This year, employers were required to file Form 1094-C to comply with the Affordable Care Act (ACA) for the first time. To complete the form, employers were required to identify and disclose whether the employer was a member of an "aggregated Applicable Larger Employer (ALE) group." If this was the case, the employer was required to disclose the names of some (or all) of the other members of the group.
Many of our clients discovered in the course of complying with this ACA requirement that their aggregated ALE groups did not correlate with the group of employers that participated in the healthcare insurance plan. For example, a healthcare plan might cover all of the employers that are managed by the same organizations (a "management group"). However, if various employers have slightly different equity ownership, some of the members of a management group might not be members of the same aggregated ALE group. The scenario in which a single healthcare plan includes members of multiple aggregated ALE groups seems to be quite common among groups of entities that manage real estate as well as among family owned enterprises.
Having a single healthcare plan that covers multiple aggregated ALE groups results in some difficulty in preparing the Form 1094-C. However, there is potentially a bigger problem for companies with this issue in that the grouping rules that are used for ACA purposes are also used for many income tax and ERISA purposes.
An Inadvertent MEP
Income tax, ACA, and ERISA rules all treat members of a "controlled group" or an "affiliated service group" as an aggregated group - the members of which are generally treated as a single employer. Potential issues arise when the group used in the plan is not coextensive with the definition of an aggregated group. In such case, the plan is considered to be a "multiple employer plan" (MEP), in that each group (and each entity that is not part of an aggregated group) that is a member of the plan is considered to be a separate employer participating in the plan.
Having an inadvertent MEP creates at least two potential problems.
The Internal Revenue Code (the Code) permits employers to set up MEPs. Many of the employee benefit plan requirements under the Code are performed on a plan-wide basis with respect to a MEP. However, other requirements are tested on an aggregated group or separate employer basis (as opposed to a plan-wide basis). Where testing is done on an aggregated group or separate employer basis, the plan will fail if any of the groups or employers fail the test.1
Minimum Coverage Requirements
One requirement that appears to be performed on an aggregated group or separate employer basis, is the minimum coverage requirements for section 401(k) plans. As a result, if a client is performing the test on a plan-wide basis, it is possible that one or more of the aggregated groups or separate employers might fail the test. If a single group or employer fails the minimum coverage requirement, the entire plan is disqualified for all groups and employers.
MEPs or MEWAs
Employers are permitted to form MEPs for both income tax and ERISA purposes. For certain ERISA purposes, these plans are described as multiple employer welfare arrangements (MEWAs). However, it appears that ERISA requires that such a plan be set up as a MEP or a MEWA. If the plan authors assumed that all of the participants in the plan were members of a single aggregated group, they would not have done this. In such case, the plan may need to be corrected. There would also need to be a scheme set up to properly allocate costs among the members. There may also be some ERISA compliance issues with having an inadvertent MEP or MEWA.
For companies that have an inadvertent MEP problem, it may be possible to fix the problem by having a single payroll corporation. In such case, the payroll corporation provides service to the individual related entities and bills them for the work.
1Treas. Reg. sec. 1.413-2(a)(3)(iv).
Questions? Contact your Berdon advisor or Joseph Reinhardt, CPA, Berdon LLP, New York Accountants