AGGREGATED EMPLOYERS AND DISCRIMINATION TESTING CONCEPTS Presented by: Mark Major, Esq. Law Office...

AGGREGATED EMPLOYERSAND

DISCRIMINATION TESTING CONCEPTSPresented by:

Mark Major, Esq.Law Office of Mark W. Major, P.C.

FOR

CSAHU 2015 Annual SymposiumJune 2, 2015

AGENDA

Aggregated Employers• Common Control Terminology• Parent-Subsidiary Controlled Groups• Brother-Sister Controlled Groups• MEWA Risk• Affiliated Service Groups• Broker Strategies

Discrimination Testing Concepts• 105(h) Rules – Self-funded vs. Insured (ACA)• Basics of 105(h) Testing• 105(h) Testing Tips• Cafeteria Plan Discrimination Testing Highlights

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AGGREGATED EMPLOYERS a/k/a

Controlled & Affiliated Service Groups


• Importance of Knowing these Concepts– Affordable Care Act (ACA) rules consider “the employer” to

include related entities• “Applicable large employer” (ALE) for shared responsibility• Determining employer size to identify if in large or small

employer market– Impacts eligibility for small business exchanges (SHOP) – Impacts application of small group market restrictions

• Eligibility for small business health insurance tax credit• Cadillac tax computations• Annual ACA reporting under Forms 1094 and 1095

– “Aggregated ALE group”

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• The same ACA “employer aggregation” rules are widely used elsewhere in benefit rules under the Internal Revenue Code– §105(h) & ACA nondiscrimination for health plans– §125 cafeteria plan nondiscrimination– §79 group term life insurance nondiscrimination– Dependent care benefits nondiscrimination– Fringe benefit and other nondiscrimination rules– Qualified retirement plan rules

• Source of the primary controlled & affiliated service group rules– Internal Revenue Code §§414(b), (c), (m), (o) & (t)

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Aggregated Employer Groups

• Terminology– Controlled Group of Corporations– Trades or Businesses Under Common Control– Affiliated Service Group– Aggregated ALE Group

• Separate tax ID numbers (EIN, or FEIN)– Many purposes: Separate EIN ≠ separate employers– 1094/1095 reporting: Separate EIN requires separate report

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What to Look For

• Aggregated employer group rules are complex• Some arrangements not difficult to identify• Others can be complicated, for example

– Multiple family or friends sharing ownership– Diverse businesses independently operated

• Learn the “yellow flags” that suggest a closer look is needed

• Know when to recommend expert assistance

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Basic Controlled Group Structures

• “Parent-Subsidiary” Controlled Group

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Company A – Parent Company

Company B –Subsidiary Company

Company C –Subsidiary Company

General Test: “Parent” company directly owns at least 80% of one or more other companies in the group. Simplest arrangement is a “core group.”

80%

100%




80% 80%

Shaded entities = “core group” in a parent-subsidiary group; i.e., parent and each entity 80% owned by parent


• “Parent-Subsidiary” Controlled Group (cont’d)

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80%

80%

Expanding Parent-Subsidiary Controlled Group: Include entities directly 80% owned by one or more other entities in the group. The shaded entities below are the added entities.




80% 80%

Company D – Subsidiary Company

40%40%


• “Parent-Subsidiary” Controlled Group (Cont’d)

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ASK ABOUT OWNERSHIP OF AND BY

ANY PARTICULAR BUSINESS

? %

? %

Red Flag Test: One company directly owns at least 80% of another company

“Ownership”

• Corporations– Voting power of all classes of voting stock , or– Value of all classes of stock

• Partnerships– Profits interest or capital interest

• Sole Proprietorship– The proprietor as legal owner

• Trust or Estate– Actuarial interest of grantor, beneficiaries, heirs, etc.

