Keep it Together
Divide and conquer won’t work to avoid employer mandate
Although many franchisees discuss splitting their companies up to avoid provisions of the Affordable Care Act, experts say the idea is a non-starter. At issue is the definition of the ‘controlled group,’ as this column explains.
It might be cold comfort if you own a quick-service restaurant with 52 full-time equivalent employees, but it’s worth noting that the effects of the Affordable Care Act on the franchise system as a whole are anything but uniform.
Some ‘zees are too small to be affected. In the healthcare space, others, like Kennet Square, Pennsylvania-based patient advocacy chain IKOR, are actually finding it a source of new business. And then there are those in the middle, for whom the ACA is little more than a blip on the radar screen.
Ken Voelker is one of those. He’s the president of Norcross, Georgia-based Mighty Distributing System, a franchised distribution system of automotive products in the wholesale market. The company has about 125 employees between headquarters and the six company operations, along with 110 franchised operations in the United States and five international distributors.
For his company, the Affordable Care Act has been nearly a non-issue. All company employees above 20 hours a week are offered an 80/20 cost split on premiums and he’s added a new, higher-deductible plan ($2,500) with a Health Savings Account option. But externally, very few franchisees are over the 50 FTE threshold.
The only exception is what the company calls “strategic franchises,” those who already own other types of automotive businesses and set up Mighty Distributing instead of buying maintenance items from a third party. Voelker says he has not dealt directly with this issue and doesn’t know what those franchisees will do, but thinks some may split off into smaller companies that would not fall under the mandate.
“Depending on whether they set up Mighty as a separate LLC or sub-S corporation, they would have less than 50 employees,” Voelker says. “If they’re incorporating Mighty as a division, then they could potentially exceed that 50 employee limit. Most franchises have established a separate LLC or sub-S.”
Simple, right? Only it isn’t. Mark Stember is a Washington, D.C.-based attorney with Kilpatrick, Townsend & Stockton. He says that no amount of legal slicing and dicing will keep the employer mandate away.
“What this comes down to is what is referred generally as the controlled group rules,” Stember says. “You have to apply all your full-time and part-time workers of your own company plus any other companies or any other entities that fall under that controlled group.”
Brian McDonough is an independent HR consultant based out of Mission Viejo, California. He says the strategy Voelker alluded to was a common plan at the early stages of the ACA.
“In the beginning of this, early 2012, I heard a number of franchisees who owned multiple brands” talking about this, McDonough says.
As the law has gotten clearer, though, this dream strategy is looking more like a pipe dream. In 1964, the Internal Revenue Code established the idea of controlled groups when large corporations tried to gain tax advantages by splitting into smaller ones. In 1974, language was added to cover employees. According to the Senate Committee Report: “The Committee, by this provision, intends to make it clear that the coverage and nondiscrimination provisions cannot be avoided by operating through separate corporations instead of separate branches of one corporation.”
Stember says the Affordable Care Act will be handled in a similar way.
“If you have a parent-sub relationship, or a brother-sister company, those entities will be brought into the mix in determining whether you’re under the threshold of employees or not,” Stember says. “By breaking off some of your operations into a separate company, that’s not going to work. It will still be considered part of the controlled group.”
Stember says he could probably teach an eight-hour class on the idea of the “controlled group”—much like the definition of “full-time equivalent,” it’s not easy to understand. But Rupert Barkoff, another attorney with Kilpatrick Townsend & Stockton, says franchisors should do their best to make sure their franchisees have the basics down.
“When a franchisee doesn’t comply and it hits the news that can be a black mark on the brand,” Barkoff said.
Dividing and conquering is one dodge that won’t work. However, franchisees are adapting to the law anyway. Stan Friedman is the president of Atlanta-based FRM Solutions and a 24-year veteran of the franchise industry. He says in spite of the burdens the ACA places on franchisees, most are moving forward.
“You have two choices,” Friedman says. “You lay down your head and quit, or you adjust and you do what you need to do.”
1. Understand this fact: Many employers think they can split their companies into separate pieces to avoid the employer mandate under the ACA.
2. Not so, so it’s best to abandon the idea now.
3. “If you have a parent-sub relationship, or a brother-sister company, those entities will be brought into the mix in determining whether you’re under the threshold of employees or not,” says Mark Stember.
4. Franchisors should audit their franchisees to make sure they have the basics down, to avoid a black mark on the brand.