[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
 THE HEALTH CARE LAW: THE EFFECT OF THE BUSINESS AGGREGATION RULES ON 
                            SMALL EMPLOYERS 

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                            DECEMBER 4, 2013

                               __________

                 [GRAPHIC(S) NOT AVAILABLE TIFF FORMAT]

            Small Business Committee Document Number 113-046
              Available via the GPO Website: www.fdsys.gov

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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director



                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Chris Collins...............................................     1
Hon. Nydia Velazquez.............................................     2

                               WITNESSES

Deborah Walker, CPA, National Director, Compensation & Benefits, 
  Cherry Bekaert LLP, Tysons Corner, VA..........................     3
Sibyl Bogardus, JD, Chief Compliance Officer, Western Region 
  Employee Benefits, Hub International Insurance Services Inc., 
  Salt Lake City, UT.............................................     5
Ellis Winstanley, Chief Executive Officer, Tradelogic 
  Corporation, Austin, TX, testifying on behalf of the National 
  Restaurant Association.........................................     8
Donna Baker, CPA, Donna Baker & Associates, Adrian, MI...........    10

                                APPENDIX

Prepared Statements:
    Deborah Walker, CPA, National Director, Compensation & 
      Benefits, Cherry Bekaert LLP, Tysons Corner, VA............    34
    Sibyl Bogardus, JD, Chief Compliance Officer, Western Region 
      Employee Benefits, Hub International Insurance Services 
      Inc., Salt Lake City, UT...................................    52
    Ellis Winstanley, Chief Executive Officer, Tradelogic 
      Corporation, Austin, TX, testifying on behalf of the 
      National Restaurant Association............................    93
    Donna Baker, CPA, Donna Baker & Associates, Adrian, MI.......   106
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Statement submitted by Linda R. Mendel, Counsel, Columbus, 
      Ohio office of Vorys, Sater, Seymour and Pease L.L.P., and 
      Mark A. Bodron, Partner, Baker Botts L.L.P.................   111


