IRS Controlled Group Designation and its Impact on ALE Status and ACA Compliance

Understanding Controlled Groups Under the ACA

The Affordable Care Act (ACA) introduced complex requirements for employers offering group health coverage. At the center of ACA compliance is the Applicable Large Employer (ALE) designation, which determines whether an employer must offer health insurance and report coverage to the IRS.

But ALE status isn’t always determined at the individual company level. The IRS Controlled Group designation plays a pivotal role, especially for business owners who operate multiple entities. Misunderstanding this rule can lead to costly penalties, missed filings, and noncompliance with ACA mandates.

What Is a Controlled Group?

A controlled group is defined by the IRS as a set of two or more businesses that are connected through common ownership or control. These businesses, whether corporations, partnerships, LLCs, or sole proprietorships, must be evaluated as a unit when determining employer responsibilities under federal tax and healthcare laws.

The IRS recognizes three main types of controlled groups:

1. Parent-Subsidiary Group

This structure exists when one entity owns at least 80% of another business. Ownership is direct and hierarchical.

2. Brother-Sister Group

In this scenario, five or fewer common owners (individuals, estates, or trusts) own:

At least 80% of two or more entities and
More than 50% of those entities with identical ownership

This applies even if the businesses operate independently.

3. Combined Group

A hybrid of the first two, a combined group involves three or more organizations connected through both parent-subsidiary and brother-sister relationships.

Why Controlled Group Status Matters for ACA Compliance

The ACA uses controlled group rules to prevent businesses from segmenting employees across multiple entities to avoid compliance. When businesses fall under a controlled group, they must combine their full-time employees and full-time equivalent (FTE) hours to determine ALE status.

Controlled Group → Shared ALE Status

If the total employee count across the group meets or exceeds 50 full-time employees or FTEs, then each entity is considered an ALE, regardless of its individual size.
If the aggregate count is under 50, none of the companies within the group are subject to ACA employer mandates.

Key point: Controlled group status can pull smaller entities into ALE territory and trigger full ACA compliance obligations.

ACA Responsibilities for Controlled Group Members (ALEMs)

Once a controlled group is deemed an ALE, each business within that group becomes an Applicable Large Employer Member (ALEM) and must meet individual ACA compliance requirements.

Here’s what each ALEM must do:

1. Offer Compliant Coverage

Each ALEM must offer:

Minimum Essential Coverage (MEC) to 95% or more of its full-time employees and their dependents
Coverage that is affordable and meets Minimum Value (MV) standards

Failing to meet these requirements can result in Employer Shared Responsibility Penalties (ESRP) under Section 4980H of the Internal Revenue Code.

[Internal link: Consider linking to SBMA’s MEC, MVP, and Limited Medical Plans for ACA-compliant offerings]

2. File ACA Reports with the IRS

Each ALEM must file:

Form 1094-C (transmittal summary)
Form 1095-C (for each full-time employee)

Even if a business within the group employs only a small number of workers, it must still file and report if the controlled group qualifies as an ALE.

Note: Penalties are often applied at the ALEM level, meaning a single reporting failure by one entity can result in fines, even if the rest of the group is compliant.

Real-World Implications for Employers

If you operate multiple businesses or have shared ownership structures, you must evaluate controlled group status annually. Overlooking this step can expose your company to:

Unexpected ACA reporting requirements
Penalties for failing to offer or report coverage
Disruption to employee benefits strategy across entities

At SBMA, we work with employers across industries, including construction, hospitality, retail, and healthcare, to ensure that compliance, cost control, and coverage are addressed as part of a unified benefits strategy.

Who Should Pay Attention?

The following types of business owners and HR leaders should proactively assess controlled group status:

Owners of multiple franchises or LLCs
Professional service firms with separate legal entities under shared ownership
Family businesses with ownership split across siblings or relatives
Businesses that have acquired or merged with other entities in the past year

If any of these apply to your organization, controlled group designation could change your ALE status, and your compliance requirements.

Next Steps: Simplify Compliance with SBMA

Navigating the IRS controlled group rules and ACA compliance isn’t optional, it’s a legal requirement. But it doesn’t have to be complicated.

SBMA delivers ACA-compliant plan structures, fast enrollment, and industry-leading technology that helps you stay compliant, reduce costs, and provide usable benefits, whether you manage one entity or five.

Reach out to learn more about plan options and ACA-compliant solutions built for complex ownership structures.