How Controlled Group Rules Affect ALE Testing & ICHRA Offers

Navigating health benefits and ACA compliance can feel like a maze, especially if you own or manage multiple businesses. You might think each company stands on its own, but the IRS often sees things differently. These “controlled group” rules require businesses with common ownership to be treated as a single entity for key regulations. Understanding how controlled group rules affect ALE testing and ICHRA offers is essential for maintaining compliance.

In short, these rules force you to combine the employees of all related companies when determining if you are an Applicable Large Employer (ALE) subject to the ACA mandate. If the combined total exceeds 50 full-time equivalent employees, every company in the group becomes an ALE. This then dictates that any ICHRA you offer must meet specific affordability and reporting requirements to satisfy the mandate for each of those companies. Let’s break down the details.

First, What is a Controlled Group?

Under IRC Section 414, a controlled group is a set of two or more businesses connected by common ownership. The IRS treats these businesses as a single employer for many benefits and tax purposes. Think of it as a family of companies. Even if they operate independently, their shared ownership links them together in the eyes of the law.

The main threshold for this connection is typically 80% common ownership. The IRS defines three primary types of controlled groups.

Parent Subsidiary Controlled Groups

This is the most straightforward structure. It exists when one company (the parent) owns at least 80% of the stock (by voting power or value) of another company (the subsidiary). You can have chains of these, where the parent owns a subsidiary, which in turn owns another subsidiary. As long as the 80% ownership link is maintained, they are all part of one parent subsidiary group.

Brother Sister Controlled Groups

This type involves a small group of people (five or fewer individuals, trusts, or estates) who own multiple businesses. To qualify as a brother sister group, two tests must be met:

1. 80% Controlling Interest: The same five or fewer owners must collectively own at least 80% of each business.
2. 50% Effective Control: The same owners must have more than 50% identical ownership across the companies. “Identical ownership” is the smallest percentage an individual owns in any of the companies.

If both conditions are met, the companies are treated as a single employer, even without a formal parent company.

Combined Controlled Groups

As the name suggests, this is a hybrid. A combined group exists when a company is both the parent in a parent subsidiary group and a member of a brother sister group. This rule effectively links all the entities together into one large, combined controlled group for compliance purposes.

The Big Impact: Determining Your ALE Status

So, why does this all matter? The most significant reason is for determining Applicable Large Employer (ALE) status under the Affordable Care Act (ACA). This status dictates whether you are subject to the employer mandate.

The Employer Aggregation Rule

The ACA’s employer aggregation rule is simple: to see if you’re an ALE, you must combine the employees of all companies within a controlled group. If the total average number of full time employees (including equivalents) was 50 or more in the previous calendar year, then every single company in that group is considered an ALE.

This is a critical point. A company with only 15 employees could be an ALE if its owner also has a 90% stake in another business with 40 employees. Together, their 55 employees push both companies over the threshold. Understanding how controlled group rules affect ALE testing and ICHRA offers starts with this aggregation principle.

Calculating Your Total Employee Count

To determine if your group hits the 50 employee mark, you need to do a specific calculation for the prior calendar year.

1. Count Full Time Employees: For each month, count every employee who averaged at least 30 hours of service per week (or 130 hours that month).
2. Calculate Full Time Equivalents (FTEs): For each month, add up the total hours worked by all your part time employees (capping each individual at 120 hours) and divide that sum by 120. This gives you your FTE count for the month.
3. Find the Monthly Total: Add your full time employees and your FTEs together for each of the 12 months.
4. Calculate the Annual Average: Sum up the 12 monthly totals and divide by 12. If the result is 50 or greater (after rounding down), your controlled group is an ALE.

A Few Key Exceptions: Seasonal and Foreign Workers

The ACA includes a couple of important exceptions to this count:

• Seasonal Worker Exception: If your employee count only exceeded 50 for 120 days or fewer during the year, and the employees who pushed you over the limit were seasonal workers (like holiday retail staff or harvest workers), you are not considered an ALE.
• Foreign Workers: For global companies, only employees working in the United States are included in the ALE calculation. A company with 1,000 employees in Europe and only 20 in the U.S. would not be an ALE based on its U.S. headcount.

Good News: Penalty Liability Is Assessed Separately

While you must aggregate employees to determine ALE status, the good news is that penalty liability is not shared. If one company in an Aggregated ALE Group fails to offer compliant coverage and incurs a penalty, that specific company (by its EIN) is responsible for paying it. The other members of the group are not on the hook, assuming they met their own obligations.

Offering an ICHRA as an Aggregated ALE

Once your controlled group is determined to be an ALE, each member company must comply with the ACA employer mandate. Offering an ICHRA is a popular and flexible way to do this. But it comes with its own set of rules, especially concerning affordability.

The 95% Offer Requirement

To avoid the most severe ACA penalty (the “A” penalty), an ALE must offer Minimum Essential Coverage (MEC) to at least 95% of its full time employees and their dependents. Dependents are defined as an employee’s children up to age 26; offers to spouses are not required. Failing to meet this 95% threshold can lead to significant fines if even one full time employee receives a subsidy on the marketplace.

Does an ICHRA Satisfy ACA Requirements?