• Certain Exclusions for Treasury Stock & other Situations– e.g., subsidiary stock held by officer of parent company that

already owns 50% of the subsidiary11

“Ownership”

• Other Ownership Issues– Limited Liability Companies (LLC)

• Follow the ownership rules for partnerships unless entity has elected to be treated as a corporation for federal tax purposes

– Tax Exempt Organizations• Special rules apply to determine “common control” generally based on

whether at least 80% of the directors or trustees are either representatives of or directly or indirectly controlled by another organization

• Significant facts & circumstances analysis (control, agent, etc.)• “Permitted aggregation” if regularly coordinating daily exempt activity • Church-controlled organizations excluded from these regulations

– Public Sector Employers• Reasonable good faith interpretation (for Form 1094/1095, may want

to use “Designated Government Entity” option)

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• “Brother-Sister Company” Controlled Group

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General Test: 5 or fewer individuals, estates or trusts together own, directly or by attribution at least 80% in each of two or more companies.

? %

John Smith

Jim’s Family Trust

Mary Smart

Restaurant A

25%

Restaurant B

Other unrelated persons or entities own remaining %

20%

15%

50%40%

15%


• “Brother-Sister Company” Controlled Group (Cont’d)• Key Principles

– “General Control Test”• At least 80% control by the “5 or fewer”

PLUS– “Effective Control Test”

• The common % that each of the “5 or fewer” individually has across all companies

• Added to the common % of each of the other “5 or fewer” • Exceeds 50%• Counting only those with ownership in all companies

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“Brother-Sister Company” Controlled Group (Cont’d)

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Effective Control Test: Considering only the smallest % each of the 5 or fewer owns in any company, the total % of all owners exceeds 50%.

? %

John Smith

Jim’s Family Trust

Mary Smart

Restaurant A

25%

Restaurant B

Other unrelated persons or entities own remaining %

20% 15%

40% 50%

15%


• Ownership Attribution– To and from parents, children, grandchildren– To and from spouses (includes same sex spouses)– To grantors and beneficiaries of trusts– To beneficiaries of estates– From companies to individuals with 5% ownership

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Jim Jones

Company A

Company C

100%

50%

30%

TEST

You’re consulting Company A.

Are A and C a Controlled

Group?

ASK ABOUT OWNERSHIP OF AND BY

ANY PARTICULAR BUSINESS

Brother-Sister Controlled Group

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~ TEST ~ RESTAURANT 1

RESTAURANT 2

RESTAURANT 3

Eff. Control >50 %

1&2 2&3 1&3 All 3

OWNER A 45% 33% 20% 33 20 20 20

OWNER B 25% 33% 15% 25 15 15 15

OWNER C 15% 34% 25% 15 25 15 15

OWNER D 15% 0% 40% 0 0 15 0

OWNERSHIP:A, B & C 85% 100% 60% 73 60 50 50

A, B, C & D 100% 100% 65

CONTROLLED GROUP A CONTROLLED GROUP B


• “Combined Group”

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Company C – Parent Company

Company D –Subsidiary Company

Company E –Subsidiary Company

100%

80%

Two Part Test: (1) Each company is a member of either a

parent-subsidiary controlled group or a brother-sister controlled group, and

(2) At least one is the common parent of a parent-subsidiary controlled group as well as a member of a brother-sister controlled group (Company C)


Company B – Parent Company

John owns30% of A, B &

C

TRUST owns35% of A, B & C

Mary owns30% of A, B & C

Controlled Group & MEWA Risk

• Multiple Employer Welfare Arrangements (MEWA)– Health Benefits Covering Two or More Employers

(After Applying Controlled Group Rules)– State Insurance Laws May Regulate

• Many prohibit self-funded MEWAs• State mandates may apply if permitted

– ERISA, ACA, Other Complications• Who is the common law employer?• Initial (advance) and annual Form M-1 filing (but

controlled group based on common ownership of 25% instead of 80% only for purposes of M-1 filing obligation)

• Form 5500 issues

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Affiliated Service Group Basics

• Concept: Two or more companies with at least one “service organization” that should be considered one employer operationally– Focus is on operational relationships, not so much on

ownership– Rendering services to members within the group– Jointly rendering services to third parties– “Service organization” is an entity “the principal business of

which is the performance of services” • Example: Engineering and health care professionals• As distinguished from one deriving the majority of its revenue from

capital investment (e.g., manufacturing)

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The “Management Service Organization” Example 1: Principal business of Management Company X is

to provide management services on a regular and continuing basis to Company A.

