COBRA: The controlled group/common ownership issue.

Three companies all have less than 20 employees, but they are owned by one individual. Are any of these companies subject to COBRA?

Let's start at the beginning. Employers with 20 or more employees during 50% or more of the business days in the preceding calendar year are subject to COBRA. So, what is an "employer".

Many people believe that if a company is a separate business with a separate Tax ID number and the company employees fewer than 20 employees, the company would not be subject to COBRA.

This is not necessarily the case. COBRA uses the IRS definition of "controlled group" to determine which employers are subject to COBRA. (see below for text of the actual rule). Generally, if one individual owns three companies, the total number of employees of all three companies are added together to determine whether the controlled group exceeds the 20 employee threshold and is subject to COBRA.

EXAMPLE: AA Auto Repair, BB Dry Cleaning and CC Pizza employ 10, 12 and 15 employees, respectively. At first glance, they would all appear to be exempt from COBRA's rules. Turns out, all three companies are owned by one man: Jackie Mason. According to the IRS controlled group rules, the total number of employees of all three companies are added together to determine whether or not the companies are subject to COBRA.

In this example, the controlled group has 37 employees and so all three companies are subject to COBRA.

This rule can be a little tricky, so employers should check with their CPA and/or attorney to determine if they are part of a controlled group.

 

Section 1563. Definitions and special rules

    (a) Controlled group of corporations

      For purposes of this part, the term "controlled group of

    corporations" means any group of - 

      (1) Parent-subsidiary controlled group

        One or 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 corporation, is owned (within the meaning of subsection

        (d)(1)) by one or more of the other corporations; and

          (B) the common parent corporation owns (within the meaning of

        subsection (d)(1)) 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.

      (2) Brother-sister controlled group

        Two or more corporations if 5 or fewer persons who are

      individuals, estates, or trusts own (within the meaning of

      subsection (d)(2)) 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 the stock of each

        corporation, and

          (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.