own
their pro rata interest of property held by the trust. (Under IRC 1563, there is no
attribution to beneficiaries who have less than a 5% interest, determined according to
IRS actuarial tables.)
 Additionally, if the trust is a grantor trust, then the deemed owner (usually the grantor
or settlor) of the trust is deemed to own all of the trust's property.
• Attribution from Estate: a beneficiary in an estate that owns stock is
considered to own a proportionate share of the stock.
• Attribution to Estate: stock owned by a beneficiary in an estate is considered
to be owned by the estate.
• From companies to individuals with 5% ownership:
 Corporate ownership interests attributed, proportionately to shareholders (owning at
least 5% of corporate stock).
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Ownership Attribution

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Test
Company C
Jim Jones
100%
50%
30%
You’re consulting
Company A.
Are A and C a
Controlled
Group?
Ask about ownership of and
by any particular business.
Company A

24. Test Restaurant
1
Restaurant
2
Restaurant
3
Eff. Control >50%
1&2 2&3 1&3 All 3
Owner A 45% 33% 20% 33 20 20 20
Owner B 25% 33% 15% 25 15 15 15
Owner C 15% 34% 25% 15 25 15 15
Owner D 15% 0% 40% 0 0 15 0
Ownership:
A, B & C
85% 100% 60% 73 60 50
A, B, C & D 100% 100% 65
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Brother-Sister Controlled Group Structure
|
CONTROLLED GROUP A – 1&2
|
CONTROLLED GROUP B – 1&3

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Combined Group Structure
Example:
Company C –
Parent Company
Company D –
Subsidiary Company
Company E –
Subsidiary Company
100%
80%
Two Part Test:
(1) Each company is a member of either a
parent-subsidiary controlled group or a
brother-sister controlled group, and
(2) At least one is the common parent of a
parent-subsidiary controlled group as
well as a member of a brother-sister
controlled group (Company C)
Company A –
Parent Company
Company B –
Parent Company
John owns
30% of A, B & C
TRUST owns
35% of A, B & C
Mary owns
30% of A, B & C

26. Multiple Employer Welfare Arrangements (MEWA)
• Health Benefits Covering Two or More Employers (After Applying Controlled
Group Rules)
• State Insurance Laws May Regulate
 Many prohibit self-funded MEWAs
 State mandates may apply if permitted
• ERISA, ACA, Other Complications
 Who is the common law employer?
 Initial (advance) and annual Form M-1 filing (but controlled group based on common
ownership of 25% instead of 80% only for purposes of M-1 filing obligation)
 Form 5500 issues
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Controlled Group & MEWA Risk

27. Affiliated Service Groups

28. Concept: Two or more companies with at least one “service
organization” that should be considered one employer
operationally
• Focus is on operational relationships, not so much on ownership
• Rendering services to members within the group
• Jointly rendering services to third parties
• “Service organization” is an entity “the principal business of which is
the performance of services”
 Example: Engineering and health care professionals
 As distinguished from one deriving the majority of its revenue from capital
investment (e.g., manufacturing)
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Affiliated Service Group Basics

29. • A-Organization Group
 First Service Organization (FSO) and at least one “A Organization”
• B-Organization Group
 First Service Organization (FSO) and at least one “B Organization”
• Management Group – Management organization and one
other entity
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Affiliated Service Group Basics

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Affiliated Service Group Basics
The “Management Service Organization”
• Example 1: Principal business of Management Company X is
to provide management services on a regular and continuing
basis to Company A.
• Example 2: Same as #1, but X services A, B and C which are
related (e.g., may be a brother-sister group, using a 50% vs.
80% rule on common ownership)
Management Company X
Company A
Company B
Company C
Principal business is to provide
management services

31. Management Service Group:
• Two organizations – One performs management functions
 Principal business of management organization is:
 Performing management function
 On a regular and continuing basis
 To a recipient organization
• No need for overlapping ownership
• Management functions, examples:
 Running daily business operations
 Personnel decisions
 Setting compensation and benefits
 Goal setting and planning
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Affiliated Service Group Basics