Example 2: Same as #1, but X services A, B and C which are related (e.g., may be a brother-sister group, using a 50% vs. 80% rule on common ownership)

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Management Company X

Company A

Company B

Company CPrincipal business is to provide management services


“A-Organization” and “First Service Organization (FSO)”Medical Clinic X [A-Org] regularly performs services for, or is associated with, Medical Staffing Co. [FSO] in providing health services to third parties.

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Medical Staffing Co. (provides clerical and nursing services) [FSO]

Medical Clinic X [A-Org]

KEY REQUIREMENTS:- Clinic X is a shareholder or partner in Regional Staffing Co.- Both the A-Organization and FSO are service organizations.- If the FSO is incorporated, it must be a professional service corporation

Servicing patients


“B-Organization” and “First Service Organization (FSO)”Financial Services Corp. (FS)[FSO] is a financial services firm. A significant portion of Support Inc.’s (SI) [B-Org] business is providing services to FS of a type historically provided by employees in that business. One or more of the highly compensated employees of FS together own a total of at least 10% of SI.

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Support Inc. [B-Org]

FS (service org.) [FSO]

KEY REQUIREMENTS:- At least 10% of B-Org is owned by highly compensated FSO employees.- The FSO, but not B-Org, must be a service organization.

Services to FS FS EE 10% ownership in SI

Additional Considerations

• Transferring ownership to avoid controlled group status may create a “predecessor company” that would be combined with the successor company under the ACA

• Carriers have differed in how carefully they examine controlled and affiliated service group relationships– The ACA has resulted in more carrier focus– They don’t always get it right

• Different members of a controlled or affiliated service group can still have different benefits (but must abide by nondiscrimination rules)

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Broker Strategies

• Sometimes controlled group status is quite clear (e.g., 1 person owns at least 80% in each of two companies)

• When unclear, the risks merit careful review• Strategies employed by brokers to address this area

include:– “Hands Off” – (Will a competitor offer more assistance?)– “Conservative” – Provide awareness materials to client and

request client to disclose controlled or affiliated group status to agency

– “Aggressive” -- Facilitate detailed fact-finding on client’s organization and structure to make a joint determination with client on controlled or affiliated service group status

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Basic Information for Analysis

Whether looking for confirmation of a simple situation, or seeking assistance on a more involved case:1. Ownership Details – Percentage ownership by each other

entity and underlying individual, estate or trust.2. Relationships Among Owners or Between Entities and Owners

– Parent/child (and which children under age 21), spouses, company officers

3. Service Organization – Is at least one entity a service organization; if so, what are the operational relationships with other entities

4. Entity Tax Status – Has LLC elected to be taxed as corporation; any tax-exempt or church entity; any governmental entity

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Discrimination Testing

Basic Concepts and Strategies

Why Discrimination Testing?

• Main area of concern: Health plans favoring the highly compensated in eligibility or benefits– Code Section 105(h)– ACA (adds rule “similar to” Section 105(h))

• Rationale: Encourage employers to provide benefits to rank-and-file employees by conditioning tax benefits on use of designs not disproportionately favoring the highly compensated

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105(h) Before the ACA

• For “highly compensated individuals” (HCIs)– Requires employers to include some or all reimbursements in

taxable income– When a self-funded health plan discriminates in HCIs favor

with respect to eligibility or benefits

• “Health plans” include medical, dental, vision, health FSA, HRA and any other employer sponsored plan reimbursing expenses incurred for medical care (as defined in Code Section 213(d) (except routine medical diagnostic procedures and HSAs)

• Applies to all employers -- private sector for-profit and non-profit, church plans, as well as public sector

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Insured Health Plans Before the ACA

• NOT constrained by Section 105(h) if “insured” (i.e., risk shifted)• Result: Basic or supplemental group health insurance policies

(primarily medical) designed to favor executives, managers, salaried or other highly compensated groups (or individuals)

o Restricting eligibility only (or mostly) to the favored groupo Higher employer contribution rates for the favored groupo Providing better benefits to the favored groupo Allowing shorter or no waiting periods for the favored groupo Extending health coverage to only the favored group upon

retirement or severance• NOTE: Although not subject to Section 105(h), these practices may

present issues under other laws, particularly nondiscrimination rules applicable to cafeteria plans, depending on the design

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Enter the ACA Rule (PHSA 2716)• Rules “similar to” the Section 105(h) rules are to apply to

insured health plans as of some date following issuance of IRS guidance and a period of compliance (2017 at the earliest?)

