The House Small Business Committee held a hearing to determine whether businesses are considered single or multiple entities under the health care reform law, and the compliance ramification for multi-owner business ownership.

"As we are all aware, the new health care law requires businesses that employ 50 or more employees who work an average of 30 or more hours per week, ‘full-time’ in the law’s definition, to offer health insurance or pay a penalty,” said Rep. Chris Collins, R-N.Y., who chaired Wednesday’s hearing of the House Committee on Small Business.  “A critical [issue] with the law is the definition of ‘employee,’ but equally important is the issue of which—and how many—employees are attributed to a business.  The answer may be simple for one business with a single owner.  However, when an individual shares ownership of multiple entities, or when a business has multiple owners, the answer is less clear.”

According to the National Federation of Independent Business, 39 percent of small businesses with 20 or more employees own at least 10 percent of one or more other businesses, Collins noted.  To determine if the threshold of 50 or more employees has been met in these situations, the Affordable Care Act uses the Tax Code’s complex and confusing “controlled group business aggregation rules.”

“Some experts have suggested that most small business owners could not interpret these rules without the guidance of a tax specialist,” Collins said in his opening statement.

Donna Baker, CPA, a tax practitioner and accountant in the rural town of Adrian, Mich., was one of the witnesses testifying at the hearing.

“The business aggregation rules in the Affordable Care Act will have a negative impact on small businesses,” she said in her prepared testimony. “The aggregation rules require any group of companies under “common control” to be treated as a single employer. The primary key in determining which companies are combined is direct or attributed ownership, not operational control. The attributed ownership rules may cause unrelated businesses held by family members or trusts to be aggregated. Companies within a controlled group do not need to have the same management or operate in the same industry. All employees of the controlled group must be considered in determining if the health insurance mandate applies. These rules could cause employers to delay growth, manipulate ownership percentages or limit employees to less than 30 hours, discourage small businesses from investing in other businesses, and require health insurance coverage in industries where this is not the norm which will affect a businesses ability to compete.”

The aggregation rules are vast and detailed, Baker noted. “They are rarely used by small business and small business advisors. The level of complexity and the unfamiliarity could create inaccurate application of the rules.”

Another CPA, Deborah Walker, national director of compensation and benefits at the CPA firm Cherry Bekaert MMLP, also testified. She noted that in order to determine if an employer is subject to the shared responsibility rules of the Affordable Care Act, the employer must determine if at least 50 full-time equivalents are employed on business days during the preceding taxable year. Prior to making this calculation, the business needs to determine what trades or businesses comprise the employer. The employer includes the business and related entities, including entities related by common ownership and by attribution of ownership from one party to another, and certain other businesses that provide services to the business.

“To make the determination, one needs detailed ownership rules and business relationships between the entities,” Baker added. “The rules used by the Affordable Care Act are the same rules used for determining if qualified retirement plan benefits are available on a nondiscriminatory basis to a fair cross-section of employees. The use of bright-line tests has enabled tax planners to structure arrangements to avoid the application of the rules. Because the rules have been developed over a number of years to counteract avoidance of the rules by tax planners, they are voluminous and extremely detailed. In the health care context, this is a test that will only be used by businesses close to exceeding the 50-employee limit and, as businesses grow or decline the need for applying the test evaporates. Such a complicated test for such few taxpayers is not warranted."

Employers who are close to exceeding the limit might also make business decisions that would result in decreased hiring by taking into account the increased cost of mandated health care, experts have warned.

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