If you’re an applicable large employer (ALE) and you didn’t receive a Letter 226-J from the IRS for failing to comply with the employer mandate for the 2015 tax year, that doesn’t mean you’re safe from future fines.
The IRS is gearing up to send out penalty letters for the 2016 reporting year, and the fines are steeper than the year before. The only way to avoid paying costly penalties is to stay on top of your reporting and accurately track your employees. Unfortunately, this can prove to be a bit more complicated if you’re a franchise business.
Franchises’ complex ownership structures mean sometimes multiple franchises operate under the same ownership group without knowing it. These challenges pose major problems for tracking and reporting and can trigger Affordable Care Act (ACA) penalties.
In order to avoid costly fines, you as a franchise owner need to first look at your overall company structure – particularly, how is it set up?
Licensing vs. outside ownership: Which type of franchise are you?
From a franchising perspective, a company falls under one of the following structures: licensing or outside ownership.
Licensing is when the company pays for the right to license the name. A common example is when a hotel pays to use the name of a bigger chain. Oftentimes, a franchise that’s licensing the name of a larger brand is owned and operated individually.
In this case, your company is a regular individual entity. You receive the perks that come from being part of the name brand, but you file ACA forms to the IRS on your own. This is the less complicated situation.
Outside ownership is exactly how it sounds. It’s when the franchise is partly owned by an outside company. Here, your company becomes a franchise hub after receiving an investment from the outside company. Things get really complicated when you start talking about this type of multi-tiered ownership.
Who is the owner of the company and what are their assets?
If at any point the brand name or an outside investor owns at least 20 percent of your franchise and another franchise, then both parties are part of a control group. And, even without any prior relationship, you and this other franchise become intertwined.
As members of a control group, you and the other franchise need to note your relation to one another when you file. For instance, say you own and operate one set of franchises in Florida, and another company owns and operates a different set of franchises in Ohio. If you share a mutual investor that owns 20 percent of both companies, then you both have to report and note your relation to the other franchise. This should be indicated on both franchises’ 1094-C forms in Part III on line 21.
How do you track employees across different locations?
Let’s say you own a particular restaurant franchise and you decide to open another one nearby. Since the restaurants are close to each other, there’s a chance many of your employees will work at both locations. For this reason, it’s crucial that you’re accurately tracking their hours.
Remember, since each restaurant falls under common ownership, the number of hours an employee works at both places must be taken into account when assessing their full-time employment status.
So, if Steve works 25 hours at “Restaurant A” and 20 hours at “Restaurant B,” then he’s technically considered a full-time employee under the ACA. It doesn’t matter that each restaurant has its own employer identification number (EIN); they’re both part of the same ownership group. Therefore, since Steve works at least 30 hours a week on average, he must be offered affordable health care with minimum essential coverage.
As for which restaurant is required under the ACA to offer coverage, the responsibility falls on Restaurant A, as Steve works at this location the most. Of course, should Restaurant B offer coverage, the ownership group would still comply under ACA guidelines.
Ensuring ACA compliance moving forward
Franchises face more challenges than most when it comes to dealing with the ACA. The complexities associated with multi-tiered ownership levels and having different franchises under the same control group are why many franchises face penalties for ACA noncompliance.
With the midterm elections resulting in Democrats taking control of the House, it’s clear the ACA and its employer obligations are not going away. Employers should stay the course and remain vigilant in their tracking and reporting. For franchise owners, this starts with hiring a business advisor or broker who’s extremely detailed and has a real understanding of your company’s overall setup. After all, why make things harder on yourself?