• “Health plans” include only insured group health plans subject to the ACA

• ACA “excepted benefits” are not subject to this rule, for example:

– Retiree-Only Coverage (Plans with Less than 2 “Employees”)– Dental and Vision Under Separate Policies– Non-coordinated Coverage for a Specified Disease or Illness (Such

as Cancer-Only Policies), and Hospital Indemnity or other Fixed Indemnity Insurance

• Grandfathered plans are not subject to this nondiscrimination rule

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Enter the ACA Rule (PHSA 2716)• Penalty for ACA discrimination: Employer pays an excise tax of $100

per day “per individual discriminated against” until corrected – NOT simply imputing taxable income to the highly compensated

as under Section 105(h) – Up to lesser of 10% of plan costs or $500K (limits don’t apply if

violation due to willful neglect or no reasonable cause)– Minimum $2500/person if not corrected before IRS audit– Also, for ERISA plans, civil injunction and attorney fee exposure

(no delay in this penalty)• If excise tax not voluntarily reported by employer, additional penalties

and interest may apply– Form 8928 expected to be revised for this purpose

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Basic 105(h) Testing

• To Avoid Discrimination Under Section 105(h), Certain Tests have to be Satisfied– Eligibility Test (one of four tests must be passed)– Benefits Test (a design test and an operational test)

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• Key Definitions• “Highly Compensated Individuals” (HCIs) Means

– The 5 highest paid officers,– Each more-than-10% shareholder, and– The top 25% most highly paid of all employees (other than

those that are “excludable” and not participating)– “Self-employed” are excluded from test (e.g., partners and

more-than-2% S Corp shareholders)

• “Non-HCIs” (NHCIs) are the Non-Excludable Employees Who are not HCIs

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• Key Definitions (cont’d)• “Excludable” Employees are Those Who

– Have less than 3 years service– Are under age 25 at beginning of plan year– Are part-time (generally less than 25 hours/week; 35 hours in

some cases*)• Compare ACA definition for full-time: 30 hours/week average

– Are seasonal (generally less than 7 months; 9 months in some cases*)

– Are collectively bargained if excluded from the plan– Are nonresident aliens with no U.S. source income* Longer hours/months apply if other employees doing same job work substantially longer hours or more months

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Eligibility Test Objective: Plan must benefit a reasonable number of non-HCIs

Optional forms of eligibility testing (in order of simplicity):1. 70% of all employees enrolled 2. 70% of all employees are eligible, and 80% of those are enrolled3. Reasonable (nondiscriminatory) classification

• Ratio-percentage test (more objective)

4. Reasonable (nondiscriminatory) classification• Fair Cross Section test (more subjective)

For all tests: May disregard “excludable” employees (IRS position: Only if plan actually excludes)


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105(h) 70% Eligibility Test

• At least 70% of all non-excludable employees are enrolled

• EXAMPLE: ABC Co. has 10 employees: 5 high-paid consultants, 2 managers, 3 secretaries. ABC pays 100% of cost of coverage for the 5 consultants and 2 managers. Secretaries not eligible.

• 70% Test Passed (7 of 10 Enrolled)– Even if 100% of HCIs (top 25%) enrolled, additional 45% of

employees are enrolled

• Note: Can select positions to be covered as long as 70% of non-excludable employees participate

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• At least 70% of all non-excludable employees are eligible, and 80% of those are enrolled

• EXAMPLE: ABC Co. has 10 employees: 5 highly-paid, 2 managers, 3 secretaries. Assume ABC requires employees to pay portion of premium, only the 5 highly-paid and 2 managers are eligible, but only the 5 highly-paid and one manager choose to pay the required contributions.

