[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE HEALTH CARE LAW: THE EFFECT OF THE BUSINESS AGGREGATION RULES ON
SMALL EMPLOYERS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
DECEMBER 4, 2013
__________
[GRAPHIC(S) NOT AVAILABLE TIFF FORMAT]
Small Business Committee Document Number 113-046
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Chris Collins............................................... 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Deborah Walker, CPA, National Director, Compensation & Benefits,
Cherry Bekaert LLP, Tysons Corner, VA.......................... 3
Sibyl Bogardus, JD, Chief Compliance Officer, Western Region
Employee Benefits, Hub International Insurance Services Inc.,
Salt Lake City, UT............................................. 5
Ellis Winstanley, Chief Executive Officer, Tradelogic
Corporation, Austin, TX, testifying on behalf of the National
Restaurant Association......................................... 8
Donna Baker, CPA, Donna Baker & Associates, Adrian, MI........... 10
APPENDIX
Prepared Statements:
Deborah Walker, CPA, National Director, Compensation &
Benefits, Cherry Bekaert LLP, Tysons Corner, VA............ 34
Sibyl Bogardus, JD, Chief Compliance Officer, Western Region
Employee Benefits, Hub International Insurance Services
Inc., Salt Lake City, UT................................... 52
Ellis Winstanley, Chief Executive Officer, Tradelogic
Corporation, Austin, TX, testifying on behalf of the
National Restaurant Association............................ 93
Donna Baker, CPA, Donna Baker & Associates, Adrian, MI....... 106
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Statement submitted by Linda R. Mendel, Counsel, Columbus,
Ohio office of Vorys, Sater, Seymour and Pease L.L.P., and
Mark A. Bodron, Partner, Baker Botts L.L.P................. 111
THE HEALTH CARE LAW: THE EFFECT OF THE BUSINESS AGGREGATION RULES ON
SMALL EMPLOYERS
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WEDNESDAY, DECEMBER 4, 2013
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in Room
2360, Rayburn House Office Building. Hon. Chris Collins
presiding.
Present: Representatives Collins, Luetkemeyer, Tipton,
Huelskamp, Schweikert, Bntivolio, Velazquez, Hahn, Payne, Meng,
and Barber.
Mr. COLLINS. [Presiding] Good afternoon. I call this
meeting to order.
As we are all well aware, the health care law requires
businesses that employ 50 or more full-time or full-time
equivalent employees to offer health insurance or pay an
employer mandate penalty or tax. A critical issue is the
definition of employee, but equally important is the issue of
which and how many employees are attributed to the 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.
Today, we will examine the process of determining whether
businesses are considered single or multiple entities under the
healthcare law, which requires business owners to aggregate
employees and could subject the business to the Obamacare
employee mandate. 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. To determine if the threshold of 50 or more
employees has been met in these situations, the health care law
utilizes the Internal Revenue Service code controlled group
business aggregation rules, which are complex and confusing
even for experts. Some experts have suggested that most small
business owners could not interpret these rules without the
guidance and related cost of a tax specialist. Despite the
administration's promises that the health care law would help
small businesses, each week seems to bring entrepreneurs more
bad news, more costly regulations, more uncertainty, and less
incentive to grow their business and create jobs.
A recent U.S. Chamber of Commerce International Franchise
Association survey found that 53 percent of small business
owners believe the law will have a negative impact on their
business. In our challenging economy, many small business
owners are simply not hiring or are reducing worker hours to
avoid the employer mandate.
Thank you to this outstanding panel of witnesses who have
taken time from their busy schedules to be here today. We do
look forward to your testimony.
I now yield to Ranking Member Velazquez for her opening
statement.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Small businesses are the backbone of our economy, but in
the past high health care costs and declining coverage have
hindered small business owners under employees. These factors
have hampered our nation's entrepreneurial progress and held
back small businesses. In fact, the chairman mentioned NFIB and
the U.S. Chamber of Commerce. They have conducted surveys about
small businesses, asking them what is the main issue that they
are concerned about. They talk about the cost of health
insurance and being able to provide it. In fact, 62 percent of
small businesses in this country provide no health insurance to
their employees, their families, or themselves. So if anything,
this law will enable small businesses to participate in the
exchanges so that we have a larger pool, and in the process we
will bring premium costs down because that will provide the
kind of leverage that will enable them to negotiate good
premiums.
But the Affordable Care Act has changed the health care
landscape for small firms. It has expanded coverage options,
increased purchasing power, and gave consumers control over
their own health care. Yet, as with any law of this magnitude,
some fixes will need to be made along the way. It happens every
day. That is what the legislative process is all about. We pass
laws, we implement them, and we will fix what needs to be
fixed, that is what the mechanism of legislation is all about.
That means listening to the feedback of those most affected and
working together to ensure small firms secure quality,
affordable health care.
Today we will do just that by hearing from witnesses about
a complicated issue. The health care law includes an employer
mandate that requires businesses with more than 50 full-time
employees to provide health insurance. Its goal is to
discourage employers from dropping coverage and leaving
employees on their own to find insurance. While the enforcement
of this rule has been delayed until 2015, many small employers
must begin adopting now.
This hearing will focus on a particular area of the law
that many small firms may not be familiar with, the business
aggregation rules. Traditionally, this rule has been used to
treat a separate business as a single employer for purposes of
retirement plans. This is not new. It is on the books when it
comes to benefit plans. This tax rule will incorporate it into
proposed regulations to deter entities from splitting into
smaller companies with the purpose of avoiding the employer
mandate. The intent behind this regulation is admirable, but I
remain concerned about how these very complex rules will impact
small firms. What kind of outreach, what kind of resources will
be in place to assist small businesses so they understand the
rule and how to abide by the rule.
I am sure it came as little surprise to many tax experts
that these rules are being employed to determine business
sizes. Unfortunately, for many small, family-owned businesses
and franchise owners, these rules are not commonplace. For that
reason, we must consider how the business aggregation rules
impact many entrepreneur business models. Though some small
employers have already been applying this rule to comply with
ERISA, other firms have a steep learning curve ahead of them.
I hope our hearing today provides more information on just
how many small employers currently navigate this rule and how
many more will be newly affected. Our witnesses today will help
walk us through these complicated standards on how best to
educate owners of their nuances. With careful planning and
proper outreach, small employers may avoid many pitfalls when
complying with new obligations under the Affordable Care Act.
I thank all the witnesses for being here, and I look
forward to our insightful comments. Thank you very much, Mr.
Chairman. I yield back.
Mr. COLLINS. Our first witness today is Deborah Walker. Ms.
Walker is a certified public account and the National Director
of Compensation and Benefits for Cherry Bekaert, LLP, in Tysons
Corner, Virginia. She advises small and large businesses on
compensation, benefits, and employment tax matters. Welcome,
and you have five minutes.
STATEMENTS OF DEBORAH WALKER, CPA, NATIONAL DIRECTOR,
COMPENSATION AND BENEFITS, CHERRY BEKAERT, LLP; SIBYL BOGARDUS,
CHIEF COMPLIANCE OFFICER, WESTERN REGION EMPLOYEE BENEFITS, HUB
INTERNATIONAL INSURANCE SERVICES, INC.; ELLIS WINSTANLEY, CHIEF
EXECUTIVE OFFICER, TRADELOGIC CORPORATION, ON BEHALF OF THE
NATIONAL RESTAURANT ASSOCIATION; DONNA BAKER, CPA, DONNA BAKER
& ASSOCIATES.
STATEMENT OF DEBORAH WALKER
Ms. WALKER. Good afternoon, Chairman Collins, Ranking
Member Velazquez, and members of the Committee. Thank you for
hosting this important hearing on the effect of the business
aggregation rules on small business in applying the healthcare
provisions. I am Deborah Walker, a CPA with over 35 years of
experience in the employee benefits area.
To determine if the employer is subject to the shared
responsibility rules of the Affordable Care Act, the business
needs to determine who the employer is, and that determination
is made by looking at related entities, related by common
ownership, related by attribution, and also by services that
the entities provide to each other. To make the determination,
one needs to understand detailed ownership and the services
that are provided to each other. My written submission
describes these rules in excruciating detail, and I can assure
you that no one would apply the rules in a complex situation
without looking at the regulations.
The rules, as mentioned, used by the Affordable Care Act
are the same rules used for determining whether qualified
retirement plan benefits are provided on a nondiscriminatory
basis to a fair cross-section of employees. Those rules for
retirement plans are voluntary, not mandatory. In addition,
because we are looking at bright-line tests, bright-line tests
offer the opportunity as evidenced by the qualified plan rules
of ways to plan around them. In other words, for people to
avoid the rules. In addition, because they are bright-line
tests, it often happens that the application does not make as
much sense as it otherwise may.
In the healthcare context, whether we looking at whether we
have 50 employees or not, it is a complicated test for the few
taxpayers that are nearing the 50-employee limit. One can
expect that those employers nearing the 50-employee limit
would, in fact, consider the increased healthcare cost in
deciding whether to hire additional workers. It will lead to
inefficient and unwarranted economic behavior.
Many small employers, as mentioned, offer a retirement
plan, a 401(K) Safe Harbor Plan. They do not even need to apply
these rules because they are not subject to the discrimination
tests due to the safe harbor. The small businesses could not do
this without advice, and many of the advisors for small
business are not familiar with the rules. So therefore, I offer
an alternative suggestion, and it is a suggestion that would be
a facts and circumstances test. It would look to who is the
individual who hires, that fires, and makes purchasing
decisions, that sets prices, who operates that business on a
day-to-day basis. And in that case, we do not have to worry
about who is merely a passive investor and aggregate those
entities. By focusing on control of day-to-day operations, the
employer would be defined by the industry in which that
employer individual operates, and it would not affect the
competitive position of the business. The opportunity to avoid
the bright-line test through planning would not be available,
and the unwanted effects of a bright-line test would not exist.
Now, this facts and circumstance idea is not new. We use it
and have in the tax law for years--30, 40 years in determining
whether somebody is an employee or independent contractor. And
people tried in the 1980s to have certainty with determining
whether somebody was an employee or independent contractor, and
it was determined that there were too many varied situations
between service providers and recipients, and it was too hard
to draw a hard and fast bright-line rule, and bright-line rules
would be circumvented.
So what we have is a 20-factor test. The 20-factor test,
there is not specific weight to any factor. In fact, the weight
of the factors changes depending on the industry. And any
advisor and the IRS reviews the 20 factors, reviews the
particular situation, and makes a judgment call. It is a facts
and circumstances test subject to everybody's judgment, of
course, subject to audit.
There is another place where we talk about separate lines
of business. This is also in the qualified retirement plan
area, a separate line of business. It is a portion of an
employer identified by property and services that are provided
to a customer. So the regulations define what is a separate
line of business and it has to be organized individually. There
has to be a distinct profit center, and there can be no more
than moderate overlap between employees and management. A rule
such as that, more of a facts and circumstances test, may be
more appropriate.
Of course, as I mentioned, the determination is always
subject to audit by the IRS. The rules could require a notice
requirement. The rules could also have a procedure, such as
they do for separate line of business and employee independent
contractors where, in fact, the two businesses could apply to
the IRS for the IRS to make a determination.
To summarize, the mechanical test used for qualified plan
rules are overly complex and understood by only a limited
number of tax professionals. A small business cannot apply them
without professional help. It is a small subset of
professionals that deal with these rules, and these rules are
only going to apply for businesses for a few years of their
lifecycle when they are close to the 50-employee test. For that
reason, facts and circumstances to me, based on who controls
day-to-day businesses, is a much more logical rule. The statute
or communique reports could list characteristics of management
and control and taxpayers would be able to make a judgment as
to what constitutes the employer for purposes of these rules.
Thank you for your time and attention.
Mr. COLLINS. Thank you, Ms. Walker.
I would like to yield to Ranking Member Velazquez to
introduce our next witness.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
It is my pleasure to introduce Ms. Sibyl Bogardus. Ms.
Bogardus is an attorney serving as the chief compliance officer
for Hub International Insurance Services. In this position, she
provides compliance and consulting services regarding health
plans and other employee benefits. Ms. Bogardus was previously
chosen as one of the 100 leading women in insurance by Business
Insurance and was selected as one of the 25 Most Influential
Business Women by the St. Louis Business Journal. Welcome, and
thank you for being here.
STATEMENT OF SIBYL BOGARDUS
Ms. BOGARDUS. Thank you. Thank you, Mr. COLLINS. Thank you
Ranking Member Velazquez. I am honored and very happy to be
here to be able to give some comments and testimony on this
very important issue. I want to have an echo for what Ms.
Walker said regarding some possible compromises or concessions
towards small businesses. I think a controlled test would be a
great first step as opposed to a bright-line standard.
I want everyone to keep in mind as we go through these
types of discussions that the importance of the 50-employee
rule and the control group rules which can cause small
businesses to be treated as one employer has impacts not just
on the basic issue of whether the employer will be subject to
the law as a whole; it has huge implications also for the
practical compliance under the rules.
I want to address specifically today the issues of
complexity. Also, the issues of awareness. And then finally,
confusion. And I think the issue of complexity, as you read
through the rules, very quickly you begin to learn, as you have
seen from the written testimony and comments, that these are
very complex rules. It definitely requires a tax advisor or a
corporate planner to assist an employer in determining whether
they have a control group. As to the awareness, the level of
awareness is low. If an employer has voluntarily decided to
create a retirement plan, yes, they have generally addressed
these issues. But for employers that are made up of various
small groups, they have likely not done this if they have not
put in place a retirement plan. And while it is true that
insurance carriers ask questions about the employer's size,
they do so not so much to do an analysis. It is not an
analysis. They are asking questions about size so that they can
put into their programs how COBRA should be administered if it
does apply, whether Medicare secondary payer rules apply, and
other technical issues like that, but it is not an analysis of
the control group. They are also asking that question so they
can determine whether they will issue a small group or large
group policy.
We are already seeing confusion around that issue. For
example, just this week I received an e-mail regarding a small
employer in California, and they were unable to get a small
employer policy because they were considered to be part of a
larger control group by the insurance carrier. The insurance
carrier in California said they would not issue that policy
because it would be discriminatory. However, that same control
group had a small employer in Arizona. That small employer in
Arizona was able to get the policy. For the employees in
California, very low paid employees. They are now put into a
very expensive PPO and they cannot afford it. It is $1,300 a
month. So we have seen quite a bit of low awareness around this
issue, even among not just small employers but large employers.
They say many times I was not aware of this and we do get
comments that are very incredulous that this would even be the
case.
In terms of some of the additional confusion, there are
myths around association plans. Unless you have stickiness
within a group, it is difficult to put unrelated or even fairly
closely-related employers together. Some insurance carriers
will not write them even though they technically would be a
control group for U.S. tax purposes. So keep that in mind. Part
of the problem is the practical access to the insurance
coverage, which the law unfortunately does not guarantee for
the small employers.
Are there planning opportunities? Yes. Do we see smaller
employers trying to use those to avoid compliance with the law?
Not yet. And I think part of the lack of awareness is also a
little bit of a reaction to the delays that have occurred. The
employers believe that there have been delays and that those
delays will continue. For smaller businesses, there is a
sentiment that the rules for the large employers were delayed,
which they were until 2015. However, for the smaller
businesses, they have already felt, many of them, the brunt of
the very expensive renewals this year. Of our clients that were
offered an early renewal option to renew their policy this
December and to delay the cost impacts of health reform,
invariably they have taken that offer if the carrier has
extended it. So they have basically kicked the issue down the
road for another year, so to speak. And also the cost impacts.
We will hear more about that next fall. Additional policy
cancelations and increases. We are seeing some premium
increases of 100 percent for smaller employers. So it is a
matter of the law providing access to coverage with no
preexisting conditions, but it is not by any means affordable,
even for the small businesses.
The small businesses are also different. If they are part
of a control group, that does not mean there is actual control
or authority or even cooperation among the various owners.
There is generally no central payroll system, no central HR
person. They may handle that function at various locations but
not centrally. Commonly, there are situations where the
employers simply do not have a common point person. Now, of
course, they could appoint someone but creating common systems
to determine whether the employer is 50 employees or more and
then also consistency across the group for payroll purposes is
very difficult.
I want to also touch quickly on participation requirements
that insurance carriers have in the small group marketplace.
The rules under the Federal law do allow participation
requirement of 70 percent. The insurance carrier can require
that percentage of the employees to elect the coverage.