 THE HEALTH CARE LAW: THE EFFECT OF THE BUSINESS AGGREGATION RULES ON 
                            SMALL EMPLOYERS

                              ----------                              


                      WEDNESDAY, DECEMBER 4, 2013

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360, Rayburn House Office Building. Hon. Chris Collins 
presiding.
    Present: Representatives Collins, Luetkemeyer, Tipton, 
Huelskamp, Schweikert, Bntivolio, Velazquez, Hahn, Payne, Meng, 
and Barber.
    Mr. COLLINS. [Presiding] Good afternoon. I call this 
meeting to order.
    As we are all well aware, the health care law requires 
businesses that employ 50 or more full-time or full-time 
equivalent employees to offer health insurance or pay an 
employer mandate penalty or tax. A critical issue is the 
definition of employee, but equally important is the issue of 
which and how many employees are attributed to the business. 
The answer may be simple for one business with a single owner. 
However, when an individual shares ownership of multiple 
entities or when a business has multiple owners, the answer is 
less clear.
    Today, we will examine the process of determining whether 
businesses are considered single or multiple entities under the 
healthcare law, which requires business owners to aggregate 
employees and could subject the business to the Obamacare 
employee mandate. According to the National Federation of 
Independent Business, 39 percent of small businesses with 20 or 
more employees own at least 10 percent of one or more other 
businesses. To determine if the threshold of 50 or more 
employees has been met in these situations, the health care law 
utilizes the Internal Revenue Service code controlled group 
business aggregation rules, which are complex and confusing 
even for experts. Some experts have suggested that most small 
business owners could not interpret these rules without the 
guidance and related cost of a tax specialist. Despite the 
administration's promises that the health care law would help 
small businesses, each week seems to bring entrepreneurs more 
bad news, more costly regulations, more uncertainty, and less 
incentive to grow their business and create jobs.
    A recent U.S. Chamber of Commerce International Franchise 
Association survey found that 53 percent of small business 
owners believe the law will have a negative impact on their 
business. In our challenging economy, many small business 
owners are simply not hiring or are reducing worker hours to 
avoid the employer mandate.
    Thank you to this outstanding panel of witnesses who have 
taken time from their busy schedules to be here today. We do 
look forward to your testimony.
    I now yield to Ranking Member Velazquez for her opening 
statement.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Small businesses are the backbone of our economy, but in 
the past high health care costs and declining coverage have 
hindered small business owners under employees. These factors 
have hampered our nation's entrepreneurial progress and held 
back small businesses. In fact, the chairman mentioned NFIB and 
the U.S. Chamber of Commerce. They have conducted surveys about 
small businesses, asking them what is the main issue that they 
are concerned about. They talk about the cost of health 
insurance and being able to provide it. In fact, 62 percent of 
small businesses in this country provide no health insurance to 
their employees, their families, or themselves. So if anything, 
this law will enable small businesses to participate in the 
exchanges so that we have a larger pool, and in the process we 
will bring premium costs down because that will provide the 
kind of leverage that will enable them to negotiate good 
premiums.
    But the Affordable Care Act has changed the health care 
landscape for small firms. It has expanded coverage options, 
increased purchasing power, and gave consumers control over 
their own health care. Yet, as with any law of this magnitude, 
some fixes will need to be made along the way. It happens every 
day. That is what the legislative process is all about. We pass 
laws, we implement them, and we will fix what needs to be 
fixed, that is what the mechanism of legislation is all about. 
That means listening to the feedback of those most affected and 
working together to ensure small firms secure quality, 
affordable health care.
    Today we will do just that by hearing from witnesses about 
a complicated issue. The health care law includes an employer 
mandate that requires businesses with more than 50 full-time 
employees to provide health insurance. Its goal is to 
discourage employers from dropping coverage and leaving 
employees on their own to find insurance. While the enforcement 
of this rule has been delayed until 2015, many small employers 
must begin adopting now.
    This hearing will focus on a particular area of the law 
that many small firms may not be familiar with, the business 
aggregation rules. Traditionally, this rule has been used to 
treat a separate business as a single employer for purposes of 
retirement plans. This is not new. It is on the books when it 
comes to benefit plans. This tax rule will incorporate it into 
proposed regulations to deter entities from splitting into 
smaller companies with the purpose of avoiding the employer 
mandate. The intent behind this regulation is admirable, but I 
remain concerned about how these very complex rules will impact 
small firms. What kind of outreach, what kind of resources will 
be in place to assist small businesses so they understand the 
rule and how to abide by the rule.
    I am sure it came as little surprise to many tax experts 
that these rules are being employed to determine business 
sizes. Unfortunately, for many small, family-owned businesses 
and franchise owners, these rules are not commonplace. For that 
reason, we must consider how the business aggregation rules 
impact many entrepreneur business models. Though some small 
employers have already been applying this rule to comply with 
ERISA, other firms have a steep learning curve ahead of them.
    I hope our hearing today provides more information on just 
how many small employers currently navigate this rule and how 
many more will be newly affected. Our witnesses today will help 
walk us through these complicated standards on how best to 
educate owners of their nuances. With careful planning and 
proper outreach, small employers may avoid many pitfalls when 
complying with new obligations under the Affordable Care Act.
    I thank all the witnesses for being here, and I look 
forward to our insightful comments. Thank you very much, Mr. 
Chairman. I yield back.
    Mr. COLLINS. Our first witness today is Deborah Walker. Ms. 
Walker is a certified public account and the National Director 
of Compensation and Benefits for Cherry Bekaert, LLP, in Tysons 
Corner, Virginia. She advises small and large businesses on 
compensation, benefits, and employment tax matters. Welcome, 
and you have five minutes.