• 70%/80% test passed: 70% are eligible, and 6 of those 7 (or 86% of eligibles) enroll-- Even if 100% of HCIs (top 25%, here, 3) are eligible and

enrolled, an additional 40% of all employees are eligible and all but one of them are enrolled

• 70% test would be failed: Only 6 of 10 (60%) enrolled

105(h) 70%/80% Eligibility Test

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105(h) Ratio-Percentage Eligibility Test

• Reasonable Classification Ratio-Percentage Test– Compares

A. The percentage of covered NHCIs(Enrolled or eligible NHCIs) ÷ (Total non-excludable NHCIs)

TOB. The percentage of covered HCIs

(Enrolled or eligible HCIs) ÷ (Total non-excludable HCIs)

– 40% Rule of Thumb (conservative approach)• Assume all non-excludable HCIs enroll (or are eligible)• If A is at least 40%, the plan likely passes the ratio-percentage test

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105(h) Fair Cross Section Eligibility Test

Test of “last resort” – Subjective evaluations to demonstrate that a reasonable number of employees in each wage bracket (e.g., $5,000 brackets) participate in the plan. Relevant IRS guidance (not extensive) indicates key requirements or factors are:• Compensation of eligible employees substantially same as for

ineligible employees• Plan covers employees in all compensation ranges• Middle and lower compensation range covered in more than

nominal numbers• Classification on its face does not discriminate in favor of

officers, shareholders, or HCIs• Rate of HCI participation not unreasonably greater than rate

of non-HCI participation

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GENERAL 105(h) BENEFITS RULE: • No HCIs can have more favorable benefits than any NHCI participant • Benefit differences might take the form of:

– Lower required employee contributions at any benefit level– The type of medical expenses that are reimbursable – Shorter or no waiting periods imposed

Maximum Benefit Rule: The maximum benefit level (attributed to employer contributions) cannot vary based on percent of compensation, age, or years of service

Optional (Elective) Benefits Rule: (1) all participants must be eligible for each option, and (2) there must either be no required employee contribution for each

benefit option, or the employee contribution must be identical for all participants for each option

105(h) Benefits Test

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EXAMPLE: ABC Co. has 40 salaried and 20 hourly employees. None are “excludable” employees. The salaried employees are eligible for medical insurance immediately, and the hourly are eligible after 90 days from hire. Benefit Test failure?

Do the different waiting periods cause a Benefits Test failure? NO!

Using 40% Rule of Thumb: (Enrolled or eligible NHCIs) ÷ (Total non-excludable NHCIs) = SALARIED “PLAN”: 29 ÷ 45 = 64% HOURLY “PLAN”: 18 ÷ 45 = 40% Strategy: Designate the salaried and hourly benefits as separate plans• Each plan must pass an eligibility test and the benefits test on its own• Only the benefits within each separate plan need to pass the benefits test • Requires specific plan document language

Different Benefits for Different Groups: It’s Possible

Salaried“Testing Plan”

Hourly“Testing Plan”

Total

Top 25% in wages (HCIs) 13 2 15

Lower 75% in wages (NHCIs) 27 18 45

Total non-excludable 40 20 60

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The “Operational” Benefits Discrimination TestApart from the plan design, favoring HCIs “in operation” can also result in benefit discrimination

• EXAMPLE: ABC Co. amends its medical plan to increase coverage for surgical expenses just prior to the CEO being admitted to a hospital for back surgery, and in the following year the coverage reverts to the former level

Not a “Use” test:• The fact that HCIs participating in a plan “utilize a broad range of

plan benefits to a greater extent than do other employees participating in the plan” does not alone create a discriminatory plan

105(h) Benefits Test

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Cafeteria Plan Testing Highlights

• Several tests apply to cafeteria plans (Code Section 125) –

• Key employee concentration test: No more than 25% of all nontaxable benefits under the cafeteria plan may be for the group composed of officers with annual compensation greater than a specified dollar threshold (indexed, $170,000 for 2015), more-than-5% owners, and more-than-1% owners with compensation over $150,000 (not indexed)

• Eligibility test: A ratio-percentage test similar to that under 105(h), but with key differences (for example, HCIs include officers, more than 5% shareholders, employees with compensation over $115,000 (indexed), as well as spouses and dependents of the foregoing)

• Benefits test: A utilization standard is imposed, making it more difficult to pass if HCI usage is higher than non-HCI usage

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Cafeteria Plan Testing Highlights

• Premium Only Safe Harbor: If a cafeteria plan’s only feature is pre-tax premium payments, and it passes the safe harbor ratio percentage eligibility test, the key employee concentration and the benefits tests are deemed satisfied