Yes, an ICHRA can be a great tool for ALEs. Here’s how it works:

• Minimum Essential Coverage (MEC): An ICHRA offer counts as an offer of MEC, provided the employee enrolls in a qualifying individual health plan. Since employees must have individual coverage to use their ICHRA, this requirement is met for anyone who participates.
• Minimum Value (MV): The rules are even simpler here. If an ICHRA is considered affordable for an employee, it is automatically deemed to provide Minimum Value.

This means that by offering an affordable ICHRA, an ALE can satisfy both key components of the ACA mandate. It’s crucial to ensure every employee using the ICHRA has proven they have MEC. A platform like SimplyHRA helps by automating MEC verification, ensuring your HRA stays compliant and protecting you from risk. See how SimplyHRA keeps you compliant.

Calculating ICHRA Affordability: The Lowest Cost Silver Plan

The core of ICHRA compliance is affordability. An offer is affordable if an employee’s required contribution for the lowest cost self only Silver plan in their area does not exceed a certain percentage of their household income. This percentage changes annually (it was 8.39% in 2024).

The formula is:
(Lowest Cost Silver Plan Premium - Monthly HRA Amount) ≤ (Employee’s Household Income x Affordability %) / 12

If an ICHRA offer is affordable, the employee is not eligible for premium tax credits on the marketplace. If it’s unaffordable, they can decline the HRA and get a subsidy, which could expose the employer to a penalty.

Managing Remote and Multi Location Workers

The complexity of how controlled group rules affect ale testing and ichra offers is magnified with a distributed workforce. Because insurance premiums vary by location, a single HRA allowance might be affordable in one city but unaffordable in another.

ICHRA rules allow employers to create different employee classes based on geographic rating areas and offer them different allowance amounts. For remote workers, their primary site of employment is their residence (if they have no assigned office) or their assigned office location. An HRA administration platform is almost essential here, as it can automatically pull the correct local premium data for every employee, no matter where they live or work.

Safe Harbors: Simplifying Affordability and Reporting

Because you don’t know an employee’s household income, the IRS provides several safe harbors to make proving affordability much easier.

Income Based Safe Harbors

Instead of using household income, you can use one of these three figures:

• W2 Safe Harbor: Based on the wages reported in Box 1 of the employee’s Form W2.
• Rate of Pay Safe Harbor: For hourly employees, you multiply their hourly rate by 130 hours. For salaried employees, you just use their monthly salary.
• Federal Poverty Line (FPL) Safe Harbor: You ensure the employee’s contribution is no more than the affordability percentage of the FPL for a single individual. This is the simplest method, as one dollar amount applies to everyone.

Choosing the right safe harbor is a key strategic decision. Platforms like SimplyHRA have built in affordability calculators that model these safe harbors, helping you design a plan that is both compliant and cost effective.

Timing and Location Safe Harbors

Two other safe harbors simplify the logistics:

• Lookback Month Safe Harbor: Allows you to use the Silver plan premiums from January of the prior year, giving you plenty of time to set allowances without waiting for new rates to be released.
• Location Based Safe Harbor: Lets you use the premium from an employee’s primary worksite instead of their home address, which is much easier to track.

ACA Reporting Requirements for an ICHRA

Every ALE member in a controlled group must file its own ACA reports. There is no combined filing. This involves providing each full time employee with a Form 1095 C and submitting copies to the IRS with a Form 1094 C transmittal.

The IRS has specific codes for ICHRA offers that must be used on Form 1095 C (for example, Code 1L or 1M). Getting these codes right is critical for avoiding reporting penalties. Modern HRA platforms can auto generate these forms, saving countless hours and reducing the risk of errors.

These rules can seem overwhelming, but they are manageable. Understanding how controlled group rules affect ALE testing and ICHRA offers is the foundation. With the right strategy and tools, you can offer a flexible, modern health benefit that works for your employees and keeps your businesses compliant.

Ready to see how an ICHRA can work for your controlled group? Schedule a free consultation with a SimplyHRA expert today.

Frequently Asked Questions

1. What happens if I don’t realize my businesses form a controlled group?

Failing to identify a controlled group can lead to serious consequences. You might incorrectly determine you are not an ALE, fail to offer coverage, and then face significant ACA penalties. It can also lead to issues with retirement plan compliance. It’s crucial to review your ownership structure with legal or tax counsel.

2. Can one company in a controlled group offer an ICHRA while another offers a traditional plan?

Yes. While all companies in an Aggregated ALE Group are subject to the employer mandate, each company can choose its own method of compliance. One ALE member could offer an ICHRA, another a traditional group health plan, and a third could decide to pay the penalty, as long as each entity handles its own compliance.

3. How often do I need to test for ALE status?

ALE status is determined annually based on your employee data from the previous calendar year. You should conduct an analysis at the end of each year to determine your status for the upcoming year.

4. What is the easiest ICHRA affordability safe harbor to use?

The Federal Poverty Line (FPL) safe harbor is generally considered the simplest to administer. It uses a single, federally set income level, meaning you can set one contribution threshold that you know is affordable for every employee, regardless of their actual pay. The tradeoff is that it often requires a higher employer contribution.

5. How do controlled group rules affect benefits other than health insurance?

The rules are not limited to the ACA. Controlled group status also impacts compliance for other employee benefits, most notably retirement plans like 401(k)s. The rules are used for nondiscrimination testing to ensure plans do not unfairly favor highly compensated employees across the entire group.