Alternatively, many carriers require the employer to pay a
significant percentage of the premium for employee only,
sometimes 100 percent of the cost. So the concept that the
employer is only going to pay for the coverage based on the 9-
\1/2\ percent rule is not the case. Not for small employers and
not for large employers. The employers are paying significantly
more, especially because of the fact that they cannot know
household income. The discrimination rules, which have yet to
be issued, are a continuing concern. Just for information, the
senior counsel for the Treasury Department indicated to me that
they cannot enforce those rules. That is what we have
experienced in actual practice. Even when there is an audit,
they ask to see the testing, check it off their list, and they
are done with the issue. They cannot enforce the current rules
for self-funded plans. It would be extremely difficult for them
to do so for small insured plans and very difficult for the
employers to be able to coordinate a nondiscriminatory program
across various companies in different industries in different
states quite commonly. Automatic enrollment, if the group
should happen to be above 200, will be another serious issue
whenever that rule does eventually take effect.
And then finally, MIWA issues. Commonly held, commonly
controlled groups for federal tax purposes may not be
sufficiently related for either carrier purposes. They may not
issue the policy. Or the states may consider those groups to be
an illegal MIWA under state law, even though it is not being
formed as a self-funded plan to do anything to avoid state
rules. And it would require licensing as an insurance carrier
for those groups if they would try to self-fund, and then also
capitalization as a carrier and regulation as a carrier. So
very onerous.
Just in summary, I think there are many issues that are
affecting the smaller employer's awareness, complexity of the
rules certainly, but I think the issue is around confusion and
the fear of the smaller employers as to what impacts they will
feel from the law and what they should do now with the
uncertainty without regulations. Thank you.
Mr. COLLINS. Thank you, Ms. Bogardus.
Our next witness is Ellis Winstanley. He is the chief
executive officer of Trade Logic Corporation in Austin, Texas.
With several of his family members, Mr. Winstanley owns a
number of businesses, including restaurants, a catering
company, a software company, and a promotional products
company. Welcome.
STATEMENT OF ELLIS WINSTANLEY
Mr. WINSTANLEY. Chairman Collins, Ranking Member Velazquez,
and members of the House Committee on Small Business. Thank you
for the opportunity to testify today on the effects of the
business aggregation rules included in the healthcare law on
small businesses like ours.
My name is Ellis Winstanley. I am the CEO of Tradelogic
Corporation. I own a variety of small businesses in Austin,
Texas, with my twin brother, parents, and other partners. I am
honored to share the perspective of our companies, especially
our restaurants, on behalf of the National Restaurant
Association, the leading trade organization for the restaurant
and food service industry.
I am a business executive with a successful track record of
starting up, turning around, and growing businesses in the
hospitality, construction, software, printing and promotional
products, and apparel industries. My brother and I are
entrepreneurs who got started in business while we were
students at the University of Texas. We are known for rescuing
local historic restaurant brands and turning them around to
maintain their place in the community as contributors and job
creators.
Currently, we own eight restaurants with our partners,
which I oversee on a day-to-day basis. We also partner with our
parents in two construction and three printing and promotional
products small businesses. In addition, we own software
development companies, one of which is Trade Logic Corporation,
which also serves as our management company.
The healthcare law presents compliance challenges for all
of our small businesses, but particularly for the restaurant
and foodservice operations due to the unique characteristics of
our workforce. It is difficult for many restaurants, especially
small businesses, to determine how the law impacts us and what
we must do to comply. The employer aggregation rules present a
significant complication to our business. It may seem like a
simple thing to do, but due to the aggregation rules and the
structure of many restaurant companies, determining the
employer is more complicated than many may expect. Austin,
Texas, like many other cities around the country, has a rapidly
developing restaurant community, and we, like most of the
operators we know, participate in multiple restaurant entities
with various partners, often with family members. Though we
consider each operation to be a small business, many of us are
discovering that for the purpose of the healthcare law, all of
the businesses must be considered one employer due to the
aggregation rule. This threatens to stunt the development of
restaurants in our community.
The application of these aggregation rules is already
having an impact on small businesses, consuming valuable time
and resources as businesses attempt to decipher the law's
effect on them. Most of our small businesses each have less
than 50 full-time equivalent employees and independently would
not be considered applicable large employers. Two are highly
seasonable businesses and may not be considered large depending
on the calendar month and uncontrollable factors, such as
whether or not our legislature is in session, the performance
of UT sports and the academic calendars related to the
surrounding universities.
Based on my understanding of the aggregation rules, I
believe we will be considered as one employer under the law,
thus an applicable large employer. The effect of this is that
the cost of doing business for each of our companies will go
up. Restaurants operate on thin margins already forcing
operators to manage labor costs very closely to remain viable.
Austin, Texas remains one of the strongest economies in the
country, but since the recession we have regularly tightened
our belts to manage rising costs, and we are very much still
feeling the impact, including double-digit health insurance
premium increases even since the law was passed. This puts
pressure on our team, our vendors, our pricing, and in the end,
our customers. I see the cost associated with the way the
healthcare law has been implemented as adding significantly to
that pressure. In addition to the aggregation rules, there are
several other sections of the law that impact restaurant
operations and similar small businesses.
While the increasing cost of offering coverage remains a
major concern, I am also very concerned about the
administrative demands that compliance with this law will
impose on our businesses. The restaurant and food service
industry attracts people seeking a flexible work environment,
whether they are students, between careers, or just looking for
a second job to make ends meet. There is significant movement
in and out of the industry and between employers.
Given the short-term nature of individual employment, the
administrative burden of educating and processing enrollments
and declinations could prove almost as expensive as the
coverage itself. Restaurants cannot absorb this cost and
ultimately the cost will be borne by the public as a whole. The
implementation also threatens the safe haven of the flexible
work environment for those who depend on it.
Thank you again for the opportunity to testify before you
today regarding the healthcare law and its effects of the
business aggregation rules on small businesses like ours. I am
both proud and grateful for the responsibility of serving my
community in Austin, Texas, creating jobs, boosting the
economy, and serving our customers. We are committed to working
with Congress to find solutions that foster growth and truly
benefit the communities we serve.
Mr. COLLINS. Thank you, Mr. Winstanley.
Our final witness is Donna Baker. Ms. Baker is a certified
public accountant in Adrian, Michigan. She holds an MBA from
Michigan State University and a B.A. in accounting from Siena
Heights University. Welcome.
STATEMENT OF DONNA BAKER
Ms. BAKER. Thank you, Chairman Collins, and Ranking Member
Velazquez, and members of the Committee. It is really an honor
to be here to testify on this subject.
I am Donna Baker, CPA. I have been a CPA for 25 years and I
have owned my own accounting firm for the last 13 years. I live
and practice in Lenawee County, Michigan, which is a very
small, rural area. On top of owning my own CPA firm, I also own
a small payroll company. I have invested in a retail store, and
my husband Kim, who is also with me here today, is a partner in
a family dairy farm.
As you have already heard, the business aggregation rules
require any group of companies under common control to be
treated as a single employer. The primary key in determining
which companies should be combined is either direct or
attributed ownership or affiliated service but not operational
control. These rules may cause unrelated businesses held by
family members or trusts to be aggregated. Companies within a
control group do not need to have the same management or even
be in the same industry. Also, the business aggregation rules
are very complicated, as you have heard, and are rarely
applicable to small businesses. Therefore, they are unfamiliar
to both small businesses and small business advisors. I have
had many webinars and training on the ACA rules, and most of
the materials will mention that the controlled group rules
apply but do not cover the specifics of these rules. And
unfortunately, I think many business advisors that deal with
just primarily small businesses assume that controlled groups
means hands-on control instead of the actual emphasis of
director-attributed ownership.
I have two examples of applying these control groups to two
businesses. One is my own personal business. Like I said, I own
100 percent of a very small CPA firm that I also manage, along
with a payroll company that I manage. And I have invested in
the retail store. However, that is an investment. I do not
manage that or operate that on a day-to-day basis. And then, of
course, my husband's farm. He is a partner with his brother in
the dairy farm. I have no management responsibilities. I do not
make decisions for that company, but my name is on some of the
land and I do provide some bookkeeping services. So based on
the business aggregation rules, we would have to combine all
four of those entities. We are not quite close to 50 employees
yet but close, and the payroll company is new and very quickly
growing.
My second example is one of my clients. I have an elderly
woman that owns 100 percent of two local restaurants, and her
son manages and controls all of the business decisions in those
two restaurants. She recently provided the capital for a nephew
to open a restaurant in Florida in which the restaurant in
Florida, the nephew manages and makes all the business
decisions for that restaurant. Under the current business
aggregation rules, those three entities would be combined and
they would exceed the 50 full-time equivalents and require them
to provide the minimum essential health insurance benefits.
So those two examples illustrate how the control group
rules will aggregate businesses that are not directly owned by
the same person, they do not have the same management, are not
in the same industry, and may not even be in the same state.
Therefore, the implications of requiring small businesses
to use these aggregation rules could create several negative
effects. It could hinder growth and discourage owners from
hiring new employees. It can create that environment where the
owners try to manipulate their ownership percentages or
minimize their employees and keep them within the 30 hours. It
could discourage small business owners from investing in other
businesses, and it could require them to provide health
insurance benefits in industries where it is not typically the
norm, and the additional cost could create it difficult for
them to compete in those industries.
Lastly, I would like to mention the increased cost of my
own plan. I do provide basic health insurance for the people in
my accounting firm and my payroll company. This policy has been
canceled, and the closest policy, I have been quoted a 40 to 44
percent increase that would have reduced benefits. It would
have higher copays and higher maximum out-of-pocket expenses.
So these increased costs would be very difficult to absorb.
Thank you.
Mr. COLLINS. Thank you very much, Ms. Baker.
We will now enter a questioning period, and I guess I would
like to start by just stating the obvious. Hearings like the
one that we are having today give us all an opportunity to
obtain testimony on the record that will highlight the
consequences, intended and unintended, of various laws and
regulations. And it is very helpful then, as Ms. Velazquez
said, as we move down the road and we look at potential changes
that we need. And again, to state the obvious, we all need and
want more jobs in the economy. The economy is kind of
languishing today and more jobs is what everything is about,
getting the unemployment down and increasing payroll across the
country to drive the economy.
Ms. VELAZQUEZ. Will you yield?
Mr. COLLINS. Certainly.
Ms. VELAZQUEZ. So I will join you in supporting legislation
that--passing the jobs bill. What we need is to pass
legislation to create jobs and we are just waiting for the
leadership to do so.
Mr. COLLINS. I can appreciate that. It is jobs. We may
disagree though on what stimulates jobs. I know, myself, I
believe in lower taxes, less regulation, less government
interference, and certainly, we will have some other questions
today to indicate the impact of the ACA.
What I heard today though, and again, I am a small business
guy. We have the mantra ``grow or die.'' And if you are not
growing, you are not doing what you should do as an
entrepreneur. But growth requires capital. Accounts receivable,
inventory, et cetera, et cetera. And any and all dollars wasted
on regulatory burdens, such as the business aggregation rule
and hiring a tax expert is, in fact, a dollar that is not
available to invest in growth.
So I guess briefly, we have a lot of members to ask
questions, but just to reconfirm, I think I heard it in your
testimony, but I would like to go down the line starting with
Ms. Walker and just ask you if you think this business
aggregation rule is, as it is currently written, would have a
negative impact on jobs and the economy hindering job creation
and economic growth and therefore should be altered.
Ms. WALKER. I think anytime that you have a bright-line
test it is going to hinder people that do not want to cross the
bright-line test. And that, in this case, is going to hinder
hiring, hinder expansion, and the ``grow or die,'' they are
just going to choose to stop growth and perhaps move over to
other forms of business, other ownership. So yes.
Mr. COLLINS. Thank you.
Ms. Bogardus.
Ms. BOGARDUS. Yes, Mr. Chairman, the provisions definitely
do hinder job growth, and they hinder strong job growth. And by
that I mean that the jobs that could be created in the future
would instead be part-time jobs. That is, of course, advisers
on this topic have their own bag of tricks and it is definitely
possible to stay outside of compliance with respect to each
individual employee if you can keep that individual in a part-
time position. Full-time jobs are absolutely necessary. You
cannot serve two masters. It is hard to have coordination just
on the part of the employee, much less between two separate
employers. So strong job growth is necessary. And of course,
there are other issues involved as well but I agree that the
funds that are spent to analyze the issue and then also to
comply are extremely high, and it is not just the initial cost.
It is the participation every single year in the premium
payment.
Mr. COLLINS. Thank you.
Mr. Winstanley.
Mr. WINSTANLEY. Yes. I think what we are seeing now is less
people have insurance than have had insurance. We are seeing
the reverse effect of what we were hoping to achieve here. And
I think we have also, in the restaurant industry specifically,
you hear a lot of talk about people getting pushed below 30
hours a week, and that being the reaction, you see that being
tried around the country, and I think that is extremely
negative for the industry. I think that is negative for the
employees. I think long term, while some groups I think feel
that that is their only option, but I think in the long run
that is not healthy for our economy.
Mr. COLLINS. Thank you.
Ms. Baker.
Ms. BAKER. Yes, I do. As in the testimony, I think there is
a lot of concern with that. But I am also concerned with those
that have the true entrepreneurial spirit to be discouraged
from investing in more small businesses and expanding in other
areas. That would definitely hinder.
Mr. COLLINS. One more quick question and then I will yield
to Ms. Velazquez.
Kind of a yes/no. You know, we are focused today on the
complex business aggregation rules but we are talking about
other issues, and certainly, Mr. Winstanley has talked about
the impact and the employees getting their hours cut and the
like to get them under the 30-hour rule. So, as we look and try
to message some changes that could be made, I would first like
to ask each of you if you think in your opinion the 30-hour
definition of full-time should be increased back to 40 hours.
Ms. Walker.
Ms. WALKER. Yes. It will prevent the people from ratcheting
down workers to 30 hours and leave them at 40.
Mr. COLLINS. Yeah.
Ms. Bogardus.
Ms. BOGARDUS. Yes.
Mr. COLLINS. Okay.
Mr. Winstanley.
Mr. WINSTANLEY. Yes, I do.
Mr. COLLINS. Ms. Baker.
Ms. BAKER. Yes. Absolutely.
Mr. COLLINS. Very succinct.
Now, the other question, we talk a lot about the 50
employee threshold, and there are a lot of companies in that
40-plus, going to 50, wanting to go to 75, and under Obamacare,
this arbitrary selection of 50 now defining a large
corporation, does not fit with the entrepreneurial spirit. So
in the same, what do you think, yes or no, do you think we
should increase beyond 50 the number of FTEs that would trigger
the Affordable Care Act? I do not know if it is 100 or 150, but
do you believe that 50 is too low and stifles job creation and
therefore, we as Congress should increase it to a number higher
than 50?
Ms. WALKER. I think the bright-line test of a certain
number of people is the wrong test. You need a facts and
circumstances test on who has day-to-day control. If you
increase it to 50, then the same thing that happens at 50 will
happen beyond 50, whether it is 75, 150, 200, or 500.
Mr. COLLINS. Yeah.
Ms. Bogardus.
Ms. BOGARDUS. As with the 30-hour rule, I would agree that
increasing the number above 50 would alleviate a number of the
issues. But as with the 30-hour rule, it is a legislative fix.
There would have to be the change to the statute itself.
Mr. COLLINS. Right.
Mr. Winstanley.
Mr. WINSTANLEY. I think that the challenge comes in that
every industry cannot be put in the same box. I think in the
evaluation of really any organization that tries to encapsulate
multiple industries, there is always different criteria for
different industries, and I think looking at an industry with a
somewhat mobile workforce or by general definition, a short-
term workforce, I think the costs are going to be significantly
higher for the same number of employees, the same number of
FTEs than it would be with a longer term workforce. So yes, I
think it should be higher, but I do not think it can be the
same number for every industry.
Mr. COLLINS. Okay. Thank you.
Ms. Baker.
Ms. BAKER. Yes. I think that would definitely help, but
then I, you know, support what has previously been said. A
facts and circumstance would make a whole lot more sense when
it comes to defining control. And then when you do have
something that crosses different industries, it is adding
additional complications.