• Dependent Care Flexible Spending Account Average Benefit Test: Average DCAP benefit for non-HCIs must be at least 55% of the average benefit for HCIs (using cafeteria eligibility definition of HCI)

• Dependent Care Owner Benefit Concentration Test : No more than 25% of the total dependent care benefits can be paid to individuals who are more-than-5% owners (or their spouse or dependents)

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TPA Cafeteria Plan Testing Alert

Although many flex administration firms purport to conduct “testing,” common shortcomings arise due to:• Failure to test on required controlled group basis• Conducting some, but not all, required tests• Failure/inability to evaluate alternative tests• Use of data limited to participants, but not accounting for non-

participants, leased workers, and others• Common TPA Error: Code Section 125 does not exclude part-

time employees from the testing procedure, so if data on part-time employees is not provided to a TPA, its testing is, by definition, inaccurate

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“Simple Cafeteria Plan”- Test Avoidance Strategy

“Simple” Cafeteria Plans: Benefits under a “simple” cafeteria plan (new under the ACA) are not subject to these tests as long as certain minimum contributions are made by the employer to the plan. Many small employers may be able to restructure existing employer contributions to meet the minimum contribution requirements without additional out-of-pocket expenditures.

• Eligible employers are generally those with 100 or fewer employees.

• The employer must make a uniform contribution for all eligible employees in one of two ways:– 2% of the employee’s compensation for the plan year, or– A minimum matching contribution that is the lesser of 100% of the employee’s

elected salary reduction contribution or 6% of the employee’s annual compensation

• Employers may exclude from eligibility employees (i) under age 21, (ii) with less than 1 year of service, (iii) with less than 1000 hours of service in the prior year, and (iv) under collective bargaining agreements, as well as certain nonresident aliens.

• Awaiting guidance as to whether simple cafeteria plans avoid health reform’s new nondiscrimination test for insured medical plans.

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THE MATERIAL IN THIS PRESENTATION IS PROVIDED AS A GENERAL INFORMATIONAL SERVICE AND SUBJECT TO CHANGE DUE TO LATER GUIDANCE AND LEGISLATION. IT SHOULD NOT BE CONSTRUED AS,

AND DOES NOT CONSTITUTE, LEGAL ADVICE ON ANY SPECIFIC MATTER, NOR DOES THIS DOCUMENT OR MATERIAL CREATE AN

ATTORNEY-CLIENT RELATIONSHIP.

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• Mark Major’s 30 years of experience as an employee benefits attorney includes fourteen years as in-house ERISA counsel for three corporations and ten years as a lead compliance attorney for Mercer Consulting. Prior to these positions, he was in private practice handling tax, estate planning and benefit matters.

• Now with his own specialty health, welfare and retirement benefits law practice, Mark continues to support large and small employers, as well as plan administrators. Recent activities include governance and fiduciary assessment and training, wellness program compliance, dependent eligibility audits, COBRA, merger and acquisition transaction support, HIPAA privacy and security, nondiscrimination testing and strategy, plan documents, vendor contracts, and general compliance review and strategy under federal and state laws, including health reform.

• Mark has presented at many webinars and conferences including the state and local Colorado Health Underwriters Associations, Annual Colorado Culture of Health Conference, ISCEBS Employee Benefits Symposium, Mountain States Employer Council Employee Benefits Conference, and webinars for the International Foundation of Employee Benefit Plans and EBIA.

• Mark received his BA summa cum laude, from Creighton University, and his Juris Doctor, magna cum laude, from the Creighton University School of Law. He is a member of the Colorado and Denver Bar Associations.

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Mark W. Major, J.D.

Law Office of Mark W. Major, P.C. Phone: 720-331-5457P.O. BOX 4352 E-mail: [email protected], CO 80155 Website: www.MajorLawOffice.com

AGGREGATED EMPLOYERS AND DISCRIMINATION TESTING CONCEPTS Presented by: Mark Major, Esq. Law Office...

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Transcript of AGGREGATED EMPLOYERS AND DISCRIMINATION TESTING CONCEPTS Presented by: Mark Major, Esq. Law Office...