     STATEMENTS OF DEBORAH WALKER, CPA, NATIONAL DIRECTOR, 
COMPENSATION AND BENEFITS, CHERRY BEKAERT, LLP; SIBYL BOGARDUS, 
CHIEF COMPLIANCE OFFICER, WESTERN REGION EMPLOYEE BENEFITS, HUB 
INTERNATIONAL INSURANCE SERVICES, INC.; ELLIS WINSTANLEY, CHIEF 
  EXECUTIVE OFFICER, TRADELOGIC CORPORATION, ON BEHALF OF THE 
NATIONAL RESTAURANT ASSOCIATION; DONNA BAKER, CPA, DONNA BAKER 
                         & ASSOCIATES.

                  STATEMENT OF DEBORAH WALKER

    Ms. WALKER. Good afternoon, Chairman Collins, Ranking 
Member Velazquez, and members of the Committee. Thank you for 
hosting this important hearing on the effect of the business 
aggregation rules on small business in applying the healthcare 
provisions. I am Deborah Walker, a CPA with over 35 years of 
experience in the employee benefits area.
    To determine if the employer is subject to the shared 
responsibility rules of the Affordable Care Act, the business 
needs to determine who the employer is, and that determination 
is made by looking at related entities, related by common 
ownership, related by attribution, and also by services that 
the entities provide to each other. To make the determination, 
one needs to understand detailed ownership and the services 
that are provided to each other. My written submission 
describes these rules in excruciating detail, and I can assure 
you that no one would apply the rules in a complex situation 
without looking at the regulations.
    The rules, as mentioned, used by the Affordable Care Act 
are the same rules used for determining whether qualified 
retirement plan benefits are provided on a nondiscriminatory 
basis to a fair cross-section of employees. Those rules for 
retirement plans are voluntary, not mandatory. In addition, 
because we are looking at bright-line tests, bright-line tests 
offer the opportunity as evidenced by the qualified plan rules 
of ways to plan around them. In other words, for people to 
avoid the rules. In addition, because they are bright-line 
tests, it often happens that the application does not make as 
much sense as it otherwise may.
    In the healthcare context, whether we looking at whether we 
have 50 employees or not, it is a complicated test for the few 
taxpayers that are nearing the 50-employee limit. One can 
expect that those employers nearing the 50-employee limit 
would, in fact, consider the increased healthcare cost in 
deciding whether to hire additional workers. It will lead to 
inefficient and unwarranted economic behavior.
    Many small employers, as mentioned, offer a retirement 
plan, a 401(K) Safe Harbor Plan. They do not even need to apply 
these rules because they are not subject to the discrimination 
tests due to the safe harbor. The small businesses could not do 
this without advice, and many of the advisors for small 
business are not familiar with the rules. So therefore, I offer 
an alternative suggestion, and it is a suggestion that would be 
a facts and circumstances test. It would look to who is the 
individual who hires, that fires, and makes purchasing 
decisions, that sets prices, who operates that business on a 
day-to-day basis. And in that case, we do not have to worry 
about who is merely a passive investor and aggregate those 
entities. By focusing on control of day-to-day operations, the 
employer would be defined by the industry in which that 
employer individual operates, and it would not affect the 
competitive position of the business. The opportunity to avoid 
the bright-line test through planning would not be available, 
and the unwanted effects of a bright-line test would not exist.
    Now, this facts and circumstance idea is not new. We use it 
and have in the tax law for years--30, 40 years in determining 
whether somebody is an employee or independent contractor. And 
people tried in the 1980s to have certainty with determining 
whether somebody was an employee or independent contractor, and 
it was determined that there were too many varied situations 
between service providers and recipients, and it was too hard 
to draw a hard and fast bright-line rule, and bright-line rules 
would be circumvented.
    So what we have is a 20-factor test. The 20-factor test, 
there is not specific weight to any factor. In fact, the weight 
of the factors changes depending on the industry. And any 
advisor and the IRS reviews the 20 factors, reviews the 
particular situation, and makes a judgment call. It is a facts 
and circumstances test subject to everybody's judgment, of 
course, subject to audit.
    There is another place where we talk about separate lines 
of business. This is also in the qualified retirement plan 
area, a separate line of business. It is a portion of an 
employer identified by property and services that are provided 
to a customer. So the regulations define what is a separate 
line of business and it has to be organized individually. There 
has to be a distinct profit center, and there can be no more 
than moderate overlap between employees and management. A rule 
such as that, more of a facts and circumstances test, may be 
more appropriate.
    Of course, as I mentioned, the determination is always 
subject to audit by the IRS. The rules could require a notice 
requirement. The rules could also have a procedure, such as 
they do for separate line of business and employee independent 
contractors where, in fact, the two businesses could apply to 
the IRS for the IRS to make a determination.
    To summarize, the mechanical test used for qualified plan 
rules are overly complex and understood by only a limited 
number of tax professionals. A small business cannot apply them 
without professional help. It is a small subset of 
professionals that deal with these rules, and these rules are 
only going to apply for businesses for a few years of their 
lifecycle when they are close to the 50-employee test. For that 
reason, facts and circumstances to me, based on who controls 
day-to-day businesses, is a much more logical rule. The statute 
or communique reports could list characteristics of management 
and control and taxpayers would be able to make a judgment as 
to what constitutes the employer for purposes of these rules.
    Thank you for your time and attention.
    Mr. COLLINS. Thank you, Ms. Walker.
    I would like to yield to Ranking Member Velazquez to 
introduce our next witness.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    It is my pleasure to introduce Ms. Sibyl Bogardus. Ms. 
Bogardus is an attorney serving as the chief compliance officer 
for Hub International Insurance Services. In this position, she 
provides compliance and consulting services regarding health 
plans and other employee benefits. Ms. Bogardus was previously 
chosen as one of the 100 leading women in insurance by Business 
Insurance and was selected as one of the 25 Most Influential 
Business Women by the St. Louis Business Journal. Welcome, and 
thank you for being here.

