How does the employer mandate apply to controlled groups?

Written by: Christina Merhar
Originally published on December 10, 2020. Last updated March 31, 2021.

The Affordable Care Act (ACA) requires applicable large employers (ALEs)—those with 50+ full time equivalent employees to either offer minimum value and affordable health insurance coverage to full-time employees, or pay an employer health insurance tax penalty based on full-time employees. This is commonly referred to as the “employer mandate” or “shared responsibility provisions.”

But what if the employer owns several small businesses under the same parent company? Does the mandate apply to the parent or the individual companies under the parent?

The short answer is: When a business entity is considered a controlled group (as defined below), the business is considered a single employer under the ACA employer mandate.

3 Types of Controlled Groups

There are three types of controlled groups that are considered one employer for the purposes of the ACA employer mandate. The IRS defines, and provides examples of these in IRS Code § 414 (b) and 414 (c).

1. Parent-Subsidiary Group

According to the IRS: “A parent-subsidiary controlled group exists when one or more chains of corporations are connected through stock ownership with a common parent corporation; and

  • 80 percent of the stock of each corporation, (except the common parent)
  • is owned by one or more corporations in the group; and
  • parent corporation must own 80 percent of at least one other corporation.”

2. Brother-Sister Group

A brother-sister group is a group of two or more corporations, where five or fewer common owners own directly or indirectly a "controlling interest" of each group and have “effective control.”

  • Controlling interest – 1.414(c)-2(b)(2) – generally means 80 percent or more of the stock of each corporation (but only if the common owners own stock in each corporation); and
  • Effective control – 1.414(c)-2(c)(2) – generally more than 50 percent of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.”

A common owner must be an individual, a trust, or an estate.

3. Combined Group

A combined group is a group consisting of three or more organizations that are organized as follows:

  • Each organization is a member of either a parent-subsidiary or brother-sister group, and
  • At least one corporation is the common parent of a parent-subsidiary, and is also a member of a brother-sister group

View the IRS source and examples of these types of controlled groups.

To summarize, if the business entity falls under one of these three types of controlled groups then, for the purposes of the employer mandate, the entity is considered one employer.

How controlled groups calculate the health insurance tax penalty

Once the business determines if they are a controlled group under the IRS definition, they then need to determine:

  1. Is the business an "applicable large employer” (50+ FTE employees)? For each business in the controlled group calculate the number of full-time equivalent employees and total them.
  2. What is the penalty if I do not offer “minimum essential coverage” to my employees? See this FAQ for information about penalties.
  3. What is the penalty if I offer “minimum essential coverage,” but it is not “affordable” for some of my employees? See this FAQ for information about penalties.

Does the employer mandate affect a controlled group whose parent is based outside of the U.S.?

Yes. These rules apply regardless of whether the parent or owner is located in the United States. However, they would only aggregate employees working in the U.S. to calculate the number of FTEs for determining if they are subject to the employer mandate.


The IRS is clear about what constitutes a controlled group. It’s also clear that an employer who owns a controlled group must calculate the FTE for all employees in all businesses in a group to determine if they are an ALE and therefore subject to the employer mandate.

Are you an applicable large employer interested in offering employees an affordable health benefit that also meets the employer mandate? An individual coverage HRA could be the ideal solution. Learn more here or schedule a time to speak with one of our experts.

Originally published on December 10, 2020. Last updated March 31, 2021.


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