How does the employer mandate apply to controlled groups?

Written by: Elizabeth Walker
Published on June 13, 2022.

The Affordable Care Act (ACA) requires applicable large employers (ALEs)—those with 50 or more full-time employees—to offer health insurance that meets minimum value coverage. 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 organizations are commonly owned. For these controlled groups, there are specific IRS regulations that determine whether they’re required to offer health insurance to their employees.

Let’s look at how controlled groups are subject to the employer mandate and how a health reimbursement arrangement (HRA) can help you meet the mandate’s requirements.

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

What is a controlled group?

Under Internal Revenue Code §414(c)1, a controlled group is when any two or more businesses are connected through common control of ownership. Any business entity 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), so long as they have common ownership.

In terms of the ACA and the employer shared responsibility rules, a controlled group must perform certain calculations to determine if two or more employers are considered a single employer with 50 or more full-time equivalent employees (FTEs). If they are, they’re required to offer health insurance to their employees. This law was created to discourage employers from setting up multiple businesses to avoid the mandate’s requirements.

What are the three types of controlled groups?

The IRS classifies three types of controlled groups a single employer can fall under for ACA and employer mandate compliance purposes. To help you determine if your organization is considered a single employer controlled group under the ACA, 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 corporation.

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 corporation.

2. Brother-sister group

A brother-sister controlled group is classified as a group of two or more corporations, where five or fewer common owners 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 owners of the group 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 organization is a member of either a parent-subsidiary or brother-sister group.
  • At least one corporation is the common parent of a parent-subsidiary group and is also a member of a brother-sister group.

How controlled groups calculate their full-time equivalent employees

Under ACA regulations, businesses within a controlled group must be combined as a single business to determine if they collectively have 50 or more full-time equivalent employees.

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 employees with full-time status. This situation is the “shared responsibility” aspect of the ACA.

If the controlled group fails to correctly determine if they’re subject to the mandate, they could be subject to significant penalties. Even though the controlled group’s FTE count is aggregated, penalties are accessed to each group member in violation individually.

So it’s imperative that controlled groups go over the employer mandate rules carefully to determine any potential liability.

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

Controlled group rules for the employer mandate 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 will be hit with pesky 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 tough. Thankfully, employers can satisfy the employer mandate by offering an individual coverage HRA (ICHRA) as long as it meets minimum value and is considered affordable coverage.

Employers can offer the ICHRA to all their eligible employees or a select group of eligible employees (within legitimate employee class guidelines) provided at least 95% of full-time employees are offered coverage.

If the ICHRA’s allowance amount provided for reimbursement is affordable enough to pay for a silver-level health insurance policy, the employer mandate would be satisfied.

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 money in 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 company is looking to avoid the employer mandate by dividing their organization into several smaller companies, they could be asking for trouble. Depending on their combined size, controlled groups don’t get a pass on the mandate’s requirements.

It’s essential to calculate your entire group’s full-time equivalent employees to determine your ALE employer status to avoid potential liability issues and expensive penalties.

If you’re an ALE looking for a flexible health benefit to help you satisfy the employer mandate, 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 June 13, 2022.


Originally published on June 13, 2022. Last updated June 13, 2022.


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