Effective date of new member of Aggregated ALE group

[Flyboyjohn]

Owners of an ALE purchase a non-ALE 10/1/2022, making the non-ALE a member of an Aggregated ALE group as of what date?

Applying the normal 2022 look back monthly-average-FTEs to the prior non-ALE falls below 50 (even after including the ALE employee numbers for Oct-Dec).

Does the non-ALE become a member of the Aggregated ALE group on 1/1/2023 or not until 1/1/2024?

Thanks

 

[Brian Gilmore]

It's as of the closing, so as of 10/1/22 in your example.  Upon an ALE buyer acquiring a non-ALE small company seller, the small company becomes an “Applicable Large Employer Member,” or “ALEM,” of the buyer’s “Aggregated ALE Group.”

Subsidiaries and related entities in an ALE’s controlled group are referred to as ALEMs, and the controlled group itself is referred to as the Aggregated ALE group.  So an ALE with multiple EINs in its controlled group is an Aggregated ALE Group consisting of multiple ALEMs.

That’s a jargon-filled way of saying that because ALE status is determined on the basis of the employer’s entire controlled group, the small company becomes subject to the ACA employer mandate pay or play rules and the associated ACA reporting requirements upon the acquisition.  Furthermore, the small seller company is referred to as an ALEM of the broader Aggregated ALE Group because it is preserving its EIN as a member of the buyer’s controlled group.

In short, even if the previously non-ALE seller maintains its EIN, upon the close the acquisition the seller becomes an ALEM subject to:

1. Potential ACA employer mandate pay or play penalties, and
2. ACA reporting for the seller’s employees.

More details: https://www.newfront.com/blog/aca-reporting-for-controlled-groups

Here's a slide summary:

Newfront Office Hours Webinar: M&A for H&W Employee Benefit Plans

[Flyboyjohn]

Thank you very, very much Brian, you make an interesting argument but I can't yet agree that it's clearly supported by the statute or regulations.

My argument is that an employer's status as an ALE or ALEM for a particular calendar year is always determined based on monthly average FT/FTEs in the prior calendar year and, once determined, cannot change during the particular year.

Accordingly under the facts posited the earliest that the new ALEM could be subjected to the employer mandate is 1/1/2023.

Can we agree to disagree or do you have any additional support for the position that ALE status can change "suddenly" upon a change in ownership?

Many thanks for your thoughts.

 

 

[Brian Gilmore]

Yeah of course fine to disagree, and thanks for raising the question for everyone's input.  I'd be curious if anyone else here is taking that position.  I read the rules to require the ALE status of each member to be assessed on a monthly basis. 

I'd be careful with your approach because it exposes the ALEM to significant §4980H and §6056 liability if the IRS reads the rules the same way I do.  The only debate I've really ever had on this point is whether they become an ALEM the month the deal closes or the month following.  I haven't seen the position you're taking that it may not be until a year or two later.

So I'd suggest the more conservative route here is to take the approach I'm arguing absent guidance stating you can delay.  I think the argument that you can delay absent guidance stating ALEM status triggers as of the close is fairly aggressive in this context.

Here's the main point I'm relying on from the regs:

https://www.federalregister.gov/documents/2014/02/12/2014-03082/shared-responsibility-for-employers-regarding-health-coverage

(5) Applicable large employer member. The term applicable large employer member means a person that, together with one or more other persons, is treated as a single employer that is an applicable large employer. For this purpose, if a person, together with one or more other persons, is treated as a single employer that is an applicable large employer on any day of a calendar month, that person is an applicable large employer member for that calendar month. If the applicable large employer comprises one person, that one person is the applicable large employer member. An applicable large employer member does not include a person that is not an employer or only an employer of employees with no hours of service for the calendar year. For rules for government entities, and churches, or conventions or associations of churches, see § 54.4980H-2(b)(4).

[Flyboyjohn]

Thanks again Brian, my heartburn is the "trap" presented by the immediate nature of the obligations foisted on the unsuspecting/uninformed former non-ALE.

I think there should be some grace period like the transition period provided in the qualified retirement plan world when a new controlled group is created.

In the ACA sphere we have the nice 3 month limited non-assessment period for January-March of the first year becoming an ALE and it would certainly be nice to have a similar period after becoming an ALEM.

Thanks again.

 

 

[Brian Gilmore]

Yeah I hear you.  I would think of this more as an obligation foisted on the buyer, who hopefully has more resources and sophistication in this area.  It ought to be part of the due diligence/transition process.  A three-month rule like we have for new ALEs would be great--although since the buyer is already an ALE I'm not sure the IRS would be receptive to the idea.

[Peter Gulia]

Whatever one might think about the public policy merits of a rule of the kind Flyboy John might like, the statute does not provide the Secretary of the Treasury authority to make such a rule.

[Chaz]

Any thoughts on how and whether this analysis would change in an asset sale, where the assets of a non-ALE are acquired by another non-ALE, and, upon closing, the purchaser exceeds the 50 FTE threshold.  

I think in a stock sale, the obligation to offer coverage commences in the month of closing but I am not sure if that is true in an asset deal.  I've read conflicting things on it, none of which are particularly convincing.  

Thanks.

[Brian Gilmore]

I would argue that in the asset deal scenario it's no different than going on a hiring spree.  Employees of the seller are first termed then (if continuing) rehired by the buyer, and the buyer does not acquire the corporate entity (stock) itself.

Under that approach, you stick to the standard rule that ALE status is always based on prior-year headcount.  So the influx of new employees wouldn't potentially make the buyer an ALE until the next calendar year--and even then only if it averaged 50+ full-time employees (including full-time equivalents) over the course of the whole preceding year.

• More details: https://www.newfront.com/blog/becoming-an-ale-subject-to-the-aca-employer-mandate-2

Slide summary:

2024 Newfront ACA Employer Mandate & ACA Reporting Guide

[Chaz]

Thanks!