Mr. COLLINS. Thank you all. I will yield to Ranking Member
Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
I would like to call the attention of committee members to
the hearing that we conducted on October 9th, ``The Effect of
the Law and Definition of Full-Time Employee on Small
Businesses.'' And one of the expert witnesses was Dean Baker,
the executive director for the Center for Economic and Policy
Research, who analyzed data right after we passed the
Affordable Care Act and where small businesses were expecting
the employer mandate to go into effect. Since then, he did not
find any data that showed small businesses were not hiring
employees or increasing the 30 hours because the Affordable
Care Act going into effect and when people were expecting the
employer mandate to go into effect. The Federal Reserve from
San Francisco conducted research demonstrating that it has not
had any effect. But like any law, we will continue to monitor
it and make the fixes that are necessary.
My question to the panel of witnesses, the business
aggregation rules are meant to prevent skirting the law. In
your opinion, what is the correct balance between preventing
abuses and protecting closely-held businesses from potential
penalties?
Ms. Walker.
Ms. WALKER. I think anytime that you have a bright-line
test, you are going to end up with abuses because people will
walk right up to that bright line and not cross it. So what you
have to do is come back and put it into a facts and
circumstances test where you apply judgment, I apply judgment,
the IRS applies judgment, and each person decides based on the
facts and circumstances in that situation whether there should
be an aggregation, whether it truly operates as an employer.
Ms. VELAZQUEZ. So do you consider that a final regulation
should incorporate a fact and circumstances test?
Ms. WALKER. Yes. That would be a statutory change, however.
Ms. VELAZQUEZ. Ms. Bogardus.
Ms. BOGARDUS. I agree with Ms. Walker that the facts and
circumstances test is a much better standard, again, requiring
a legislative change.
Ms. VELAZQUEZ. And that will create more jobs?
Ms. BOGARDUS. I think it would, and I think also serious
consideration should be given to changing the threshold from 50
to perhaps 250 and look at it on an industry basis instead, or
perhaps blend the two. There are some precedents for using 250,
such as the W-2 payroll reporting rule.
Ms. VELAZQUEZ. Mr. Winstanley.
Mr. WINSTANLEY. Sure. I think when you look at the original
context that the control group provision was put together per
the IRS, it was put out there to stimulate the use of
corporations and companies growing, and I think the way it is
being implemented now is having the alternate effect. I think
what businesses need is clarity around what the rules are they
need some rules that they can reasonably work with based on the
industry they are in. And then I think that job growth will
loosen up.
Ms. VELAZQUEZ. Thank you.
Ms. Baker, I would like to ask you another question.
When it comes to contracting programs in the federal
government, or maybe Ms. Bogardus, you may be willing to answer
this question, a business must meet not only ownership by
holding a majority of shares, but also demonstrate active
control over business operation and you described that in your
testimony. Yet, for purposes of the ACA and business
aggregation rules, only common ownership is considered. Which
standard, in your opinion, is a better indicator of ownership?
Ms. Baker.
Ms. BAKER. I am not sure if I really got that but to me it
would be control over the entity, the day-to-day operations,
the decision-making, not just investment. So the day-to-day
operations, which supports the facts and circumstance that they
have been discussing here.
Ms. VELAZQUEZ. Ms. Bogardus.
Ms. BOGARDUS. I would agree. Actual control and the facts
and circumstances of the day-to-day operations, which is also
necessary, absolutely necessary for compliance. And as I said
before, the small businesses do not have centralized systems,
payroll, HR.
Ms. VELAZQUEZ. Thank you. I would like to ask other
questions but I know that all the members would like to ask
their questions as well.
Mr. COLLINS. Thank you.
At this point I would like to yield five minutes to
Representative Tipton.
Mr. TIPTON. Thank you, Mr. Chairman. I think I would like
to start out with Mr. Winstanley. When you are talking about
the variety of businesses you have, do you file separate tax
returns?
Mr. WINSTANLEY. Yes. They all file separate tax returns.
Mr. TIPTON. Are you allowed, if you have a loss on your
small software business versus your restaurant, can you write
that loss off against your restaurant?
Mr. WINSTANLEY. No, they are separate.
Mr. TIPTON. What happened to business aggregation?
Mr. WINSTANLEY. Right. There is a significant
administrative burden that goes into running the multiple
entities separately and there is value to doing so.
Mr. TIPTON. So effectively what we are seeing through this
administration is a policy to be able to force you to be able
to provide the healthcare. Has that impacted your ability to be
able to create jobs?
Mr. WINSTANLEY. Yes.
Mr. TIPTON. You are living in the real world.
You know, we just heard comment that there is no data. I
will quote that, again, that there is no data that small
businesses are not hiring as a result of the implementation of
the president's Affordable Healthcare Act, no effect on job
hiring. Is that your experience?
Mr. WINSTANLEY. No, it is not.
Mr. TIPTON. Anyone else care to comment?
Ms. WALKER. No, it is not. I see it in small businesses and
large businesses.
Mr. TIPTON. The businesses are not hiring because of the
Affordable Care Act?
Mr. WINSTANLEY. I believe it is draining resources from the
companies that would otherwise be going to be used to grow the
businesses.
Mr. TIPTON. Very interesting, because we are dealing with
theoretical data. We are dealing with real life experiences. I
appreciate that testimony.
I come from rural Colorado. I am a small business guy. Do
you have any experience--and perhaps the CPA on the panel can
address this the best--are you seeing insurance cost
differences between businesses in rural areas versus urban
areas? And what I can speak to is in the state of Colorado, if
you punch in a rural zip code for your healthcare insurance,
you are paying a 65 percent premium compared to people that are
living in urban Colorado. Are you seeing those same sorts of
circumstances.
Ms. WALKER. I am sorry. I am going to have to pass that to
the insurance person.
Ms. BOGARDUS. That is happening and it does happen because
there is less competition. There are fewer facilities in the
rural areas, and they can charge what they want to charge
because that is the only hospital, the only emergency room in
some cases.
Mr. TIPTON. Since you have a little bit of experience with
this, is it a little more typical in these rural areas to see a
lower income than we do in urban America?
Ms. BOGARDUS. It is? You know, we hear a lot of talk here
in Washington coming out of this administration about income
inequality, but I am just hearing testimony that the
administration, through its policies, are forcing you to cut
the incomes of people by reducing their hours. We are hearing
that people that live now in rural America, who earn less, are
going to be paying more for what is now law that you must obey
and buy insurance. Is that correct?
Ms. WALKER. The simple answer is yes.
Mr. TIPTON. The simple answer is yes. So effectively, what
we are seeing is a system that is not affordable and we can
certainly get into the accessibility issues as well.
But going back to the aggregation rules we are specifically
trying to address on this, can anyone on the panel give me,
small business guy, I just want to be able to produce my
product, to be able to sell, to be able to provide for my
family. Can you give me two sentences to be able to define the
aggregation rule? Can anyone?
Ms. BOGARDUS. A parent subsidiary group where you own 80
percent of a chain of corporations, a brother-sister
corporation where the same five or fewer own 50 percent and in
conjunction 80 percent, and then the affiliated service group
rules. Those rules do not necessarily have ownership, but if I
provide management services to another business, that will be
aggregated.
Mr. TIPTON. As a small business guy to have to tell you,
you are a CPA, that is about as clear as mud to me to really be
able to understand that.
We have had abundant testimony on this Committee that rules
and regulations--and this is another one that we are talking
about today--are killing jobs in America, killing job-hiring
prospects in America today when we need to be able to hire
people. How much more is this going to cost small businesses,
like Mr. Winstanley's, who are working on a narrow profit
margin, just to be able to comply with another government
mandate. Any idea?
Ms. BOGARDUS. Any time you look at these rules in a
situation as complicated as his with different ownership, you
are going to have to sit down with a chart. When he transfers
ownership to ownership, to other people, you are going to have
to go through the chart. You are going to have to ask him who
does the management for his different businesses. Does the
software company, in fact, do some payroll for the restaurants,
those types of questions, and then you are going to put it all
together. Once you reach 50 people, he will have to comply with
the rules and then he knows which companies in that pot he has
to provide minimum essential coverage to the workers for.
Mr. TIPTON. A lot of money.
Thank you, Mr. Chairman. I yield back.
Mr. COLLINS. Thank you.
At this point, I would like to yield five minutes to
Representative Meng.
Ms. MENG. Thank you, Mr. Chair. Thank you, Ranking Member
Velazquez.
I had a question. I think it was Mr. Winstanley who
testified, if I heard correctly, that you believe that fewer
people have health insurance now.
Mr. WINSTANLEY. I believe that fewer people are accepting
health insurance now that it is available to them.
Ms. MENG. I am just curious. I know that there are a lot of
good employers out there, like you, Ms. Baker, who have always
provided health insurance to your employees. I represent a
district in Queens, New York City, where a lot of employers
have not always done the right thing, like you, Ms. Baker, and
have not provided health insurance to their employees and have
taken advantage of many employees around the country who do not
speak English and are not familiar with rules. Statistics have
shown that on Sunday and Monday alone, 29,000 people signed up
for the new healthcare law just on the website in two days and
I was just wondering what advice could you have given or would
you give to a lot of these employees or small business
employers who have not provided insurance in the past? And
anyone can answer.
Mr. WINSTANLEY. Sure. We like to consider ourselves a good
employer and we have provided insurance in the past. The nature
of it is that the cost of insurance has risen drastically in
the last few years and most of the young people who are healthy
simply drop off the plan, which makes the cost go up even more.
And so we have got a situation where people are not willing to
pay for the insurance, despite the fact that we are continuing
to increase our contribution. And it has become a situation
where I have got to believe--I only know from my own
experiences what we are dealing with, but I have got to believe
that there are a lot of other small businesses around the
country that have experienced the exact same thing. And I think
if you multiply all those that the net loss is significant.
Ms. VELAZQUEZ. Would the gentle lady yield?
I would like to relate the fact that in Massachusetts, when
they passed the law and implemented it, the targeted young
people were not signing up, and then later on they enrolled. So
we believe that that type of trend that we saw in Massachusetts
will be seen throughout the country.
Ms. BAKER. Can I answer yours?
Okay. So for my own personal situation, I am in one of the
rural areas with very high health insurance and lower income.
Our county has about 99,000 as a population with an average
household income of middle 40,000s. So as I struggle to provide
more health insurance and they aggregate the businesses to make
it--if I can stay under that 50 I will--I mean, it will be
extremely expensive for me. And in the meantime, to absorb a 40
to 44 percent health insurance increase, it would be much
easier for me to put my employees out on the exchange. It is a
lot cheaper for them to provide that than for me to absorb that
additional cost within my small profit margins anyway. Thank
you.
Ms. BOGARDUS. I would just comment that if the additional
cost of adding each employee would be approximately $4,000 to
provide insurance to that individual at an affordable rate--it
may be a smaller figure in some places, higher in others--that
does stunt the job growth. I will say that the law itself is
having an impact on the cost, and we are seeing people not
enroll in the coverage that maybe in the past they would have
enrolled in because the costs are just higher. And we do see,
and traditionally have seen, young individuals not enroll in
the coverage, even if it costs them $20 a pay period. And it is
a matter of individual choice. They are looking at the coverage
and they are saying I would rather have the money. And in the
bigger picture, in the context of wages, if people would rather
have the money, the Affordable Care Act takes that off the
table if they have to be offered the insurance.
Mr. COLLINS. We would like to yield five minutes to
Representative Luetkemeyer.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
One of the things that I think we are seeing and you have
discussed today is the problem with companies trying to deal
with this. I know there was an economist in Committee here
recently and they had done a small business survey, and 76
percent of the businesses that were surveyed said they were not
going to hire in the next six months.
Ms. Walker, you have mentioned in your testimony here
something like not hiring workers or limiting working hours.
Have you seen this already with your practice that businesses
are starting to limit their hours, and can you give me an idea
of the number of businesses you are talking about?
Ms. WALKER. What I have seen is that businesses tend to
hire new workers at less than 30 hours. So when we have to
expand, we are going to expand on a part-time basis.
One of the other things I saw in a statistic yesterday for
a slide presentation, if you go back two years, there were six
full-time workers hired for every one part-time worker. That
has flipped now and such that it is one full-time worker is
hired for every four part-time workers, and those are DOL
statistics.
Mr. LUETKEMEYER. Thank you for that.
Ms. Bogardus, in your comments a while ago you said that--
if I got this right, correct me if I am wrong here--you made
the comment that your company does not write some groups
because they may not be a related business. So in other words,
you are not sure if they would fall under this rule or not, so
as a result you back away from doing it. Did I understand that
correctly?
Ms. BOGARDUS. Actually, we are an insurance consulting and
brokerage firm, so we see the insurance carriers doing that and
refusing to write certain groups. And some of it may be the
confusion among the carriers, but they are still exercising
their leeway when they can to refuse to write a policy.
Mr. LUETKEMEYER. So even though they may technically, if
they did the research and they dotted their I's and crossed
their T's, may actually qualify, just the unintended
consequence, just the concern about they may be in
noncompliance is enough to back them away from that. Is that
what you are saying?
Ms. BOGARDUS. That is correct. It may be a smaller entity,
a smaller subsidiary in one state without the headquarters
location, and so it could not be the location or site as for
the insurance contract as a whole and they back away from it.
Mr. LUETKEMEYER. Now, you work with this every day. Are all
the rules promulgated on the president's healthcare law?
Ms. BOGARDUS. No, sir. They are not. The rules we have
currently on the very important issues of play or pay, the
employer mandate, were issued in early January last year. We
have a lack of final guidance, a lack of guidance on very
industry- and employee-specific issues. There are impacts and
unintended consequences of the rules that have already been
issued that need to be fixed and resolved, and we do not know
basic information, such as whether we will get transition
relief for particular situations, such as counting the
employees for purposes of 2015. We are less than a month away
from the calendar year that is most at issue, 2014, starting
January 1st, and an employer needs to know. So we are lacking
guidance. We are kind of operating in an area of this is what
we know today which is the case.
Mr. LUETKEMEYER. How can you help that company plan with
the uncertainty that just sort of hangs over them with regards
to the rules are not promulgated yet, as well as do not know
the unintended consequences of what may or may not happen here?
Ms. BOGARDUS. We like to address that with a three- to
five-year strategy and we always have a plan B. If they change
the rules in this manner, then we will go this direction. But
we advise, we do have some small business clients, but we
advise many, many large employers. And I know that not every
small employer has access to advisors with the level of
sophistication that we would bring.
Mr. LUETKEMEYER. Mr. Winstanley, thank you for being here
today. It is always great to have someone who deals with this
on a daily basis. Ms. Baker, you as well, because you give us
the real-life experience of how the consequences and unintended
consequences of stuff that goes on here in Washington affects
real people in the real world.
How much time and how much money do you spend on compliance
with this healthcare law?
Mr. Winstanley.
Mr. WINSTANLEY. It has been a very significant distraction
from our business over the last couple of years, especially as
we try to ascertain where it is going to go and where things
are going to land. Some of the folks that help with our
administrative stuff, they spend a lot of time. I have spent a
lot of time on it. It takes a lot of our energy.
Mr. LUETKEMEYER. Ms. Baker.
Ms. BAKER. I have been flooded with questions and phone
calls over the last year with my clients. There is a lot of
confusion, wondering if they have to start providing the health
insurance, when would it be mandated, what do they have to do.
So I guess I have not tracked the time specifically, but it has
definitely been a burden on my practice to try to answer all
the questions that are out there.
Mr. LUETKEMEYER. And that cost and all those man-hours are
all borne by your business and therefore, that is not making
you any money?
Ms. BAKER. Absolutely.
Mr. LUETKEMEYER. Thank you very much for your testimony.
Mr. COLLINS. Although they have called votes, we do have
time for another question or two, so at this point I will yield
five minutes to Representative Hahn.
Ms. HAHN. Thank you, Mr. Chairman, Ranking Member
Velazquez, for holding this hearing.
It would be nice to hold these hearings with the thought
that if we did hear some unintended consequences that impact
our small business that we had the belief that our friends on
the other side would actually like to work on fixing some of
these problems. I get frustrated in these hearings because I
know the main purposes is just to have more bad stuff to talk
about and to attack the Affordable Care Act. I would love for
this Committee to actually work on some fixes, and I think we
even heard some offers of compromises that might make it
better. But I will tell you, you know, that is not going to
happen. We do not have partners on the other side that actually
want to look at this law, how it does impact your businesses,
and take any time or effort to fix it. We are more than willing
to work with our friends on the other side to fix things that
maybe nobody thought about or that do have unintended
consequences because being members of the Small Business
Committee, we love our small businesses. We are for our small
businesses. This is one of the Committees that I enjoy when I
go back home to my district in Los Angeles, is talking to my
small businesses and finding out what we can do here to help
them out. So it is frustrating to know that there is no
intention on the other side. All the testimony you give, nobody
is willing to work with us to try to fix this law.