                  STATEMENT OF SIBYL BOGARDUS

    Ms. BOGARDUS. Thank you. Thank you, Mr. COLLINS. Thank you 
Ranking Member Velazquez. I am honored and very happy to be 
here to be able to give some comments and testimony on this 
very important issue. I want to have an echo for what Ms. 
Walker said regarding some possible compromises or concessions 
towards small businesses. I think a controlled test would be a 
great first step as opposed to a bright-line standard.
    I want everyone to keep in mind as we go through these 
types of discussions that the importance of the 50-employee 
rule and the control group rules which can cause small 
businesses to be treated as one employer has impacts not just 
on the basic issue of whether the employer will be subject to 
the law as a whole; it has huge implications also for the 
practical compliance under the rules.
    I want to address specifically today the issues of 
complexity. Also, the issues of awareness. And then finally, 
confusion. And I think the issue of complexity, as you read 
through the rules, very quickly you begin to learn, as you have 
seen from the written testimony and comments, that these are 
very complex rules. It definitely requires a tax advisor or a 
corporate planner to assist an employer in determining whether 
they have a control group. As to the awareness, the level of 
awareness is low. If an employer has voluntarily decided to 
create a retirement plan, yes, they have generally addressed 
these issues. But for employers that are made up of various 
small groups, they have likely not done this if they have not 
put in place a retirement plan. And while it is true that 
insurance carriers ask questions about the employer's size, 
they do so not so much to do an analysis. It is not an 
analysis. They are asking questions about size so that they can 
put into their programs how COBRA should be administered if it 
does apply, whether Medicare secondary payer rules apply, and 
other technical issues like that, but it is not an analysis of 
the control group. They are also asking that question so they 
can determine whether they will issue a small group or large 
group policy.
    We are already seeing confusion around that issue. For 
example, just this week I received an e-mail regarding a small 
employer in California, and they were unable to get a small 
employer policy because they were considered to be part of a 
larger control group by the insurance carrier. The insurance 
carrier in California said they would not issue that policy 
because it would be discriminatory. However, that same control 
group had a small employer in Arizona. That small employer in 
Arizona was able to get the policy. For the employees in 
California, very low paid employees. They are now put into a 
very expensive PPO and they cannot afford it. It is $1,300 a 
month. So we have seen quite a bit of low awareness around this 
issue, even among not just small employers but large employers. 
They say many times I was not aware of this and we do get 
comments that are very incredulous that this would even be the 
case.
    In terms of some of the additional confusion, there are 
myths around association plans. Unless you have stickiness 
within a group, it is difficult to put unrelated or even fairly 
closely-related employers together. Some insurance carriers 
will not write them even though they technically would be a 
control group for U.S. tax purposes. So keep that in mind. Part 
of the problem is the practical access to the insurance 
coverage, which the law unfortunately does not guarantee for 
the small employers.
    Are there planning opportunities? Yes. Do we see smaller 
employers trying to use those to avoid compliance with the law? 
Not yet. And I think part of the lack of awareness is also a 
little bit of a reaction to the delays that have occurred. The 
employers believe that there have been delays and that those 
delays will continue. For smaller businesses, there is a 
sentiment that the rules for the large employers were delayed, 
which they were until 2015. However, for the smaller 
businesses, they have already felt, many of them, the brunt of 
