By: HUB’s EB Compliance Team

When individuals own parts of more than one business entity, those entities may be looked at as a single entity or as separate entities for certain purposes. Whether these entities are looked at together or separate depend on the exact ownership of those entities and whether the ownership meets IRS requirements for a controlled group. Whether or not entities are part of a controlled group can have wide-ranging benefits implications. 

What are Controlled Groups?

In oversimplified terms, a controlled group can exist when five or fewer individuals own at least 80% of multiple business entities and their overlapping ownership between companies is at least 50%. It can also exist where one entity (a parent entity) owns at least 80% of the equity of another entity (a subsidiary entity), either directly or through other entities. In truth, controlled groups are much more complex, especially when ownership is held by another business entity, trust or estate, when stock attribution rules are applied, and when there are multiple classes of shares. There are also special rules that apply to entities that hold themselves out together as performing services, even if there is little or no common ownership, and for tax-exempt entities. The determination of whether a controlled group exists should be made by legal counsel or a CPA with intimate knowledge of the ownership structure and the controlled group rules that apply for benefits purposes, as it can be a very fact-intensive process. 

While a full description of how to determine controlled group status is beyond the scope of this article, controlled group status can dictate several compliance obligations. In the examples below we’ll assume that Ross, Rachel, Phoebe and Joey each own 25% of each of Dinosaur Tours Unlimited (“DTU”) a company that takes people on tours of archaeological sites where dinosaur bones have been found, and Central Perk Coffee (“CPC”), a coffee shop. Assume that, as a result, DTU and CPC are part of a controlled group. DTU employs approximately 200 full-time employees while CPC employs 10 full-time employees and 6 part-time employees. 

Effects of Being in a Controlled Group

The Affordable Care Act (“ACA”)

Under the ACA, employers with 50 or more full-time equivalent employees must offer affordable, minimum value coverage or potentially be subject to penalties. The controlled group rules do apply here. Using our example, this means CPC is subject to the ACA employer mandate by virtue of their common ownership with DTU, even though CPC by itself does not have 50 full-time equivalent employees. If CPC did not have common ownership with DTU, CPC would not be subject to the ACA employer mandate.

The common ownership between DTU and CPC also means that CPC must complete ACA reporting by filing and Forms 1095-C and 1094-C with the IRS and distributing Forms 1095-C to employees. In Part III of form 1094-C, DTU will list CPC as an ALE member and CPC will do the same for DTU. This communicates to the IRS that these entities share common ownership and thus the employer mandate applies to both. 


COBRA applies to employers with 20 or more employees on a typical business day during the preceding calendar year. The controlled group rules apply here as well, so once again, CPC is subject to COBRA due to their common ownership with DTU. This is especially important to note if employees of CPC are offered different benefits than employees of DTU. If the CPC benefits are fully-insured and their insurance carrier isn’t aware of the common ownership, they won’t know that COBRA needs to be offered under the CPC plans.  Often, the carrier will ask if a company is part of a controlled group on the group’s initial application.

Non-Discrimination Rules

The Internal Revenue Code contains two sets of non-discrimination rules designed to prevent health and welfare plans from favoring highly compensated employees in their benefits. The Section 125 rules apply to all pre-tax benefits and the Section 105(h) rules apply separately to self-insured plans. Both of these rules indicate that, absent an exception, entities within a controlled group are looked at together. 

Medicare Secondary Payer Rules

The Medicare Secondary Payer rules generally apply, with certain limited exceptions, to employers with 20 or more employees for each working day in at least 20 weeks in either the current or the preceding calendar year. These rules prohibit employers from taking into account the Medicare entitlement of a current employee or a current employee's spouse or family member. In addition to determining whether the employer plan or Medicare pays primary or secondary, these rules also prevent employers from incentivizing Medicare eligible individuals to enroll in Medicare rather than the employer group health plan.

Here again, the controlled group rules apply. If it weren’t for their common control, the health plan of CPC could pay secondary to Medicare and CPC wouldn’t be prohibited from incentivizing employees or their spouses to enroll in Medicare. However, since they are part of a controlled group, they cannot.


While HUB cannot advise on controlled group status, HUB can provide education on the rules that must be followed when there is a controlled group like those described above and consult on the benefits of being a controlled group. Chief among those benefits is the ability to offer the same benefits to employees of different entities within the controlled group. Depending on the number of employees in each controlled group member, combining benefits may bring economies of scale through potentially exploring plan funding options (such as moving from fully-insured to self-insured) not feasible for one entity on its own, as well as the ability to administer a single plan rather than multiple. Importantly, organizations need to work with their legal counsel or CPA to understand if they are part of a controlled group so they can understand their compliance obligations.   

If you have any questions, please contact your HUB Advisor. You can also view more compliance articles in our Compliance Directory.


The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.