Having said that, I will ask this to Ms. Bogardus. So these
business aggregation rules already apply to many aspects of
business law, like ERISA and COBRA. So I know some of these
small businesses found it a surprise possibly that it also
included their compliance as it related to the Affordable Care
Act. So maybe you can explain to us why it came as a surprise
when these aggregation rules already existed and small
businesses were in compliance in other areas, and maybe there
are some small businesses that are having to come in contact or
in compliance with these aggregation laws for the first time,
and let us know why it was a surprise.
And maybe, two, what kinds of small businesses are
experiencing this for the first time; what kinds of businesses
that may be never had to comply with this law before even in
other areas?
Ms. WALKER. Yes, Representative Hahn, thank you.
The answer to that is that while these rules have been in
effect for quite some time--they affect ERISA, COBRA, Medicare
secondary to a number of technical issues, including retirement
plans--if a business has not offered a retirement plan and has
not offered a health plan, then the analysis simply has not
been done. Even if the small businesses offered a health plan,
again, there has not been the analysis. The insurance carrier
says, ``How many employees do you have?'' The small business
owner answers for the group that he is covering. There is not
an analysis. No one has the ability, time, or authority to sit
down from the insurance carrier and work with that employer to
determine its size in particular over the entire control group.
And that is just simply not done. The carrier has no obligation
or consideration for whether the rest of the control group is
addressed or not. So it does come as quite a surprise. I think
the difference is this is a mandate whereas it is providing
health insurance. I can provide health insurance to just some
of my workers and not others. So it has all been voluntary
before.
Ms. VELAZQUEZ. Will you yield?
Ms. HAHN. Yes.
Ms. VELAZQUEZ. And what criteria will you use to decide
which workers will get health insurance? Is it driven by job
retention?
Ms. WALKER. It is often driven by the industry.
Ms. VELAZQUEZ. Okay.
Ms. WALKER. It is, you know, different industries have
different types of retirement plans, different types of health
benefits.
Ms. VELAZQUEZ. But when people say more companies will be
dropping their plans, the health care plans, I do not know what
facts or empirical data or research will drive anyone to
conclude that, in fact, companies will drop health insurance
because when we hold hearings, one of the biggest issues that
companies and small business bring to us is to find skilled
workers. And I am sure that in order to retain those skilled
workers, if you provide health care as one of the package job
offers, then they will be more than willing to come to your
company.
Thank you.
Ms. HAHN. Thank you. Before I yield back no balance of my
time, I just want to throw out one more statistic today. The
ADP National Employment Report, which measures private
employment, says small businesses led the way in job creation
with 102,000 jobs this November.
Ms. VELAZQUEZ. Two hundred fifteen thousand.
Ms. HAHN. Thank you.
Mr. COLLINS. There are never enough jobs, so I would like
more jobs.
We will cut it down to the wire, but Mr. Schweikert, you
are good to go.
Mr. SCHWEIKERT. Thank you, Mr. Chairman. And having just
looked at those employment statistics, considering we need to
be around 300-350,000 creation every month, we are still
devastated upside down when you look at our workforce
participation.
Ms. VELAZQUEZ. Gentleman yield?
Mr. SCHWEIKERT. No.
Our workforce participation numbers. Because we are up
against the clock, I am sure the Chairman will hand you some
time when we are done.
Is it Bogardus? Am I even close?
Ms. BOGARDUS. Bogardus.
Mr. SCHWEIKERT. Just because I have heard some discussion--
you have already explained it twice--I want to ask you to do it
again the third time. On the aggregation rules, how different
these aggregation rules are in regards to what you are seeing
in the new healthcare law compared to what we have done in the
past in pension and tax and mechanics. Can you sort of help
explain some of the mechanics and how they are different?
Ms. BOGARDUS. I may yield part of this question to Ms.
Walker as to some of the technical issues.
The mechanics are different simply because employers have
not done this in the past unless they have offered the
retirement plan, and in many cases, if they are operating under
a safe harbor they may not have done all of the analysis or
they have been able to pull out certain business classification
units.
In terms of what we are seeing in actual real life, I know
there has been discussion of jobs creation and whether
employers are hiring or not hiring. I would caution you on the
statistics that you hear and answers to surveys because I know
that many of our clients will not answer that question because
they have seen the fallout in the industry, whether it is
restaurants or other industries from answering and addressing
questions like that, so I do not believe that you are getting a
complete picture.
Mr. SCHWEIKERT. Mr. Chairman, one day that might be a
complete different hearing because we had that happen once in
Arizona where some voluntary surveys that were filled out
turned out to being, you know, waking up and being audited the
next day.
Ms. Baker, now with your background in the CPA world, or I
could always turn back to our lawyer friend, let us deal with
the reality of businesses trying to survive. We had a hearing
yesterday about what many of the small banks are having to do
to survive. Have you started to have clients with smart lawyers
coming to you saying how do we have to now gain the system? Do
we have to put this in a trust? Do we have to hide this, hide
that? You do not have to throw anyone under the bus, but have
those conversations begun?
Ms. BAKER. I think most of the businesses that I deal with,
that is the first question they ask me is what do I do to avoid
this.
Mr. SCHWEIKERT. So in other words, one more time as our
regulatory command and control society grows out of Washington,
we are going to turn a lot of our friends out their businesses
into trying to find a way to game the law in many ways just to
survive.
Ms. BAKER. Of course I advise them not to. But that is
their first reaction, is what do I have to do to avoid this?
Mr. SCHWEIKERT. Is it Mr. Winstanley?
Mr. WINSTANLEY. Yes.
Mr. SCHWEIKERT. Now, you have actually, if I remember your
testimony, some of which you wrote, you have actually reached
out and invested some of your capital to start other
businesses, and yet that may be now pulling you into the
business aggregation. Does this become sort of a chilling
effect on you helping capitalize new economic growth around
you? And have you actually been approached on how to game the
system?
Mr. WINSTANLEY. It is one more variable to take into
account every time we do something. About gaming the system,
there is always how do you figure? Where do we stand on this?
How are we set up so that it is applicable, so it is not
applicable? One, we have to figure it out, which is taking
considerable resources and we think we understand it, but, you
know, I think the issue is in the distraction from the
business.
Mr. SCHWEIKERT. Mr. Chairman, just because we are down to
that about three and a half minutes, we actually sort of heard
a lot of this in yesterday's hearing where how do the small
banks help economic growth, create jobs, take care of a lot of
our brothers and sisters out there, and the arrogance that we
as policymakers keep dumping onto our country and our job
creators. At some point we have got to wake up and decide this
is not a partisan; it actually should be about the people we
represent and not the vanity here of trying to justify things
that we have done that do not work.
And Mr. Chairman, with that I yield back.
Mr. COLLINS. Thank you. At this point in time we do have
votes, as you can see. So we will adjourn for, I would say,
give or take, 30 minutes, after which we will reconvene. So for
right now we will be adjourned.
[Recess]
Mr. COLLINS. Mr. Bentivolio.
Mr. BENTIVOLIO. Thank you, Mr. Chairman.
Ms. Walker. And thank you, all of you, by the way, for
coming in today and testifying.
Ms. Walker, in your practice, you advise small employers;
correct?
Ms. WALKER. Yes.
Mr. BENTIVOLIO. Have you found that their situations
present difficult issues under the rule, such as complicated
family business arrangements, overlapping shareholders? Would
you discuss some of these situations, please?
Ms. BAKER. Are you referring to me?
Mr. BENTIVOLIO. Oh, I am sorry. Walker. Right. Ms. Walker.
Ms. WALKER. I think one of the best examples is the one
that Donna used. And that was an elderly woman who had invested
in two restaurants. She invested in a restaurant for her son in
one state and a restaurant for her nephew in another state and
that required aggregation rules.
The other situation was a family business where they were
making investments and one of the investments was a golf
course. The golf course was not in the same area and those two
businesses then had to be aggregated.
Ms. VELAZQUEZ. Mr. Chairman, we need to have the clerk
here.
Mr. COLLINS. Are we missing someone?
Thank you, Ms. Velazquez. I guess we will pause
momentarily.
Oh, okay. We can continue. Go ahead.
Mr. BENTIVOLIO. Am I still on my time?
Mr. COLLINS. Yes.
Mr. BENTIVOLIO. Thank you.
Is it Mr. Winstanley?
Mr. WINSTANLEY. Yes, sir. Winstanley.
Mr. BENTIVOLIO. Thank you.
Do you have a tax specialist on your staff?
Mr. WINSTANLEY. No, not on our staff.
Mr. BENTIVOLIO. So who would you consult for guidance on
the business aggregation rules?
Mr. WINSTANLEY. We would hire outside counsel for that. We
have attempted to read them ourselves but we will have to hire
somebody outside.
Mr. BENTIVOLIO. And how much is it to hire somebody?
Mr. WINSTANLEY. It ranges but it is expensive.
Mr. BENTIVOLIO. Very expensive. I mean, lawyer by the hour;
right?
Mr. WINSTANLEY. Right.
Mr. BENTIVOLIO. Okay. And so it is pretty costly?
Mr. WINSTANLEY. Yes.
Mr. BENTIVOLIO. A thousand dollars? Two thousand dollars?
Mr. WINSTANLEY. I imagine with the nature of our businesses
it will be significantly more than that.
Mr. BENTIVOLIO. Are you talking $5,000? $10,000?
Mr. WINSTANLEY. Maybe more.
Mr. BENTIVOLIO. More than that? Oh, my goodness.
Ms. Bogardus. Did I pronounce it right?
Ms. BOGARDUS. Yes, sir. Bogardus.
Mr. BENTIVOLIO. Thank you.
Most webinars or PowerPoint presentations on the healthcare
law for small businesses do not include materials on the
business aggregation rules. Do your companies?
Ms. BOGARDUS. We address the issue. We consistently refer--
we are an insurance consulting and brokerage firm. We
consistently refer our clients to their tax and legal advisors
because it is so complicated. They will have a better
understanding of any corporations, any business arrangements
that they created. It also requires in many cases an analysis
of options, family trusts, documents that were created for
purposes other than addressing business aggregation. So it can
get extremely detailed.
Mr. BENTIVOLIO. Well, how do small businesses know about
these aggregation rules and how they affect them? How do they
find out about this?
Ms. BOGARDUS. You know, quite frankly, their advisor, if
they are working with an advisor who mentions it to them. So if
they have a current relationship----
Mr. BENTIVOLIO. An advisor that costs more than $10,000?
Ms. BOGARDUS. If they have current legal counsel, if they
are working with a consultant or a brokerage firm that raises
the issue to them, if they read about it on their own. I know
there is information posted on the IRS website as well.
Mr. BENTIVOLIO. Now, forgive me. Are you an attorney? I did
not read----
Ms. BOGARDUS. Yes, sir.
Mr. BENTIVOLIO. You are an attorney. So now the way I
understand attorneys charge is they charge by the hour, and
that includes research; correct?
So if I had my attorney, I want to know about the
healthcare law, he would have to read thousands of pages of
regulations and he would be charging me by the hour to do that?
Ms. BOGARDUS. It would not necessarily require the attorney
to read the entire Health Reform Act, but it would require an
analysis, and quite frankly, experience with the control group
rules, which are very specific, very detailed, and that is a
very specialized area of the law.
Mr. BENTIVOLIO. So if my attorney, my normal business
attorney, is unfamiliar with that, I have to go find another
attorney, and he is going to charge me--holy cow.
Okay. Thank you. I see my time has pretty much run out. I
yield back my time. Thank you, Mr. Chairman.
Mr. COLLINS. Thank you, Mr. Bentivolio.
At this point we will yield five minutes to Representative
Barber.
Mr. BARBER. Thank you, Mr. Chairman, and Ranking Member for
having this hearing. I appreciate the witnesses' testimony. It
is very helpful to hear directly from individuals who are
affected or are trying to help others who are affected by the
law.
My wife and I ran a small business in our community for 22
years, so we know a little bit about what it takes to meet a
payroll, keep the doors open, keep customers coming back, and
deal with regulations and taxation issues. So we are very
sympathetic to small businesses on a number of levels, and we
also know that businesses have to stay profitable and they have
to find a way to grow. So all of these issues are very
important to me. That is why I wanted to be a member of this
Committee, so I could see, along with my colleagues, what we
could do to help small businesses be more successful.
Since I have come here last year in June, I have been
trying to partner with people on both sides of the aisle to
find reasonable fixes for the Affordable Care Act. I think
there are many benefits. We have realized many of them already,
individuals and so on, and now we are into the larger
implementation with small businesses and individuals. The
benefits are real but the issues are real as well. And I think
with any major piece of legislation, over the decades we have
always had to make amendments and revisions to a bill of that
size and magnitude. So I am clearly interested in learning more
about that from you.
Clearly, as I look at this, and I have heard your
testimony, and when I listen to people back home, small
business owners, I am reminded that there are three Cs that
they often talk about. They talk about the ACA's complexity,
that it is confusing, and that it is challenging. And my job as
a member of Congress, and I believe that all of our jobs is to
get through all of that and help people be successful and
understand the law.
So I have the same question for each of the witnesses. If
you could make one change, or if you could ask one question to
be resolved by the agencies that are responsible for the
Affordable Care Act, what would your top priority be? Because I
think we need to have some instruction or some ideas from
witnesses about what we can do. My colleague, Ms. Hahn, was
asking about let us figure out what to do that makes things
better, not just talking about it back and forth arguing; let
us talk about what we can do to fix things. What would those
things be from each of you if you could?
Mr. WINSTANLEY. I will go first. I would position the
aggregation rule to fulfill the scope that it was originally
designed to fulfill, which was promoting the growth of
business. I would treat the industries separately within the
context of what the industry is and deal with the workforces
within the context of what they are to position the law to be
viable for all industries.
Mr. BARBER. Ms. Baker. It is hard to choose I imagine.
Ms. BAKER. It is. It is. I would definitely support looking
at it industry by industry; looking at it by control, true
control, not just ownership or indirect attributed ownership,
you know, someone that is actually making day-to-day decisions.
And I do think that the 50 employees is too small. It is too
small.
Mr. BARBER. Thank you.
Ms. Bogardus.
Ms. BOGARDUS. With respect to the rules that impact small
businesses, I would suggest taking a second look at where the
rules are with respect to the insurance carriers because there
is not the same level of compliance required of them that would
support the employer mandate. And I think some of those gaps in
the law, which make it difficult, if not impossible for
businesses to actually get the coverage, would specifically
need to be addressed.
If I can go off the top of small businesses, I would say it
would be revisiting the definition of minimum essential
coverage, and the plans that will be offered, and I am sure
that some of you have read about them in the Wall Street
Journal, the skinny plans. There was an article that was about
six or eight months ago. They will not be sufficient coverage
but they will satisfy the employer mandate. And I think when
individuals realize that they have coverage that is not
sufficient but it is what the law required employers to
purchase and provide, there will be significant backlash, like
none of the backlash that we have seen so far to date.
Mr. BARBER. Thank you.
Ms. WALKER. I take the same approach. We are looking at the
insurance product. I think the real issue with healthcare in
this country is that the quality of care is not what it needs
to be and the ACA did not really focus on quality except in a
very small segment with some research, so there is a lot more
that needs to be done there.
And again, I think that the required insurance, the types
of insurance, does not make it very easy for people to comply
with the rules.
Mr. BARBER. Thank you for your testimony and your good
answers, and I yield back.
Mr. COLLINS. Thank you.
At this point I think Mr. Bentivolio wanted to have a few
add-on questions.
Oh, Mr. Huelskamp, I guess we will yield to you first.
Mr. HUELSKAMP. Thank you, Mr. Chairman. I apologize for
sliding in a little late here, and I thank the witnesses for
joining us today.
A couple questions or a comment at the beginning. I think
it was Ms. Walker and others have mentioned that the changes
you were looking for would take a legislative change in order
to make that happen. And I appreciate that perspective, but
what we have seen with the Affordable Care Act, that is not
necessary to make the changes from this administration. We have
had 10 executive actions, and the employer mandate is one of
those. You know what? You have got another year. And I do not
know, and Ms. Baker, when people call you, I do not know as a
consultant, it makes your job really tough if you do not know
what the rules are or they tell you the rules and say they
might delay it for another year. I know that has happened in
other arenas but we have 10 different areas of the Affordable
Care mandate which is the law of the land where the
administration has, by executive action, said you know what? We
are not going to make employers do the reporting requirements.
