Obamacare has a provision that will hand an untold number of businesses a deeply unpleasant surprise between now and Tax Day, 2015.
Very likely, most business owners understand that the health care law contains an employer mandate. Businesses with 50 or more full-time employees (FTs) or full-time-equivalent part-timers (FTEs) must either purchase health insurance for their FTs or pay a large fine for failing to do so. No surprise there.
Some business owners, however, are just realizing (or haven’t realized yet) that the employer mandate net also scoops up quite a few businesses with fewer than 50 FTs or FTEs. This happens when the smaller businesses are deemed part of a “controlled group” or part of an “affiliated service group,” due to common ownership interests. In such a case, the employees of the separate businesses will be aggregated into a larger employee count, with the mandate and penalties applying to all.
The easiest case to understand would be one where one household owns 100% of multiple businesses.
Suppose a husband’s auto repair shop has 20 FTs; his wife’s greenhouse has 15 FTs; and they own a fast-food franchise with 20 FTs. Even if the three businesses are separate corporations, with no connections other than ownership, the IRS would almost certainly treat them as a single entity with 55 FTs (for purposes of the employer mandate). If so, the owners would have to offer insurance coverage to all 55 FTs or else face an employer mandate penalty of $50,000 per year ($2,000 for every FT, excluding the first 30).
For some, these penalties can decimate or even totally wipe out their profits.
The story gets even more complicated when the households have partial interests in multiple businesses. Involvement in multiple businesses is extremely common among entrepreneurs. This situation doesn’t mean they’re rich or high-income. In fact, quite often, owners invest in multiple businesses and live Spartan lifestyles while hoping that just one of their businesses will prove successful. According to an NFIB survey, around one-in-four small-business owners also own at least a 10% interest in one or more other businesses. Of those, 56% have interests in at least three businesses. Here’s an example:
Suppose there’s a married couple, filing a joint tax return. Jim owns 90% of a dry cleaner with 17 full-time employees. (His cousin, who helped him start the business, owns the other 10%.) Jim also has an ice cream shop with 6 employees, each working half-time. Jim’s wife Mary owns a landscaping business with 21 full-time employees and 12 part-timers working 20 hours a week. Jim and Mary together own 40% of their son’s strawberry farm, which has 5 year-round full-time employees and, in the summer, employs 25 full-time seasonal employees. In addition, each of the three has a 15% interest in Mary’s friend’s delivery service, which has 6 full-time drivers. Will this family be subject to Obamacare’s employer mandate?
With the patchwork of partial ownership, will John and Mary fall under the employer mandate? If so, that will mean obligations in the tens of thousands of dollars per year. If not, they owe nothing. And the answer may well depend on the opinion of a paid expert and concurrence by the Internal Revenue Service or some other agency. Unfortunately, it would be difficult to write down a complete set of rules that yields a simple “yes” or “no” to whether or not one of these situations exists.
These multi-business definitions extend far beyond just family relationships. In a “parent-subsidiary” relationship, one business has total ownership, or at least 80% ownership, of other businesses (including subsidiaries of those other businesses). A “brother-sister” relationship is one where several businesses are owned by five or fewer common owners. An “affiliated service group” is one where the controlled-group relationships are absent, but where multiple companies in some sense act “as if” they were a controlled group.
The rules for these relationships come from the Employee Retirement Income Security Act of 1974 (ERISA). Determining whether any of these conditions exists can be mathematically and legally complex and requires a sophisticated understanding of the rules. Small businesses generally have no legal or human resources departments to work on such questions, so this means paying an expert for advice. In some cases, the complexities may require the business to seek an opinion from a public agency like the IRS.
For a business owner trying to plan for the next couple of years, it may be expensive and cumbersome to determine whether his multiple businesses will be rolled into a larger group for purposes of the mandate’s employee count. Of course, any changes in ownership structure, a frequent occurrence with small businesses, complicate things still further.
For some businesses, this confusion, this uncertainty can mean the difference between growing and shrinking – or between remaining open and shutting their doors.