the very expensive renewals this year. Of our clients that were 
offered an early renewal option to renew their policy this 
December and to delay the cost impacts of health reform, 
invariably they have taken that offer if the carrier has 
extended it. So they have basically kicked the issue down the 
road for another year, so to speak. And also the cost impacts. 
We will hear more about that next fall. Additional policy 
cancelations and increases. We are seeing some premium 
increases of 100 percent for smaller employers. So it is a 
matter of the law providing access to coverage with no 
preexisting conditions, but it is not by any means affordable, 
even for the small businesses.
    The small businesses are also different. If they are part 
of a control group, that does not mean there is actual control 
or authority or even cooperation among the various owners. 
There is generally no central payroll system, no central HR 
person. They may handle that function at various locations but 
not centrally. Commonly, there are situations where the 
employers simply do not have a common point person. Now, of 
course, they could appoint someone but creating common systems 
to determine whether the employer is 50 employees or more and 
then also consistency across the group for payroll purposes is 
very difficult.
    I want to also touch quickly on participation requirements 
that insurance carriers have in the small group marketplace. 
The rules under the Federal law do allow participation 
requirement of 70 percent. The insurance carrier can require 
that percentage of the employees to elect the coverage. 
Alternatively, many carriers require the employer to pay a 
significant percentage of the premium for employee only, 
sometimes 100 percent of the cost. So the concept that the 
employer is only going to pay for the coverage based on the 9-
\1/2\ percent rule is not the case. Not for small employers and 
not for large employers. The employers are paying significantly 
more, especially because of the fact that they cannot know 
household income. The discrimination rules, which have yet to 
be issued, are a continuing concern. Just for information, the 
senior counsel for the Treasury Department indicated to me that 
they cannot enforce those rules. That is what we have 
experienced in actual practice. Even when there is an audit, 
they ask to see the testing, check it off their list, and they 
are done with the issue. They cannot enforce the current rules 
for self-funded plans. It would be extremely difficult for them 
to do so for small insured plans and very difficult for the 
employers to be able to coordinate a nondiscriminatory program 
across various companies in different industries in different 
states quite commonly. Automatic enrollment, if the group 
should happen to be above 200, will be another serious issue 
whenever that rule does eventually take effect.
    And then finally, MIWA issues. Commonly held, commonly 
controlled groups for federal tax purposes may not be 
sufficiently related for either carrier purposes. They may not 
issue the policy. Or the states may consider those groups to be 
an illegal MIWA under state law, even though it is not being 
formed as a self-funded plan to do anything to avoid state 
rules. And it would require licensing as an insurance carrier 
for those groups if they would try to self-fund, and then also 
capitalization as a carrier and regulation as a carrier. So 
very onerous.
    Just in summary, I think there are many issues that are 
affecting the smaller employer's awareness, complexity of the 
rules certainly, but I think the issue is around confusion and 
the fear of the smaller employers as to what impacts they will 
feel from the law and what they should do now with the 
uncertainty without regulations. Thank you.
    Mr. COLLINS. Thank you, Ms. Bogardus.
    Our next witness is Ellis Winstanley. He is the chief 
executive officer of Trade Logic Corporation in Austin, Texas. 
With several of his family members, Mr. Winstanley owns a 
number of businesses, including restaurants, a catering 
company, a software company, and a promotional products 
company. Welcome.