How do you handle that? How do you answer that question when
the IRS has not finalized rules on this and they could change
the rules?
I will give you one example. I had a business in Solana,
Kansas. They were noted in the local paper, on July 1st they
made their changes. That was the renewal period and they did
everything they had to do. What a mistake. On July 2nd, the
president said, ``Just kidding.'' We are going to suspend that
part for another year or delay the mandate and those kind of
things. I mean, what is the answer you give to folks that
definitely must be calling in saying, well, what does a one-
year delay mean? And I will ask that question to Ms. Baker
first.
Ms. BAKER. It does make it very difficult, especially for a
small firm like mine because we have such limited resources, so
when you take the initiative to communicate everything and then
all of a sudden it changes, and so you reach out and have to
recommunicate. So the amount of time and the expense associated
with that is great.
Mr. BENTIVOLIO. Other responses from the panel?
Mr. WINSTANLEY. Sure. It consumes a phenomenal amount of
energy that is not used on something else constructive. And
fortunately for the restaurant side of our business, we are
looking at it saying this just is not sustainable with our
current business model, so something has got to be done before
this gets rolled out so we can feel some level of comfort that
something will happen. Hopefully that is not a pipe dream.
Mr. BENTIVOLIO. And I have yet to see anything from the
White House that they want to make any changes legislatively to
this act. I mean, there have been many suggestions of things we
can fix. We have heard them here. Heard them multiple times in
this Committee. We mention the SBA as representing the
administration and no interest in changing one letter of the
law unless it is by executive action, and that is certainly
unacceptable to me.
One thing I would like to ask Ms. Walker on another issue
as far as the trend of basically a part-time economy. The new
hires, according to the Department of Labor, I did not know
that they are that bad, that in this economy four out of five
new jobs--was that the figure that you had--that are created
are part-time?
Ms. WALKER. For every one full-time job that is created
there are four part-time jobs created.
Mr. BENTIVOLIO. So when you average the hours that is not
quite four to one.
Ms. WALKER. Right.
Mr. BENTIVOLIO. That makes sense. Four out of five new jobs
created.
Ms. WALKER. Well, that is surprising in and of itself to
me, but the trend, and I am not sure whether it was 2010 to
2012 or what the years were, but the trend, it is flipped. It
used to be six full-times to one part-time versus one to four.
Mr. BENTIVOLIO. That is really a devastating figure. I
mean, it is not devastating for us in this room, definitely, it
is the folks out there looking for a job, particularly young
people which have been the most devastated in this lack of
long-term economic recovery.
Can you describe a little more what happens, and basically
this part-time economy where you are trying to work around,
trying to avoid these mandates. I mean, people might say, well,
why are you not providing health insurance for somebody who
works 20 hours a week? There are reasons. It is costly.
Ms. WALKER. Right.
Mr. BENTIVOLIO. And trying to make those demands in a
changing, uncertain environment where you have got to look and
say you cannot work that much this weekend, and the reality is
it is not just figures. I have heard from my district story
after story of small business owners saying, you know,
``Congressman, I did not hire anybody this week. I am not going
to hire anybody next year because I am worried about the
threshold. I do not know what the rules are going to be. I am
not going to take that risk.'' And these are successful
businessmen and women. But the message we are sending from
Washington is that we will let you know next year, and it does
not work that way.
Any further comments from you all? I know I am about out of
time on that, but that is the frustration I am hearing, which
is matching what the panel has.
Ms. Bogardus.
Ms. BOGARDUS. Thank you. I would just add that it is an
issue that is crying out for leadership, and leadership in
terms of what you are doing here today, and that is seeking out
the truth. What is the truth, what are the facts, and then
coming to at least some sort of agreement on what you can agree
on. I mean, the American people, the small business owners, the
large business owners, they want to see some sort of solution
to these problems other than the issues being raised and the
lack of a solution just being acceptable or considered
inevitable. And we need somebody, and a group of people
perhaps, to step up and say something has got to change because
we cannot sit back and watch the train go down the tracks with
the bolts flying off because we know what is going to happen.
And this is our country, our economy, our fellow citizens, the
children, the young people who are trying to get jobs, people
who are trying to grow a business, business owners who are
trying to do planning who are putting off expansion, putting
off buildings, putting off all kinds of things that could
create and generate other jobs, not just within their own
businesses, construction work and other things. So it is crying
out for leadership, and I would say this is a great start and I
would continue down that path.
Mr. BENTIVOLIO. Thank you. And I yield back, Mr. Chairman.
Mr. COLLINS. Thank you, Ms. Bogardus. That was a great
summary, actually.
At this point I would like to yield five minutes to Mr.
Payne.
Mr. PAYNE. Thank you, Mr. Chairman.
Ms. VELAZQUEZ. Mr. Payne, will you yield for one second?
Mr. PAYNE. Yes.
Ms. VELAZQUEZ. I just--if not----
Mr. PAYNE. You are the ranking member. Please.
Ms. VELAZQUEZ. Go ahead and use your five minutes. I will
come back. I just did not want to----
Mr. PAYNE. No, please.
Ms. VELAZQUEZ. I did not want to lose the train here.
Ms. Walker, you mentioned--a number that struck me, one out
of five jobs are part-time jobs. What was the number?
Ms. WALKER. For every one full-time job created, there are
four part-time jobs created.
Ms. VELAZQUEZ. There was a hearing that I mentioned before,
where we had the expert witness Dean Baker from the Center for
Economic and Policy Research, and he said the vast majority of
people who work part-time do so voluntarily. In many cases,
they have family or other obligations that make part-time
employment decidable. Even with the current weak labor market,
more than two-thirds of the people who work part-time report
that they do so voluntarily.
Thank you for yielding.
Mr. PAYNE. Well, you know, this is an observation, and the
Affordable Health Care Act is the law, very new in its infancy,
and naturally there are going to be issues around the
implementation. We know the problems that we have had to this
point, but the meat of the act I think will revolutionize
healthcare in this nation. If we look back at other large
programs that have been implemented over the course of time,
one being social security is probably the easiest one to
mention, when it was implemented it was going to destroy this
nation and we were going to socialism and how could we do this?
It was going to ruin the nation. And I think most American now
think social security is part of the fabric of this country.
And so I see the Affordable Care Act having the same type of
life in this nation.
When they started social security they used your name as an
identifier. Well, guess what? They had to tweak the system
because there were a lot of Donald Paynes and Ms. Bakers and
what have you. So they went to a social security number. So
nothing is perfect when it starts. You have to let it evolve
into something that is going to work. So I like to use that
example because it is probably the easiest example to use in
terms of rough starts for large programs that are successful
over the course of time.
And Ms. Baker, in your testimony you state that this law
leads small business owners to provide health coverage in an
industry where that is not the norm. Well, let me just say
that--I want to say setting the norm is precisely what the
Affordable Care Act is about. Over the last decade, health
insurance premiums for small firms have increased 113 percent
leading to dropped coverage. The Affordable Care Act was
enacted to upset this norm and make it easier for small
businesses to compete and offer quality benefits. The norm
prior to the law allowed insurance companies to drop coverage
for employees when they needed coverage the most and
discriminate against people with preexisting conditions. The
law upsets this norm.
Prior to the Affordable Care Act, it was normal for an
average U.S. family and their employer to pay an additional
$1,000 for insured people to cover that cost. The Affordable
Care Act aims to upset this norm by bringing the uninsured into
the system, driving overall costs down.
Now, there are issues with the law that need to be tweaked,
but the bones and the substance of the law are good and are
here to stay. Further, 96 percent of U.S. businesses have fewer
than 50 employees, and according to the last census data, less
than 1 percent of businesses have between 45 and 49 employees,
placing them at risk of falling into the abyss of the employer
mandate. Again, that is less than 1 percent.
Now, I am interested in addressing valid concerns about the
Affordable Care Act and you have stated many today, such as the
compliance and the burden on small businesses. However, I
really find it nonconstructive to continue to play on the fears
of the American people rather than work on ways to make this
law better and see it implemented successfully. So over the
course of the last two days I have heard the president speaking
before groups and saying if you have ideas, and I believe he is
reaching out to our colleagues on the other side, if you have
ideas that will strengthen the law, then let us discuss it. But
to continue to try to tear it down and sabotage it and not even
allow it to go through its natural courses is
counterproductive.
So in terms of solutions, and I am very open to the
criticism and the potential of making it stronger, so I am glad
to hear your testimony.
Mr. Winstanley, you mentioned--I am sorry.
Mr. WINSTANLEY. Yes, sir.
Mr. PAYNE. Did I pronounce it correct?
Mr. WINSTANLEY. Yes. Winstanley. Yes.
Mr. PAYNE. Winstanley. I am sorry.
You mention an E-FLEX coalition that advocates for greater
flexibility and options within the law. I understand that the
restaurant industry has a unique makeup. What proposal does the
coalition have to provide flexibility while upholding the law's
goal of expanding insurance coverage for all?
Mr. WINSTANLEY. Where do you see the E-FLEX? Oh, it was
referenced in the regulations?
Mr. PAYNE. Yeah.
Mr. WINSTANLEY. I am not familiar enough with that. I am
not familiar enough with that to speak to that. What I would
like to speak to though is you mentioned social security, and
to my generation and every generation behind us, what social
security is known for is being a completely unsustainable
program. I would also like to mention that when I got started,
I got started with a 24-hour diner. It had about 10 or 12
employees. My twin brother and I stayed up all night building
that place and rebuilding it and turning it into a real
business and there was nothing we wanted more than to build our
business and add to it. And I have been fortunate to have some
very good advice from people over the years that have done
similar things, and what they have shared with me time and
again, which turned out to be true in our case, is that every
next step you take is harder than the step behind you, and
there is significant growth burden that comes with trying to
build a real business. And the 50 employees, regardless of what
industry I believe you are in, the 50 employees presents an
additional significant hurdle for people who are trying to
build something meaningful, and I think it is counter to the
spirit of this country.
Mr. COLLINS. Thank you. The gentleman's time has expired.
Mr. Bentivolio wanted to ask a follow-on question, so Mr.
Bentivolio.
Mr. BENTIVOLIO. Thank you, Mr. Chairman.
Just a few short questions.
Mr. Winstanley.
Mr. WINSTANLEY. Yes, sir.
Mr. BENTIVOLIO. Healthcare law requires you to inform your
employees about the health insurance choices available to them.
Is this an additional burden and expense for your companies?
Mr. WINSTANLEY. I am sorry, requires us to inform them
about the health care?
Mr. BENTIVOLIO. Yes, sir. There is a significant amount of
education that goes on and as anybody with kids knows, it is
hard to educate somebody who is not interested to hear what you
are saying.
It has traditionally been very challenging for us to
educate to the groups of people that we were able to provide
health insurance to. And so, yeah, I see that as being very
significant. Yes, sir. I see it as being a very significant
challenge.
Mr. BENTIVOLIO. Now, while I was back in the District last
weekend, I had dinner at a restaurant, and the waitress came
over and she recognized me and a big supporter and told me her
story; that she lost her job, now is working two jobs, all
because of the health care. She lost it when they found out
about this employer mandate, before they delayed that. Right?
And they had to reduce their employees. And now she is working
two jobs. Do you have a lot of waitresses or people on your
staff that are working two jobs to make ends meet?
Mr. WINSTANLEY. We have a significant number of people
doing that, and what we have seen is there are a lot of people
who need part-time jobs and that is because wage and job growth
in permanent, full-time positions has not been there while the
cost of childcare and housing continue to increase.
Mr. BENTIVOLIO. Do you think that is largely attributable
to the Unaffordable--excuse me--Affordable--this is really
confusing--Unaffordable Health Care Act? I got it right.
Washington got it wrong.
Mr. WINSTANLEY. I think it is attributable to a general
slowdown, which the healthcare act is very much influencing.
Mr. BENTIVOLIO. Great. So let us see. Ms. Baker, under the
aggregate rules, a controlled group is a collection of two or
more corporations with common stock ownership that are
connected in one of several ways. Many small businesses do not
issue stock. How would the rules be applied in those cases?
Ms. Baker, CPA; right?
Ms. BAKER. Yes.
They look at ownership. So if you are not a corporation,
they look at investment and equity within those companies. So
in my example, when I invested in a small women's boutique just
as an investment, I do not manage or operate that on a day-to-
day basis. Those employees are then pulled into my CPA firm as
part of the rules of aggregation.
Mr. BENTIVOLIO. And increasing the cost?
Ms. BAKER. And increasing the cost. And even though Mr.
Payne mentioned the norm, I think the norm is we would all love
to provide health insurance in every industry, but that is a
very small women's boutique. There are very few other women's
boutiques that would have to require health insurance because
they are small businesses and they are not meeting the 50
employees. So for me to have to provide health insurance for
them makes me not competitive in that market just because I am
an entrepreneur and own businesses in different industries.
Mr. BENTIVOLIO. So let us see if we can sum up. Higher
deductibles, higher premiums, additional legal costs; correct?
Tens of thousands of dollars for a small business. And you are
less competitive.
Thank you very much. I yield back.
Mr. COLLINS. At this point we will call the hearing to a
close. I want to thank all of our witnesses for being here
today. It is very timely.
I think what some people do forget is even though the
employer mandate, the penalty portion has been delayed a year,
the calculations as to whether or not you will have to comply
with the law start in three weeks time. So on January 1st, that
is the beginning of what will be 12 monthly buckets of keeping
track of the hours and the employees to see if you hit the 50
FTEs or not. So it is a very timely situation. We certainly
heard a lot of give and take. I think we all recognize that
there will be changes that will be needed in this law and
hopefully now the president would agree to make some changes.
He has not up till this point in time recognized that, but I
think an overwhelming number of Americans today are expressing
displeasure in the law. And certainly, as we heard today,
compliance with the law and the application of the complex
aggregation rules is burdensome and is confusing for business,
and I think it almost goes without saying that a big
government, ``one size fits all'' set of regulations and laws
that tell a business what benefits they have to offer, whether
that is a restaurant, a construction company, or a high-tech
manufacturing company is, in fact, a drag on the economy.
Today's hearing did highlight another example of the
unintended consequences of the Affordable Care Act, namely the
high cost to business of hiring a CPA or other tax advisor to
give advice on the IRS aggregation rules, money that is better
spent on growth and the creation of jobs.
We on this Committee will continue to closely follow the
implementation of this law and its effect on small business.
I would ask unanimous consent that members have five
legislative days to submit statements and supporting materials
for the record.
Ms. VELAZQUEZ. Yes, Mr. Chairman, before we close, I would
like to thank all the witnesses. It is a breath of fresh air to
hear that we are talking now about fixing and looking at ways
where we could improve the implementation of the health care
law. So it is great to know that we are moving beyond repealing
Obamacare to finding common ground to make it work because it
is the law of the land. Thank you.
Mr. COLLINS. Thank you, Ranking Member Velazquez. And with
that, without objection, this hearing is now adjourned.
[Whereupon, at 3:15 p.m., the Committee was adjourned.]
A P P E N D I X
``The Health Care Law, The Effect of the Business Aggregation Rules on
Small Business''
Testimony of:
Deborah Walker, CPA
National Director, Compensation & Benefits
Cherry Bekaert LLP
Washington, DC
Before the
Committee on Small Business
United States House of Representatives
December 4, 2013
The Honorable Sam Graves (R-MO), Chairman
The Honorable Nydia Velazquez (D-NY), Ranking Member
Good afternoon Chairman Graves, Ranking Member Velazquez
and members of the Committee. Thank you for hosting this
important hearing on the effect of the business aggregation
rules on small business in applying the health care law. I am
Deborah Walker, a CPA with over 35 years of experience in the
Employee Benefits area. I am currently National Director of
Compensation and Benefits for Cherry Bekiaert LLP. I welcome
this opportunity to discuss this important issue and offer an
alternative approach.
Executive Summary
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.
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 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. In addition, one can expect that the
employers close to exceeding the limit will make business
decisions that would result in increased hiring by taking into
account the increased cost of mandated health care.
