Between COBRA, discrimination testing and determining Patient Protection and Affordable Care Act compliance, employers really have to know who to count when counting employees.

Take, for example, the case of Warnecke v. Nitrocision LLC, where a district court held that an employer had more than 20 employees and was subject to COBRA because even though the direct employer had fewer than 20 employees, it was part of a control group and when all employees of the commonly controlled company were added up, the companies exceeded the 20-employee threshold. Remember that, for ERISA purposes, when two or more businesses are under common control, each can be considered a single employer of all employees in the group.

Now, PPACA says when we are counting up to 50 employees, not only do we have to account for part-time employees, but we also have to include employees in our control group. Notice 2011-36 tells us that all employees of a controlled group under § 414(b) or (c), or an affiliated service group under § 414(m), are to be taken into account in determining whether any member of the controlled group or affiliated service group is an applicable large employer. 

These code sections are the same ones that apply to discrimination testing for 401(k) plans and other benefit plans subject to discrimination testing. So you have to know when to count people who may not be your actual employees but should be included because of control group status.

Basically there are three types of control groups: brother-sister, parent-subsidiary and affiliated service groups. Each has specific rules for figuring out if they apply but the simple starting point is commonality of ownership. 

A parent-subsidiary control group exists when one company owns 80% or more of a subsidiary. In a brother-sister control group, five or fewer individuals own 80% or more of two or more companies. This is common in many closely-held or family businesses. 

In some cases, ownership by a spouse, parent, child or grandchild may be combined to determine whether a control group exists. If you have more than five owners, there are special rules for testing that structure which can also create control group concerns based on the total percentage of ownership between related individuals or owners.

The point is that if you sponsor a benefit plan and the owners of your company own other businesses, control group status should be something to consider. Don’t assume that separate EIN numbers means that employees never get counted as a group. If you don’t know the rules about control group status, you might accidentally find yourself being considered as part of a much large whole, which means much larger penalties if you don’t comply properly.

Keith R. McMurdy is part of the Health Care Reform Working Group at Fox Rothschild. He can be reached at or 212-878-7919.

This alert is intended for general information and should not be taken as specific legal advice.

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