32. Management Service Group Example:
A landscape design and maintenance company splits into two
companies. One company, W, was established to employ the
workers who perform work in the field, and a second company, M,
was established to employ the management and design team. M
performs management responsibilities for W, and W is the only
client of M. W and M are an ASG.
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Affiliated Service Group Basics

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Affiliated Service Group Basics
“A-Organization” and “First Service Organization (FSO)”
Medical Clinic X [A-Org] regularly performs services for, or is
associated with, Medical Staffing Co. [FSO] in providing health
services to third parties.
Medical Staffing Co. (provides clerical and nursing services) [FSO]
Medical Clinic X [A-Org]
KEY REQUIREMENTS:
- Clinic X is a shareholder or partner in Regional Staffing Co.
- Both the A-Organization and FSO are service organizations.
- If the FSO is incorporated, it must be a professional service
corporation
Servicing patients

34. First Service Organization
• Must be a service organization
 Capital is not a material income-producing factor
 Facts and circumstances
 Organizations in following fields are deemed to be service organizations:
Accounting Actuarial science
Architecture Consulting
Engineering Health
Insurance Law
Performing arts Consulting
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“A-Organization” and “First Service Organization (FSO)”

35. • Requires FSO and A-Org
• A-Org
 Is a service organization
 Has ownership interest in FSO
 Regularly performs services for the FSO or is regularly associated with the FSO in
performing services for third parties
• Example
 Dr. Smith owns 100% of her medical corporation. Her corporation is a 50% partner
in Smith & Wesson Clinic, a partnership. Her corporation provides medical services
to the partnership, which in turn provides medical services to the public. Both her
corporation and the partnership are service organizations. The clinic is the FSO, and
her corporation is the A-Org.
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“A-Organization” and “First Service Organization (FSO)”

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“B-Organization” and “First Service Organization (FSO)”
Financial Services Corp. (FS)[FSO] is a financial services firm. A
significant portion of Support Inc.’s (SI) [B-Org] business is
providing services to FS of a type historically provided by
employees in that business. One or more of the highly
compensated employees of FS together own a total of at least 10%
of SI.
Support Inc. [B-Org]
FS (service org.)
[FSO]
KEY REQUIREMENTS:
- At least 10% of B-Org is owned by highly compensated FSO employees.
- The FSO, but not B-Org, must be a service organization.
Services to FS FS EE 10% ownership in SI

37. • Requires FSO and B-Organization
• B-Organization
 Significant portion of business is performance of services for an FSO or for
A-Orgs associated with FSO (or both)
 Services are type historically performed by employees
 Ten-percent ownership requirement met
• Example
 Jack and Jill are attorneys. Each has his/her own law corporation, and the
two corporations own 100% of J and J, LLP. Jack and Jill’s corporations
are A-Orgs, J and J LLP is an FSO, and the three organizations together
are an ASG.
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“B-Organization” and “First Service Organization (FSO)”

38. • Grandparents-grandchildren – No attribution
• Siblings – No attribution
• Shareholder to C corporation
 Shareholder owns at least 50 percent of corporation
 Attributed shareholder’s interest
• Partners to partnership – attributed partner’s interest
• Beneficiaries to trust – attributed beneficiary’s interest
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Attribution

39. • Transferring ownership to avoid controlled group status may create a
“predecessor company” that would be combined with the successor
company under the ACA.
• Carriers have differed in how carefully they examine controlled and
affiliated service group relationships.
 The ACA has resulted in more carrier focus
 They don’t always get it right
• Different members of a controlled or affiliated service group can still
have different benefits (but must abide by nondiscrimination rules).
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Additional Considerations

40. Whether looking for confirmation of a simple situation, or seeking
assistance on a more involved case:
• Ownership Details – Percentage ownership by each other entity and
underlying individual, estate or trust.
• Relationships Among Owners or Between Entities and Owners –
Parent/child (and which children under age 21), spouses, company
officers.
• Service Organization – Is at least one entity a service organization; if
so, what are the operational relationships with other entities.
• Entity Tax Status – Has LLC elected to be taxed as corporation; any
tax-exempt or church entity; any governmental entity.
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Basic Information for Analysis

41. Questions?

42. Larry Grudzien
Attorney at Law
(708) 717-9638
larry@larrygrudzien.com
www.larrygrudzien.com
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Contact Information
42