An employer can choose to offer a retirement plan or not,
and in so doing accepts the application of these rules. For
mandated health benefits, the employer does not have a choice
of whether to be involved with these rules. For this reason,
these rules are not appropriate to define the employer for the
Affordable Care Act. Applying the same business aggregation
rules to a mandated benefit that exist for purposes of
preventing discrimination for voluntary employer provided
benefits can lead to inefficient and unwanted economic
behavior. This behavior constrains a small business and may
lead to unwanted and unwelcome business decisions including not
hiring additional works that ensure the small business is not
subject to the rules.
Many small employers who offer a retirement plan offer a
safe harbor IRC Section 401(k) plan that does not require
discrimination testing. Thus, many small employers do not have
to make this determination except for determining the
applicability of the shared responsibility rules of the
Affordable Care Act and the groups of employees for whom
minimum essential coverage is required to be provided. Because
many small employers have never had to use these rules,
avoiding them with the use of safe harbor qualified retirement
plans or not offering a qualified retirement plan, the rules
are not familiar to them. This is true for many of the advisers
to small businesses. What we have here are rules that only a
small subset of tax practitioners are familiar with and apply.
Even those that apply the rules, as I and other benefits
practitioners do, apply them on an infrequent basis, perhaps 4-
5 times a year.
For determining who is the employer, I suggest an
alternatives, facts and circumstances test focused on the
entities controlled by a specific individual. Investors who had
no control of day-to-day operations of the business would not
need to be aggregated. Examples include the individual who
makes hiring and firing and purchasing decisions and sets sales
prices. By focusing on day-to-day operations, the business
would be defined by the industry or industries with which an
individual is involved regularly. Similarly, if a spouse were
not involved with day-to-day operations of the other spouse's
business, the businesses of each spouse would not be
aggregated.
The taxpayer would evaluate the facts and circumstances of
each business and a determination would be made. By using a
facts and circumstances determination, the opportunity to plan
to avoid bright line tests is not available. A facts and
circumstances test will use business activities and
characteristics with which the small business operator is
familiar. The statute or IRS guidance could outline a
nonexclusive list of characteristics of control. This is
similar to the rules used for determining whether an individual
is an employee or independent contractor and parts of the rules
that determine what is a separate line of business. As there is
sometimes no clear-cut answer, many people may be more rather
than less conservative in making a determination.
The determination would be subject to audit by the IRS. In
addition, the IRS could establish a procedure whereby taxpayers
could obtain certainty by applying to the IRS for a
determination of whether 2 businesses should be aggregated
given specified facts.
Finally, because the existing rule is the same rule used
for qualified plan discrimination testing, some employers may
want to continue using the existing bright line test rule,
suggesting that a new facts and circumstances rule should be an
alternative.
Background
Under the Affordable Care Act, employers with an average of
at least 50 full-time employees on business days during the
preceding taxable year are subject to shared responsibility
assessable penalties if 1) minimum essential coverage is not
offered to full employees (and their dependents) and at least
one full-time employee enrolls in such coverage for which a tax
credit or cost sharing reduction is allowed, or 2) minimum
essential coverage is offered to full-time employees (and their
dependents) but the coverage is not affordable or does not meet
minimum value standards and at least one full-time employee
enrolls in such coverage for which a tax credit or cost sharing
reduction is allowed.
The Controlled Group Rules
To determine if an employer employs an average of at least
50 full-time employees on business days during the preceding
year, all persons treated as a single employer under IRC
Section 414(b), (c), (m), (n) and (o) are treated as employed
by 1 employer. This rule is known as the controlled group,
affiliated service group and leased employee rule. Special
rules apply for employers not in existence during the preceding
year, for predecessor employers and for seasonal workers. In
addition, full-time equivalent employees are treated as full-
time employees.
The controlled group rules were originally enacted with
ERISA in 1974, modeled after the controlled group rules for
consolidated return purposes. In general, the employees of a
controlled group of corporations or of commonly controlled
partnerships or proprietorships are treated as if the same
employer employed them all. The rules have been applied for
many years to qualified retirement plans and even longer for
other tax purposes. Because the purpose of the controlled group
rules for benefit plan discrimination testing and coverage
rules is broader than the purpose for the consolidated return
rules, the rules apply to noncorporate trade or business
entities using the same concepts as the corporate entities. In
general, the rule was originally adopted to make it impossible
for the qualified plan coverage and nondiscrimination rules to
be circumvented by operating businesses through separate
entities rather than as a single entity. Since that time, they
have been used for defining the employer for testing
discrimination for all types of benefit plans.
The controlled group rules include parent-subsidiary
controlled groups, brother-sister controlled group and combined
groups.
Parent Subsidiary Controlled Group
A parent-subsidiary controlled group is one of more chains
of corporations connected through stock ownership with a common
parent corporation if
(A) Stock possessing at least 80 percent of the total
combined voting power of all classes of stock entitled
to vote or at least 80 percent of the total value of
shares of all classes of stock of each of the
corporations, except the common parent corporations, is
owned (directly and through ownership of an option) by
one or more of the other corporations; and
(B) The common parent corporation owns (directly and
through ownership of options) stock possessing at least
80 percent of the total combined voting power of all
classes of stock entitled to vote or at least 80
percent of the total value of shares of all classes of
stock of at least one of the other corporations,
excluding, in computing such voting power or value,
stock owned directly by such other corporations.
For determining stock ownership, attributions rules apply
to attribute ownership to someone other than the legal owner of
the stock. For purposes of determining whether a corporation is
a member of a parent-subsidiary controlled group of
corporations, stock owned by a partnership is considered owned
proportionally by any partner that has an interest of five
percent or more of the capital or profits of the partnership,
whichever is greater. Similarly, in the case of an estate or
trust, other than a trust holding qualified retirement plan
assets, stock owned by the estate or trust is considered owned
proportionally by a beneficiary who has an actuarial interest
of five percent or more in such stock. To determine the five
percent actuarial interest, one assumes the maximum exercise of
discretion by the fiduciary in favor of the beneficiary and the
maximum use of stock to satisfy the beneficiary's rights. In
addition, the grantor of a grantor trust is considered to own
the stock of the trust.
For example, assume P Corporation owns 80 percent of the
only class of stock of S Corporation and S, in turn, owns 40
percent of the only class of stock of X Corporation, P also
owns 80 percent of the only class of stock of Y Corporation and
Y, in turn, owns 40 percent of the only class of stock of X. P
is the common parent of a parent-subsidiary controlled group
consisting of member corporations P, S, X, and Y.
Similarly, assume P Corporation owns 75 percent of the only
class of stock of Y and Z Corporations; Y owns all the
remaining stock of Z; and Z owns all the remaining stock of Y.
Since intercompany stockholdings are not treated as outstanding
for purposes of determining whether P owns stock possessing at
least 80 percent of the voting power or value of at least one
of the other corporations, P is treated as the owner of stock
possessing 100 percent of the voting power and value of Y and
of Z. Also, stock possessing 100 percent of the voting power
and value of Y and Z is owned by the other corporations in the
group. P and Y together own stock possessing 100 percent of the
voting power and value of Z, and P and Z together own stock
possessing 100 percent of the voting power and value of Y.
Therefore, P is the common parent of a parent-subsidiary
controlled group of corporations consisting of member
corporations P, Y, and Z.
When applying these rules to noncorporate entities, a
parent-subsidiary group of trades or businesses under common
control include means one or more chains of organizations
conducting trades or businesses connected through ownership of
a controlling interest with a common parent organization if--
(A) A controlling interest in each of the
organizations, except the common parent organization,
is owned (directly and through ownership of options) by
one or more of the other organizations; and
(B) The common parent organization owns (directly and
through ownership of options) a controlling interest in
at least one of the other organizations, excluding, in
computing such controlling interest, any direct
ownership interest by such other organizations.
For purposes of these rules, a controlling interest is
defined as
(A) In the case of an organization which is a
corporation, ownership of stock possessing at least 80
percent of total combined voting power of all classes
of stock entitled to vote of such corporation or at
least 80 percent of the total value of shares of all
classes of stock of such corporation;
(B) In the case of an organization which is a trust
or estate, ownership of an actuarial interest of at
least 80 percent of such trust or estate;
(C) In the case of an organization which is a
partnership, ownership of at least 80 percent of the
profits interest or capital interest of such
partnership; and
(D) In the case of an organization which is a sole
proprietorship, ownership of such sole proprietorship.
In determining ownership, only outstanding stock is taken
into account. In addition, if the parent organization owns
(A) In the case of a corporation, 50 percent or more
of the total combined voting power of all classes of
stock entitled to vote or 50 percent or more of the
total value of shares of all classes of stock of such
corporation.
(B) In the case of a trust or an estate, an actuarial
interest of 50 percent or more of such trust or estate,
and
(C) In the case of a partnership, 50 percent or more
of the profits or capital interest of such partnership.
certain other stock ownership is excluded, including that
held in trust for the payment of deferred compensation,
subsidiary stock held by principal owners, officers, partners
or fiduciaries of the parent organization, subsidiary stock
held by employees if subject to a substantial restriction which
limits the employees right to dispose of the stock which runs
in favor of the parent organization and subsidiary stock held
by an exempt organization which is controlled by the parent or
subsidiary organization, by an individual, estate, or trust
that is a principal owner of the parent organization, by an
officer, partner, or fiduciary of the parent organization, or
by an combination thereof. Whether an exempt organization is
controlled is a facts and circumstances determination.
As you can see, application of this rule involves knowing
stock and option ownership of all entities, applying
attribution rules for stock owned by partnerships, estates and
trusts and then determining if the 80% rule is met. Note that,
if stock ownership is 79%, then a parent subsidiary controlled
group is not formed. Corporate tax planning often involves
owning 79% rather than 80% of a corporation for this reason.
Brother-Sister Controlled Group
A brother-sister controlled group is a group of two or more
corporations if the same five or fewer persons who are
individuals, estates, or trusts own (directly and through the
ownership of options) stock possessing
(A) At least 80 percent of the total combined voting
power of all classes of stock entitled to vote or at
least 80 percent of the total value of shares of all
classes of stock of each corporation (the 80 percent
requirement);
(B) More than 50 percent of the total combined voting
power of all classes of stock entitled to vote or more
than 50 percent of the total value of shares of all
classes of stock of each corporation, taking into
account the stock ownership of each such person only to
the extent such stock ownership is identical with
respect to each such corporation (the more-than-50
percent identical ownership requirement); and
(C) The five or fewer persons whose stock ownership
is considered for purposes of the 80 percent
requirement must be the same persons whose stock
ownership is considered for purposes of the more-than-
50 percent identical ownership requirement.
For determining stock ownership, attributions rules again
apply to attribute ownership to someone other than the legal
owner. For purposes of determining whether a corporation is a
member of a brother-sister controlled group of corporations,
stock owned by a partnership is considered owned proportionally
by any partner that has an interest of five percent or more of
the capital or profits of the partnership, whichever is
greater. Similarly, in the case of an estate or trust, other
than a qualified retirement plan, stock owned by the estate or
trust is considered owned proportionally by a beneficiary who
has an actuarial interest of five percent or more in such
stock. To determine the five percent actuarial interest, one
assumes the maximum exercise of discretion by the fiduciary in
favor of the beneficiary and the maximum use of stock to
satisfy the beneficiary's rights. In addition, the grantor of a
grantor trust is considered to own the stock of the trust. One
also needs to attribute stock held by a corporation
proportionally to any five percent or more owner of the
corporation.
Finally, in the case of family attribution, stock owned by
a spouse is considered owned by the other spouse unless each of
the following is true:
a) the spouse owns no stock directly at any time
during the taxable year,
b) the spouse is not an employee or director or
participate in management of the corporation at any
time during the taxable year,
c) no more than 50% of the corporation's gross income
was derived from rents, royalties, dividends, interest
and annuities during the year, and
d) the stock of the corporation is not, at any time
during the taxable year, subject to conditions which
substantially limit or restrict the owner's right to
dispose of such stock which run in favor of the spouse
or children who have not attained age 21.
Stock owned directly or indirectly by a child that has not
attained age 21 is attributed to the parents and if an
individual has not attained age 21, stock owned by the parents
is attributed to the child. In addition, if an individual owns
more than 50% of the total voting power or value of all classes
of stock (after applying all attribution rules other than this
rule and attribution from children under age 21), stock owned
directly or indirectly by parents, grandparents, grandchildren
and children over age 21 are attributed to the individual.
For determining a brother-sister controlled group of
corporations, one needs to again determine stock and option
ownership, attributed stock ownership and also common ownership
(including that through attribution) and then apply the 80% and
50% test. Again, with the bright line stock ownership rules,
individuals can structure ownership to avoid the rules. When
applying these rules to noncorporate entities, adjustments are
made which highlight that only trade or business entities are
considered.
Again, certain stock ownership can be excluded for purposes
of determining ownership. If five or fewer persons who are
individuals, estates, or trusts own (directly and through the
ownership of options) own
(A) In the case of a corporation, 50 percent or more
of the total combined voting power of all classes of
stock entitled to vote or 50 percent or more of the
total value of shares of all classes of stock or such
corporation,
(B) In the case of a trust or an estate, an actuarial
interest of 50 percent or more of such trust or estate,
and
(C) In the case of a partnership, 50 percent or more
of the profits or capital interest of such partnership.
certain stock ownership is excluded, including that held in
a qualified retirement plan trust, subsidiary stock held by
employees if subject to a substantial restriction which limits
the employees right to dispose of the stock which runs in favor
of the parent organization and subsidiary stock held by an
exempt organization which is controlled by the by the
organization, by an individual, estate, or trust that is a
principal owner of the organization, by an officer, partner, or
fiduciary of the parent organization, or by any combination
thereof. Whether an exempt organization is controlled is a
facts and circumstances determination.
The term ``brother-sister group of trades or businesses
under common control'' means two or more organizations
conducting trades or businesses if
(A) the same five or fewer persons who are
individuals, estates, or trusts own (directly and
through attribution as described above) a controlling
interest in each organization, and
(B) taking into account the ownership of each such
person only to the extent such ownership is identical
with respect to each such organization, such persons
are in effective control of each organization.
The five or fewer persons whose ownership is considered for
purposes of the controlling interest requirement for each
organization must be the same persons whose ownership is
considered for purposes of the effective control requirement.
For purposes of these rules, a controlling interest is
defined as
(A) In the case of an organization which is a
corporation, ownership of stock possessing at least 80
percent of total combined voting power of all classes
of stock entitled to vote of such corporation or at
least 80 percent of the total value of shares of all
classes of stock of such corporation;
(B) In the case of an organization which is a trust
or estate, ownership of an actuarial interest of at
least 80 percent of such trust or estate;
(C) In the case of an organization which is a
partnership, ownership of at least 80 percent of the
profits interest or capital interest of such
partnership; and
(D) In the case of an organization which is a sole
proprietorship, ownership of such sole proprietorship.
For purposes of these rules, effective control is defined
as
(A) In the case of a corporation, such persons own
stock possessing more than 50 percent of the total
combined voting power of all classes of stock entitled
to vote or more than 50 percent of the total value of
shares of all classes of stock of such corporation;
(B) In the case of a trust or estate, such persons
own an aggregate actuarial interest of more than 50
percent of such trust or estate;
(C) In the case of a partnership, such persons own an
aggregate of more than 50 percent of the profits
interest or capital interest of such partnership; and
(D) In the case of a sole proprietorship, one of such
persons owns such sole proprietorship.
For example, assume X corporation is owned by 8 unrelated
shareholders, A, B, C and D each own 12% and E, F, G and H each
own 13% and Y Corporation is owned by the same 8 shareholders
with A, B, C and D each owning 13% and E, F, G and H each own
12%. Any group of five of the shareholders will own more than
50 percent of the stock in each corporation, in identical
holdings. However, X and Y are not members of a brother-sister
controlled group because at least the same five or fewer
persons do not own 80 percent of the stock of each corporation.
Alternatively, assume Corporation X and Y both has voting
and nonvoting stock outstanding. Individual A owns 100% of the
voting stock and 60% of the value of Corporation X and 75% of
the voting stock and 60% of the value of Corporation Y.
