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How does the employer mandate apply to controlled groups?

ICHRA • May 31, 2023 at 10:24 AM • Written by: Elizabeth Walker

The Affordable Care Act (ACA) requires applicable large employers (ALEs)—those with 50 or more full-time employees—to offer health insurance that meets both affordability and minimum value thresholds. If not, the employer could be subject to a tax penalty. This is known as the employer mandate.

Determining if you’re an ALE is a matter of simple calculations. But it can get more complex when several employers have common ownership between companies. For these controlled groups, specific IRS regulations determine whether they’re required to offer health insurance to their employees.

While you should work with a tax professional for more specific guidance, this article will dive into ACA rules regarding controlled groups and how these groups can determine if they must meet the employer mandate. We’ll also cover how a health reimbursement arrangement (HRA) can help you meet the mandate’s requirements.

Get our complete guide to the individual coverage HRA (ICHRA) to learn how ALEs can satisfy the employer mandate

What is a controlled group?

Internal Revenue Code §414(c)1 defines a controlled group as two or more businesses connected through common ownership. Any single entity or organization can be a member of a controlled group for employee benefit plan purposes, such as a corporation, partnership, sole proprietorship, or limited liability company (LLC), as long as they have common ownership with the other entities in that group

Due to the ACA and the employer shared responsibility rules, a controlled group must perform specific calculations to determine if they are considered a single employer with 50 or more full-time equivalent employees (FTEs).

If they are, they must offer affordable health insurance to their full-time employees and meet specific reporting requirements. The federal government created this law to discourage employers from setting up multiple businesses to avoid the mandate’s requirements.

What are the three types of controlled groups?

The IRS has three classifications for controlled groups employers can fall under for ACA and employer mandate compliance purposes. To help you determine if your organization is considered one of these controlled groups, we’ll briefly go over each type below.

1. Parent-subsidiary group

According to the IRS, a parent-subsidiary controlled group is when one or more chains of corporations are connected through stock ownership with a common parent company.

A parent-subsidiary group exists when:

  • 80% of stock ownership for each corporation within the group (except the parent corporation) is possessed by one or more corporations.
  • The parent corporation owns 80% of at least one other company under consideration.

2. Brother-sister group

A brother-sister controlled group is a group of two or more corporations where five or fewer common ownership businesses directly or indirectly own a controlling interest of each group and have effective control. In this case, a common owner must be an individual, a trust, or an estate.

The two critical aspects of brother-sister groups are defined below:

  • Controlling interest means five or fewer group owners own at least 80% of the businesses.
  • Effective control means the same owners own more than 50% of the businesses. However, ownership is considered to the extent an individual has the same level of ownership interest in each of the group’s organizations.

3. Combined group

A combined group is just like the name sounds—a combination of the two previous groups.

A combined group is a group consisting of three or more organizations where:

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

How controlled groups calculate their full-time equivalent employees

Due to special rules set by the ACA, businesses within a controlled group must be combined as a single employer to determine if they collectively have 50 or more FTEs.

If the combined total of FTEs in a controlled group is at least 50, each individual employer is subject to the employer mandate, even if that employer itself doesn’t employ 50 or more full-time employees. This situation is referred to as the ACA shared responsibility rule.

If the controlled group fails to correctly determine if they’re subject to the mandate, they may have to pay significant penalties. Even though the controlled group’s FTE count is an aggregate number, penalties are accessed to each group member in violation individually.

Therefore, controlled groups must carefully review the employer mandate rules to determine any potential liability.

Does the employer mandate affect controlled groups with parent companies outside the U.S.?

The employer mandate regulations for business owners functioning on a controlled group basis apply regardless of whether the parent or owner is in the U.S.

For example, a foreign-based company with U.S. subsidiaries must aggregate the employees of the parent company and all subsidiaries who work in the U.S. to comply with the employer mandate.

This can be tricky for foreign-owned subsidiaries in other business operations that might not know the existence of the other companies in the U.S. However, individual employers are responsible for knowing their employer mandate requirements, or their group may receive non-compliance penalties.

How HRAs can help controlled groups satisfy the employer mandate

For employers subject to the employer mandate, finding a health benefit that is affordable and tailored for their organization can be challenging. Thankfully, employers can satisfy the employer mandate by offering an employer-funded plan known as an individual coverage HRA (ICHRA).

Business owners can offer the ICHRA to all their eligible employees or a select group of eligible employees (within legitimate employee class guidelines) provided it’s affordable, meets minimum value, and offers affordable coverage to at least 95% of eligible full-time employees.

In 2024, an employer’s ICHRA is considered affordable coverage if employees aren’t paying more than 8.39% of their household income for a silver-level health plan. If that’s the case, the employer-sponsored health plan satisfies the ACA’s mandate without additional requirements.

With an ICHRA, employees purchase their own individual health plan that best suits their needs. They can also submit other qualified expenses, including over 200 out-of-pocket medical items, for reimbursement. The ICHRA gives employees more personalized control over their healthcare choices, promoting better employee retention.

Also, employers can save on their health benefit budget by offering an ICHRA over a group health insurance plan. Better yet, if you sign up for an ICHRA through PeopleKeep, our user-friendly software helps employers create a customized and compliant ICHRA benefit designed to meet the needs of the employer mandate without the headache.


If a business owner is looking to avoid the employer mandate by dividing their organization into smaller separate companies, they could be asking for trouble. Depending on their organizations’ combined size, they won’t get a pass on the mandate’s requirements.

It’s essential to calculate your entire group’s FTE to determine your ALE employer status so you can choose the right employer-sponsored health plan, accurately complete reporting requirements, and avoid potential liabilities and expensive penalties.

If you’re subject to the employer mandate and are looking for a flexible health benefit, an ICHRA is an ideal solution. Schedule a call with our sales team to set up an ACA-compliant HRA for your organization.

This article was originally published on December 10, 2020. It was last updated on May 31, 2023.

1. https://www.law.cornell.edu/uscode/text/26/414

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Elizabeth Walker

Elizabeth Walker is a content marketing specialist at PeopleKeep. She has worked for the company since April 2021. Elizabeth has been a writer for more than 20 years and has written several poems and short stories, in addition to publishing two children’s books in 2019 and 2021. Her background as a musician and love of the arts continues to inspire her writing and strengthens her ability to be creative.