Affordable Care Act (ACA) Reporting: Avoid COBRA and Controlled Groups Classification Challenges

what you need to knowAt Creative Benefits, helping employers with Affordable Care Act (ACA) reporting is a top priority. During these early days of the ACA, employers have a steep learning curve. Creative Benefits consultants support clients as they learn how to comply with the new laws and help avoid common potholes. To that point, this week we’re sharing tips for two issues causing difficulty — the issuing of 1095-C forms for COBRA recipients and the classification of controlled groups.

COBRA

As most employers know, individuals who’ve been offered COBRA coverage must receive 1095-Cs. However individuals offered COBRA coverage fall into one of three categories:

  • Former employee
  • Divorced spouses of current or former employees
  • Dependents of current or former employees, generally children who have reached 27 and aged out of coverage.

There are two outstanding issues employers must know: For dependents who age out of coverage and elect COBRA or spouses who divorce an employee and elect COBRA, the employer must provide that dependent or spouse with his or her own 1095-C once COBRA coverage begins. Prior to COBRA, the reporting follows the employee, but upon those two occurrences, the employer must provide a separate 1095-C to the dependent or spouse.

Second, that particular dependent or spouse typically will lose contact with the employer and will have not supplied the employer with a forwarding address. If the individual does not have an active mail forwarding order, the post office returns 1095-C forms to the employer. Employers must have a plan to document what efforts have been made to contact that individual. If an employer is audited, it is critical to have documentation proving reasonable efforts have been made to deliver the 1095-C.

Controlled Groups

Identifying whether an employer is a controlled group is very complex. We are seeing business owners – entrepreneurs especially – inadvertently cheating themselves because they do not analyze their group status correctly.

Here’s a fictional case that shows how ABC Ice Cream determined its group status. Amy, Brad and Carrie are the business owners. They have five ice cream stores. The table below shows the percentage ownership each has in the five stores.

Here are the steps for determining whether or not your business is a controlled group:

Step 1 – Determine if 5 or fewer individuals have at least a controlling interest defined as owning at least 80% of 2 or more corporations.

Step 2 – Determine if the common owners have effective control. You determine effective control by adding the identical ownership of each individual. If the sum of that identical ownership is 50% or more, there is effective control. You need to satisfy both elements.

Therefore, in our example, Amy and Brad own 80% or more of Stores 1 and 2.  Amy, Brad and Carrie own 80% or more of Stores 3 and 4 but not Store 5.

Identical ownership in:

Store 1 is 40+40 = 80 – effective control

Store 2 is 50+50= 100 – effective control

Store 3 is 10 + 10 + 10 = 30 – no effective control

Store 4 is 25 + 25 + 25 = 75 – effective control

Store 5 is immediately out of the equation: It is owned by a single individual.

Stores 1 and 2 satisfy both parts of the requirement, and therefore, are part of a controlled group and must aggregate the employees to determine whether they are an aggregated ALE.

In analyzing Stores 3 and 4 together, we see that Store 3 does not satisfy the effective control requirement.Therefore, Stores 3 and 4 are NOT part of a control group. Those stores look individually at whether they are an ALE.

In this scenario, the difference between Stores 1 and 2 and Stores 3 and 4 is Controlling Interest. Controlling Interest generally means 80 percent or more of the stock of each corporation (but only if such individual owns stock in each corporation)

Bear in mind, the real world seldom presents straightforward situations. For this reason we very strongly encourage employers to consult with a qualified advisor to categorize their business accurately. It is well worth the upfront expenditure of time and effort to know a controlled group status upfront. It is easier to categorize a business correctly than it is to reverse course once a status has been established.

For more information about COBRA or controlled groups, contact Creative Benefits, Inc.

About the author: Ann Duke, Esq. is General Counsel with Creative Benefits, Inc. She provides consultative services to employers and their employees.