Unrelated individual B owns no voting stock and 10% of the
value of Corporation X and 25% of the voting stock and 10% of
the value of Corporation Y. No other shareholder of X owns (or
is considered to own) any stock in Y. X and Y are a brother-
sister controlled group of corporations. The group meets the
more-than-50 percent identical ownership requirement because A
and B own more than 50 percent of the total value of shares of
all classes of stock of X and Y in identical holdings. The
group also meets the more-than-50 percent identical ownership
requirement because of A's voting stock ownership. The group
meets the 80 percent requirement because A and B own at least
80 percent of the total combined voting power of all classes of
stock entitled to vote.
These examples highlight the detail needed for determining
whether a brother sister controlled group exists. When one
considers that attribution of stock ownership must be taken
into account before this test is performed, it is evident how
complicated the rule can be. Most tax practitioners would agree
that non tax professional would not likely be able to make a
correct determination of controlled group status in situations
in which a number of entities are involved or where there is
significant stock attribution that needs to be considered.
Combined Group
A combined group is any group of three or more corporations
if
(A) Each such corporation is a member of either a
parent-subsidiary controlled group of corporations or a
brother-sister controlled group of corporations; and
(B) At least one of such corporations is the common
parent of a parent-subsidiary controlled group and also
is a member of a brother-sister controlled group.
A combined group of trades or businesses under common
control means any group of three or more organizations, if
(1) each such organization is a member of either a
parent-subsidiary group of trades or businesses under
common control or a brother-sister group of trades or
businesses under common control, and
(2) at least one such organization is the common
parent organization of a parent-subsidiary group of
trades or businesses under common control and is also a
member of a brother-sister group of trades or
businesses under common control.
Affiliated Service Group Rules
As noted above, provisions that use bright line tests
provide practitioners and their clients with the opportunity to
structure ownership to avoid the rules. That is precisely what
Dr. Kiddie and Dr. Garland did when they formed a partnership
owned 50% by each of them. The partnership employed nurses and
other staff who, as a result of plan provisions, did not
participate in the benefit plans in which the doctors
participated. The IRS challenged this arrangement, but the Tax
Court upheld it. As a result, Congress expanded the controlled
group rules by adding the affiliated service group rules in
1980. Thus, the controlled group rules were supplemented by
affiliated service group rules that focus on business
relationships and activities rather than stock ownership. In
subsequent years, more statutory changes expanded the
definition to include groups of management organizations and
the organizations managed, even if there was no stock
ownership, and broadened the attribution rules that apply. For
instance, if one entity provides management services to another
entity, the two entities would be part of an affiliated service
group.
An affiliated service group is one type of group of related
employers and refers to two or more organizations that have a
service relationship and, in some cases, an ownership
relationship. An affiliated service group can fall into one of
three categories.
1. A-Organization groups (referred to as ``A-Org'')
consist of an organization designated as a First-
Service Organization (FSO) and at least one ``A
organization''.
2. B-Organization groups (referred to as ``B-Org'')
consist of a FSO and at least one ``B organization''.
3. Management groups.
An FSO must be a ``service organization'', a
corporation, partnership or other entity whose
principal business is the performance of services.
Proposed regulations state that the principal business
of an organization is considered the performance of
services if capital is not a material income-producing
item. This is a facts and circumstances determination,
although the proposed regulations specify that capital
is a material income-producing item for banks and
similar institutions. In addition, the proposed
regulations note that capital is a material income-
producing factor if a substantial portion of the gross
income of the business is attributable to the
employment of capital in the business are reflected,
for instance, by a substantial investment in
inventories, plant, machinery or other equipment.
Capital is not a material income-producing factor if
the gross income of the business consists principally
of fees, commissions, or other compensation for
personal services performed by an individual. In
addition to non-capital intensive organizations, an
organization engaged in health, law, engineering,
architecture, accounting, actuarial science, performing
arts, consulting or insurance are all considered
service organizations.
To be an A-Org, an organization must satisfy an ownership
test and a working relationship test. The ownership test is met
if the organization is a partner or shareholder in the FSO
(regardless of the percentage interest it owns in the FSO)
determined by applying the constructive ownership rules. The
working relationship test is the organization ``regularly
performs services of the FSO,'' or ``regularly associated with
the FSO in performing services for third parties. Facts and
circumstances are used to determine if a working relationship
exists.
To be a B-Org, the organization does not need to be a
service organization. Rather, it must meet the following
requirements:
- A significant portion of its business must be the
performance of services for a FSO, for one or more A-
Org's determined with respect to the FSO, or for both,
- The services must be of a type historically
performed by employees in the service field of the FSO
or the A-Org's, and
- Ten percent or more of the interests in the
organization must be held, in the aggregate, by highly-
compensated employees of the FSO or A-Org.
Services will be considered of a type historically
performed by employees in a particular service field if it was
not unusual for the services to be performed by employees of
organizations in that service field in the United States on
December 13, 1980.
For example, assume Allen Averett, a doctor, is
incorporated as Allen Averett, P.C. and this professional
corporation is a partner in the Butler Surgical Group. Allen
Averett and Allen Averett, P.C., are regularly associated with
the Butler Surgical Group in performing services for third
parties. The Butler Surgical Group is an FSO. Allen Averett,
P.C. is an A-Org because it is a partner in the medical group
and is regularly associated with the Butler Surgical Group to
perform services for third parties. Accordingly, Allen Averett,
P.C. and the Butler Surgical Group would constitute an
affiliated service group. As a result, the employees of Allen
Averett, P.C. and the Butler Surgical Group must be aggregated
and treated as if they were employed by a single employer.
Similarly, assume that the Everett, Furman and Guilford
Partnership is a law partnership with offices in numerous
cities. EFG of Capital City, P.C., is a corporation in Capital
City that is a partner in the law firm. EFG of Capital City,
P.C. provides paralegal and administrative services for the
attorneys in the law firm. All of the employees of the
corporation work directly for the corporation, and none of them
work directly for any of the other offices of the law firm. The
law firm is an FSO. The corporation is an A-Org because it is a
partner in the FSO and is regularly associated with the law
firm in performing services for third parties. The corporation
and the partnership would together constitute an affiliated
service group. Therefore, the employees of EFG of Capital City,
P.C. and the employees of The Everett, Furman and Guilford
Partnership must be aggregated and treated as if they were
employed as a single employer.
Similarly, assume Reinhardt & Associates is a financial
services organization that has 11 partners. Each partner of
Reinhardt owns one percent of the stock in Asbury Corporation.
Asbury provides services to the partnership of a type
historically performed by employees in the financial services
field. A significant portion of the business of Asbury consists
of providing services to Reinhardt. Considering Reinhardt &
Associates as an FSO, the Asbury Corporation is a B-Org
because:
1. A significant portion of its business is in the
performance of services for the partnership of a type
historically performed by employees in the financial
services field. And,
2. More than 10% of the interests in the Asbury
Corporation is held, in the aggregate, by the highly-
compensated employees of the FSO (consisting of the 11
common owners of Reinhardt and Associates).
Accordingly, the Asbury Corporation & Reinhardt and
Associates constitute an affiliated service group. Therefore,
the employees of the Asbury Corporations and Reinhardt and
Associates must be aggregated and treated as if they were
employed by a single employer.
A management-type affiliated service group exists when an
organization performs management functions, and the management
organization's principal business is performing management
functions on a regular and continuing basis for a recipient
organization. There does not need to be any common ownership
between the management organization and the organization for
which it provides service. Any person related to the
organization performing the management function is also to be
included in the group that is to be treated as a single
employer.
A recipient organization does not need to be a service
organization. It is as organization for which management
services are performed, any organization aggregated with the
service organization under these controlled group and
affiliated service group rules and all related organizations.
For example, assume Anson and Branch Corporations are a
brother sister corporation and Crockett and Duval Corporations
constitute an affiliated service group. Assume Crockett or
Duval (or both) perform management functions and other services
for Anson or Branch (or both) and the performance of these
management functions or services satisfy the requirements of a
principal business on a regular and continuing basis. Crockett
and Duval are treated as a single management organization and
Anson and Branch are treated as a single recipient
organization. Anson, Branch, Crockett and Duval would
constitute an affiliated service group.
The affiliated service group rules are very difficult to
apply, because there are so many different iterations of
possible structures that need to be considered. In fact, the
IRS has not issued any final regulations providing guidance for
applying these rules. Proposed regulations were issued in 1983
and 1987 and portions of those were withdrawn, presumably
because they were broader than intended and thus unworkable, in
1993.
Leased Employees
At the same time that the affiliated service group rules
were enacted, employee leasing rules were also enacted, which
required the inclusion in the controlled group of employees
leased to entities. In general, a leased employee is any person
who is not an employee of the recipient and who provides
services to the recipient if--
(A) such services are provided pursuant to an
agreement between the recipient and a leasing
organization,
(B) such person has performed such services for the
recipient (or for the recipient and related persons) on
a substantially full-time basis for a period of at
least 1 year, and
(C) such services are performed under primary
direction or control by the recipient.
These rules were designed to prevent employers using
independent contractors to avoid the inclusion of individuals
in benefit plans.
Finally, Congress gave the IRS broad regulatory authority
to issue guidance to treat other relationships as controlled
groups.
The Effect of the Rules on Small Employer
Many businesses develop as an entrepreneur sees an
opportunity to provide a product or service. Often the
businesses do not develop within the same industry and thus
industry norms regarding the provision of employee benefits,
including employer provided health care, are not the same. For
instance, software engineers often enjoy employer provided
healthcare, while retail workers and restaurant workers
typically do not. It is easier to remain competitive in an
industry if compensation and benefit arrangements conform to
industry norms. Thus, as the entrepreneur expands into
different industries it is often difficult if not impossible to
use a compensation structure different than the majority of the
industry.
In addition, small employers cannot as easily negotiate the
purchase of health benefits for workers or self-insure benefits
as they have fewer covered lives. This limits the
entrepreneur's ability to provide health care.
A Better Alternative
Any time a test consists of specific levels, percentages or
amounts, such as certain ownership percentages, there are two
consequences: (1) complexity and (2) planning to avoid the
``bright line'' tests. With the requirement that qualified
plans meet certain nondiscriminatory coverage and benefits
rules, ``bright line'' teats make sense from a tax point of
view. The tests contained in sections 414(b), (c), (m) and (o)
have become increasingly complicated as Congress and the IRS
have sought to prevent taxpayers from circumventing the
qualified plan rules by changing stock ownership percentages.
After the Tax Court upheld the structuring of arrangements to
avoid aggregation, Congress adopted the affiliated service
group rules and granted the IRS the authority to adopt any
other rules necessary to eliminate the opportunity for
taxpayers to avoid the rules. It is not appropriate to apply
this test is to determine the size of a business and which
employees must be offered minimum essential coverage under the
health care law.
Applying these controlled group rules, affiliated service
group rules and leased employee rules to determine whether an
employer is subject to the shared responsibility rules would
appear to be a convenient approach because it is an existing
set of rules. These rules, however, are exceedingly complicated
and well understood by only a small subset set of tax
practitioners. Applying the qualified plan aggregation rules
does not take into account the different purpose of the
Affordable Care Act employer mandate from the retirement plan
coverage and discrimination rules. Offering retirement plans is
not mandated and thus, when the entrepreneur decides to offer a
retirement plan, it is understood that the business aggregation
rules will apply. The shared responsibility rules mandate the
provision of health benefits. Applying the same business
aggregation rules to a mandated benefit that exist for purposes
of preventing discrimination for voluntary employer provided
benefits can lead to inefficient and unwanted economic
behavior. This behavior constrains a small business and may
lead to unwanted and unwelcome business decisions including not
hiring additional works that ensure the small business is not
subject to the rules. This is the same behavior that has been
exhibited by larger businesses, attempting to limit workers to
less than 30 hours per week.
By its very nature, this is a rule that employers will be
clearly under or clearly over, something that by its very
nature changes continually as businesses grow or decline. While
the test has to be applied every year, it is only relevant for
businesses that are not clearly above the at least 50 employee
threshold. Those clearly above or below do not need to make any
calculations. Thus, for any year, the test only affects a
limited number of taxpayers and the taxpayers affected each
year change as businesses develop or decline. However, as noted
above, taxpayers that are approaching the 50 full time
equivalent employee mark may decide to delay hiring to delay
application of this rule.
A facts and circumstances test, focusing on a specific
individual's (or group of individuals) control of business
decisions is a better aggregation test for mandated employer
provided health benefits. With a facts and circumstances test,
the employer will be able to determine whether the 50 full time
equivalent test is met and which employees need to be covered
without having to know detailed ownership information of
investors and related parties, and without the cost of having
to hire expensive outside consultants. Differences in industry
norms can also be taken into account. The statute can include a
non-exclusive list of items that need to be considered in
determining who is in control of the business. Investors who
had no control of day-to-day operations of the business would
not need to be aggregated. Examples include the individual who
makes hiring and firing and purchasing decisions and sets sales
prices. By focusing on day-to-day operations, the business
would be defined by the industry or industries with which an
individual is involved regularly. Similarly, if a spouse were
not involved with day-to-day operations of the other spouse's
business, the businesses of each spouse would not be
aggregated.
As with a bright line test, with a facts and circumstances
test, taxpayers and the IRS have the responsibility of making a
determination of whether businesses should be aggregated. The
taxpayer would evaluate the facts and circumstances of each
business and a determination would be made. By using a facts
and circumstances determination, the opportunity to plan to
avoid bright line tests is not available. A facts and
circumstances test will use business activities and
characteristics with which the small business operator is
familiar. As there is sometimes no clear-cut answer, many
people will be more rather than less conservative in making a
determination. That determination would be subject to audit by
the IRS. IRS, through its enforcement process will need to
understand the facts and circumstances that lead to a specific
conclusion and taxpayers will need to support their
conclusions.
Facts and circumstances tests, by their very nature, are
less likely to be applied abusively than bright line tests.
With a facts and circumstances test, individuals would
understand the situation and make a determination regarding the
whether the employer should be aggregated as an employer
operating a business or whether 2 business operations should be
viewed separately. The Employee Stock Ownership Plan (ESOP)
rules offer a good example of rules intended to limit abuses
that were circumvented as never expected. Under those rules
determining whether the ESOP is structuring arrangements to
avoid the payment of taxes involved the conversion of benefits
to synthetic equity and an understanding of ownership including
synthetic equity.
Facts and circumstances tests are used in many situations
for determining the application of tax rules. One that comes to
mind readily are the worker classification rules, determining
whether someone is a common law employee or independent
contractor. Those rules are set forth in regulations and other
IRS guidance. In general, an employer has the right to control
not only the amount of work to be done by an employee, but also
how it is to be performed. This is not the case with an
independent contractor. The name given to a service provider,
the number of hours worked, how an individual is paid are not
important.
Revenue Ruling 87-41 outlines 20 factors that need to be
considered in determining whether a service recipient exercises
enough control over a service provider for an employee or
independent contractor relationship to exist. The ruling
specifically states that not all of the factors have equal
weight and that not all need to be present. Rather the factors
are guides to help in determining the likelihood that someone
is more closely characterized as an employee or independent
contractor. While tax practitioners do structure arrangements
with workers so that the classification is more likely to be
certain, there is no bright line test or assurance that can be
applied. Since Revenue Ruling 87-41 was issued, the IRS has
outlined three categories of factors that should be considered
in conjunction with the revenue ruling. These factors are
behavioral control, financial control and relationship of the
parties.
While this is a facts and circumstances determination, the
IRS does have a process whereby either service providers or
service recipients can file a request for determination of
worker status by filing a Form SS-8. This form asks a number of
questions regarding the relationship. In making the
determination, IRS requests information from both parties and
makes a final, binding decision regarding worker status. If a
facts and circumstances test is applied for determining the
employer for providing minimal essential coverage, a similar
determination process could also be developed to all workers
and service recipients to have certainty with respect to the
determination.
The IRS had to address the definition of employer under
these rules in the tax-exempt context. Because tax exempt
organizations do not have owners, an alternative rule was
devised and this test gives some examples of the types of
activities that are viewed as indicators of control. Notice 89-
23 specified, among other things, that in the tax exempt arena,
the controlled group included each entity that provides
directly or indirectly at least 80% of the contributing
employer's operating funds and there is a degree of common
management or supervision between the entities. A degree of
common management or supervision exists if the entity providing
the funds has the power to appoint or nominate officers, senior
management or members of the board of directors (or other
governing board) of the entity receiving the funds. A degree of
common management or supervision also exists if the entity
providing the funds is involved in the day-to-day operations of
the entity.
Final regulations adopting the rules detailed in this
guidance have since been adopted. Specifically those
regulations provide, among other things, that common control
exists between an exempt organization and another organizations
if at least 80 percent of the directors of trustees of one
organization are either representatives of, or directly or
indirectly controlled by, the other organization. A trustee or
director is treated as a representative of another exempt
organization if he or she also is a trustee, director, agent,
or employee of the other exempt organization. A trustee or
director is controlled by another organization if the other
organization has the general power to remove such trustee or
director and designate a new trustee or director. Whether a
person has the power to remove or designate a trustee or
director is based on facts and circumstances. To illustrate, if
exempt organization A has the power to appoint at least 80
percent of the trustees of exempt organization B (which is the
owner of the outstanding shares of corporation C, which is not
an exempt organization) and to control at least 80 percent of
the directors of exempt organization D, then entities A, B, C,
and D are treated as the same employer. While these rules have
a bright line 80% test, they also indicate the type of
activities that could be considered in determining whether
control exists.
The qualified separate line of business rules also use a
similar rule, allowing employers to determine that certain
businesses qualified as separate lines of businesses and thus
do not have to be aggregated for determining qualified plan
coverage and discrimination testing. In general, a line of
business is a portion of an employer that is identified by the
property or services it provides to customers of the employer.
The employer is permitted to determine the lines of business it
operates by designating the property and services that each of
its lines of business provides to customers of the employer.
A separate line of business is a line of business that is
organized and operated separately from the remainder of the
employer. The determination of whether a line of business is
organized and operated separately from the remainder of the
employer is made on the basis of objective criteria. These
criteria generally require that the line of business be
organized into one or more separate organizational units (e.g.,
corporations, partnerships, or divisions), that the line of
business constitute one or more distinct profit centers within
the employer, and that no more than a moderate overlap exist
between the employee workforce and management employed by the
line of business and those employed by the remainder of the
employer. There are rules for determining whether a line of
business is organized and operated separately from the
remainder of the employer and thus constitutes a separate line
of business. These rules include an optional rule for
vertically integrated lines of business.
A qualified separate line of business must satisfy the
three statutory requirements including a notice requirement and
a requirement to pass administrative scrutiny. A separate line
of business may satisfy this administrative scrutiny rule by
using a regulatory safe harbor or by requesting and receiving
an individual determination from the IRS that the separate line
of business satisfies the requirement of administrative
scrutiny.
Finally, some small businesses may be making annual
determinations of the employer for qualified plan purposes and
could easily use that for determining the employer for health
care reform. The facts and circumstances test could be offered
as an alternative to the mechanical tests used for qualified
plan purposes. For those businesses already relying on this
test, certainty would exist.
To summarize, the mechanical tests used for qualified plan
discrimination testing are overly complex and understood for
only a limited number of tax professionals. A small business
would not be able to apply those rules without professional
help and many of the advisers to small business would not be
familiar with the rules. In addition, the definition of
employer for determining whether an employer has at least 50
employees and which workforce needs to be offered minimal
essential coverage is a test that most businesses will only
need to run for a few years during their life cycle. It is a
mandated test and not at est that is voluntarily assumed when a
retirement plan is offered to workers. As businesses come close
to the 50-employee limit, the additional cost of mandated
health benefits will be considered in evaluating business
expansion. For these reasons, a facts and circumstances test,
focusing on the businesses that an individual operates on a
day-to-day basis makes more sense. The statute or committee
reports could list characteristics of management control and
taxpayers would be able to make a judgment regarding what
operations should be considered part of the employer. This
determination would be subject to audit by the IRS, as all tax
determinations are.
[GRAPHIC(S) NOT AVAILABLE TIFF FORMAT]
Testimony of:
Donna Baker, CPA
Donna Baker & Associates LLC
Adrian, Michigan
Before the
Committee on Small Business
United States House of Representatives
December 4, 2013
The Honorable Sam Graves (R-MO), Chairman
The Honorable Nydia Velazquez (D-NY), Ranking Member
Good afternoon Chairman Graves, Ranking Member Velazquez
and members of the Committee. I am Donna Baker, a CPA with 25
years of experience. I am an Associate Professor of Accounting
at Siena Heights University and have owned my own CPA firm for
the last 13 years.
Executive Summary
The business aggregation rules in the Affordable Care Act
will have a negative impact on small businesses. 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.
Also, the aggregation rules are vast and detailed. 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.
Background
I live and practice in Lenawee County, Michigan, a rural
area with a population of 99,000 and median household income of
$48,000. My practice includes tax and accounting services for
several small businesses. I also own a small payroll company
and retail store and my husband is a partner in a dairy farm.
The business aggregation rules in the Affordable Care Act
will impact small businesses. The Affordable Care Act requires
a business to apply the controlled group, affiliated service
and leased employee rules to determine what groups of companies
are to be treated as a single employer. All employees
(including leased employees) of companies in the controlled
group and affiliated service group must be included in the
calculation of full time equivalent employees (FTEs). If the
total number of full-time employees (including FTEs) for the
entire group is at least 50, then each entity in the controlled
group will be subject to the employer mandate rules of the
Affordable Care Act and must provide the minimum essential
health insurance coverage to all full time employees and their
dependents.
The attribution rule applies in determining a controlled
group and affiliated service group. Attribution is the concept
of treating a person as owning an interest in a business that
is not actually owned by that person. Attribution may result
from family or business relationships. One aspect of this rule
is the family attribution rule between spouses that requires
the business interest of one spouse to be attributed to the
other spouse unless there is either no direct ownership, no
participation in the company and no more than 50% of business
gross income is passive investments.
Implication of Requiring Small Business to use Controlled Group
Rules
Many Small Businesses and Small Business Advisors are
Unfamiliar with the Controlled Group Rules.
The controlled group rules are lengthy and complicated.
These rules are typically used in determining if qualified
retirement plan benefits are available on a nondiscriminatory
basis. Many small employers, who offer a retirement plan, offer
a safe harbor IRC Section 401(k) plan that does not require
discrimination testing. Therefore, the rules are rarely
applicable to small businesses. The lack of use of these rules,
make them unfamiliar to both small businesses and small
business advisors. Many CPA's, who work primarily with small
businesses, do not have the specialized knowledge that is
required to interpret the business aggregation rules. To add to
the confusion, the use of ``controlled group'' is misleading
and is often inaccurately assumed to mean ``hands on control''
instead of its actual emphasis on direct or attributed
ownership.
Most Affordable Care Act training materials do not cover
the specifics of controlled group rules. In reviewing ACA
training modules from typical sources that small business
advisors would use, (Michigan Association of CPA's, Michigan
State University, CheckPoint Learning, Thomson Reuter), most
materials mention that controlled group rules apply, but do not
define the rules.
Examples of Applying Controlled Group Rules and Ownership
Attribution.
Example 1: This is my personal example.
I own the following businesses:
CPA firm - 100% owner and manager - 20 employees
Payroll Company - 100% owner and manager - 10 employees
(and growing!)
Retail store - 50% owner (75% capital investment) - I have
no management responsibility and no control over business
decisions - 5 employees. This store was purchased as an
investment.
My husband is a 50% owner in a dairy farm with 8 employees.
I have no management responsibilities and no control of
business decisions in this entity. I am not a partner; however,
my name is on some of the land in the partnership, therefore
the family attribution rules apply.
Based on the controlled group rules, the full time
equivalents (FTE's) would be:
CPA firm--20 employees
Payroll Company--10 employees
Retail Store--5 employees
Farm--8 employees
Total FTE's--43
I am currently not at the 50 FTE's that would make the
businesses subject to the shared responsibility rules of the
Affordable Care Act. However, the payroll company is 1\1/2\
years old and quickly growing. I anticipate hiring 10-15 more
employees in the next 2 years. Alternatively, I may consider
restructuring ownership in my entities or slowing growth so
that I do not pass the 50 FTE mark.
Example 2: This is one of my clients.
Jane is an elderly woman that is a 100% owner of two local
restaurants. Her son manages these restaurants and makes all
business decisions for both of the entities.
Jane recently provided the capital, as an investment, for
her nephew to start a restaurant in Florida. The nephew manages
this restaurant and makes all business decisions for this
entity. Jane is a 50% partner, but provided 100% of the
capital. The controlled group rules would require all three
entities to be treated as one employer. The number of employees
from all three entities would exceed 50 full time equivalents
and these entities would be required to provide the minimum
essential health insurance coverage.
The two examples above illustrate how the controlled group
rules will aggregate businesses that are not directly owned by
the same person, or do not have the same management, and may
not be in the same industry or in the same state.
In addition, I want to mention the increased cost of my
health insurance plan. I currently provide basic health
insurance for my employees in the CPA firm and the payroll
company. My plan is being canceled and the closest plan will
have an increased cost of 40% to 44%. This new plan also has
reduced benefits. My businesses are located in a lower income
area which translates into a lower profit margin. The increased
health insurance cost will be very difficult to absorb.
In summary, the implication of requiring small businesses
to use the business aggregation rules will have the following
negative effects:
(1) Hinder growth by discouraging owners to hire.
(2) Create an environment where owners try to
manipulate ownership percentages or limit employees to
less than 30 hours per week.
(3) Discourage small business owners from investing
in other businesses.
(4) Require small business owners to provide health
insurance coverage in industries where this is not the
norm. This additional cost would make it difficult for
these companies to compete.
Effect of the Business Aggregation Rules under the ACA
on Small Employers
Submitted by Linda R. Mendel and Mark A. Bodron
November 22, 2013
Linda R. Mendel is of counsel in the Columbus, Ohio office
of Vorys, Sater, Seymour and Pease L.L.P. She has more than
thirty years experience working with businesses on employee
benefits issues, with a particular focus on group health plan
compliance.
Mark A. Bodron is a partner in the Executive Compensation/
Employee Benefits practice group in the Houston office of Baker
Botts L.L.P. He regularly assists clients with issues related
to employee benefits, including the design and operation of
welfare employee benefit plans and compliance with the
Affordable Care Act.
The comments provided below are solely those of Ms. Mendel
and Mr. Bodron and are not submitted on behalf, and may not be
the views, of their firms or any other person or entity.
Application of the Business Aggregation Rules under the
Affordable Care Act (``ACA'')
Starting in 2015, an employer with 50 or more full-time and
full-time equivalent (``FTE'') employees will be subject to the
employer shared responsibility payment rules (sometimes
referred to as the ``play or pay'' rules) under Internal
Revenue Code (``Code'') Sec. 4980H. The ACA relies on the
controlled group rules under Code Sec. 414 to determine which
businesses are aggregated and treated as a single employer for
purposes of the 50-employee threshold. Businesses are
aggregated if the businesses are part of: (1) a controlled
group of corporations; (b) trades or businesses under common
control; or (c) an affiliated service group.
The aggregation rules are complex but well established. The
need to identify an aggregated group of businesses is not
unique to Code Sec. 4980H. In fact:
Businesses must apply the same aggregation
rules to determine whether they must offer COBRA
continuation coverage. A business in an aggregated
group with 20 or more employees is subject to COBRA.
Businesses must apply the same aggregation
rules in testing a retirement plan for prohibited
discrimination. The proportion of highly paid employees
in the aggregated group who are offered retirement
benefits is limited by the proportion of non-highly
paid employees in the aggregated group who are offered
retirement benefits.
Similar aggregation rules apply to determine
whether a business' group health plan must pay primary
to Medicare for health expenses incurred by a Medicare-
eligible employee (or a Medicare-eligible family member
of an employee).
- If an aggregated group has 20 or more
employees, the business' group health plan must
pay primary to Medicare for employees entitled
to Medicare on the basis of age.
- If an aggregated group has 100 or more
employees, the business' group health plan must
pay primary to Medicare for employees entitled
to Medicare on the basis of disability.
Similar aggregation rules also apply for
purposes of federal income taxes.
Suggested Change to the Definition of a ``Small Employer''
We do not think it is the complexity of the Code Sec. 414
aggregation rules, but rather the complexity of Code
Sec. 4980H, that presents the challenge for smaller businesses
facing the possible application of the play or pay rules.
Smaller businesses tend not to have in-house expertise or
ongoing relationships with outside experts to assist them with
the changes that may be required to avoid the Code Sec. 4980H
penalties. Many smaller businesses are unequipped to even
determine their responsibilities. That is the problem
regardless of whether a small business is structured as a
single entity or a group of aggregated entities.
Our suggestion is to increase the threshold for the
application of Code Sec. 4980H from 50 full-time and FTE
employees to a higher number. For example, Congress could
consider a modest increase from the current threshold of 50
full-time and FTE employees to a threshold of 101 full-time FTE
employees. We suggest the 101-employee threshold because it
corresponds to the threshold for small employer status for the
SHOP Exchanges and the small group health insurance market.
Starting in 2016, the SHOP Exchanges and the small group
insurance market will be available to aggregated groups with up
to 100 full-time and FTE employees; an aggregated group with
101 or more full-time and FTE employees will be considered
large. (In fact, the same method for counting employees applies
to Code Sec. 4980H, the SHOP Exchanges, and the small group
health insurance market. The only difference is the employee
threshold for status as a small employer.) It would make sense
for an employer that is considered small for purposes of the
SHOP Exchanges and the small group insurance market to also be
considered small for purposes of Code Sec. 4980H.
Suggested Simplification of Penalties under Code Sec. 4980H
To reduce the burden on smaller businesses, we suggest that
Congress consider simplifying Code Sec. 4980H by repealing the
``no-offer'' penalty under Code Sec. 4980H(a).
There are two employer pay or play penalties under Code
Sec. 4980H:
The ``no-offer'' penalty under Code
Sec. 4980H(a) applies when an employer fails to offer
its full-time employees health coverage and one or more
full-time employees buys health insurance through a
Marketplace with premium assistance. The penalty is
$2,000 multiplied by the number of full-time employees
(including any full-time employees who were offered and
enrolled in health coverage sponsored by the employer).
The ``unaffordable/inadequate coverage''
penalty under Code Sec. 4980H(b) applies when an
employer offers health coverage to its employees but
that coverage is either unaffordable or inadequate and
one or more full-time employees buys health insurance
through a Marketplace with premium assistance. The
penalty is $3,000 multiplied by the number of full-time
employees receiving premium assistance.
The no-offer penalty under Code Sec. 4980H(a) and the
unaffordable/inadequate coverage penalty under Code
Sec. 4980H(b) are both applied separately to each business
within an aggregated group; provided, however, that with
respect to the unaffordable/inadequate coverage penalty, the
amount is the same regardless of the structure of the group.
(While the penalties are applied separately to each business
within the aggregated group, the threshold issue of whether an
employer has 50 or more full-time and FTE employees, and thus
is subject to Code Sec. 4980H, is based on the aggregated
group.)
To avoid the unaffordable/inadequate coverage penalty under
Code Sec. 4980H(b), an employer must offer its full-time
employees a group health plan that actually provides reasonable
access and protections. In contrast, to avoid the no-offer
penalty under Code Sec. 4980H(a), an employer can offer a group
health plan at inaccessible contribution levels and/or with
very limited protections for employees. (Such plans are in fact
being marketed for this explicit purpose.) In other words, the
no-offer penalty is driving group health plan design but will
not actually benefit employees, a result that we think is
contrary to the purposes of the ACA. Yet, the implementation of
the no-offer penalty raises issues for an aggregated group that
would not have to be resolved if the sole penalty under Code
Sec. 4980H was the unaffordable/inadequate coverage penalty.
The no offer penalty is complex in its application to
aggregated groups of all sizes. For example, it is not clear
how the no-offer penalty should apply to shared employees or
where one entity within the aggregated group offers health
coverage to employees of another entity in the aggregated
group. The reporting to support the no-offer penalty will
require monthly identification of the aggregated group, taking
into account acquisitions and dispositions that change the
composition of the aggregated group.
We suggest asking the Congressional Budget Office to
estimate the economic impact of the implementation of the
unaffordable/inadequate coverage penalty without the no-offer
penalty. If the unaffordable/inadequate coverage penalty is
sufficient inducement for businesses to maintain group health
coverage for lower income employees (i.e., employees who are
potentially eligible for subsidies in the Marketplaces), we
think Congress should consider the repeal of the no-offer
penalty.
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We appreciate the opportunity to provide the above comments
above to the Committee. We would be pleased to provide
additional information at your request on this issue or other
ACA issues.
Linda R. Mendel
614.464.8218 / [email protected]
Mark A. Bodron
713.229.1742 / [email protected]