                 STATEMENT OF ELLIS WINSTANLEY

    Mr. WINSTANLEY. Chairman Collins, Ranking Member Velazquez, 
and members of the House Committee on Small Business. Thank you 
for the opportunity to testify today on the effects of the 
business aggregation rules included in the healthcare law on 
small businesses like ours.
    My name is Ellis Winstanley. I am the CEO of Tradelogic 
Corporation. I own a variety of small businesses in Austin, 
Texas, with my twin brother, parents, and other partners. I am 
honored to share the perspective of our companies, especially 
our restaurants, on behalf of the National Restaurant 
Association, the leading trade organization for the restaurant 
and food service industry.
    I am a business executive with a successful track record of 
starting up, turning around, and growing businesses in the 
hospitality, construction, software, printing and promotional 
products, and apparel industries. My brother and I are 
entrepreneurs who got started in business while we were 
students at the University of Texas. We are known for rescuing 
local historic restaurant brands and turning them around to 
maintain their place in the community as contributors and job 
creators.
    Currently, we own eight restaurants with our partners, 
which I oversee on a day-to-day basis. We also partner with our 
parents in two construction and three printing and promotional 
products small businesses. In addition, we own software 
development companies, one of which is Trade Logic Corporation, 
which also serves as our management company.
    The healthcare law presents compliance challenges for all 
of our small businesses, but particularly for the restaurant 
and foodservice operations due to the unique characteristics of 
our workforce. It is difficult for many restaurants, especially 
small businesses, to determine how the law impacts us and what 
we must do to comply. The employer aggregation rules present a 
significant complication to our business. It may seem like a 
simple thing to do, but due to the aggregation rules and the 
structure of many restaurant companies, determining the 
employer is more complicated than many may expect. Austin, 
Texas, like many other cities around the country, has a rapidly 
developing restaurant community, and we, like most of the 
operators we know, participate in multiple restaurant entities 
with various partners, often with family members. Though we 
consider each operation to be a small business, many of us are 
discovering that for the purpose of the healthcare law, all of 
the businesses must be considered one employer due to the 
aggregation rule. This threatens to stunt the development of 
restaurants in our community.
    The application of these aggregation rules is already 
having an impact on small businesses, consuming valuable time 
and resources as businesses attempt to decipher the law's 
effect on them. Most of our small businesses each have less 
than 50 full-time equivalent employees and independently would 
not be considered applicable large employers. Two are highly 
seasonable businesses and may not be considered large depending 
on the calendar month and uncontrollable factors, such as 
whether or not our legislature is in session, the performance 
of UT sports and the academic calendars related to the 
surrounding universities.
    Based on my understanding of the aggregation rules, I 
believe we will be considered as one employer under the law, 
thus an applicable large employer. The effect of this is that 
the cost of doing business for each of our companies will go 
up. Restaurants operate on thin margins already forcing 
operators to manage labor costs very closely to remain viable. 
Austin, Texas remains one of the strongest economies in the 
country, but since the recession we have regularly tightened 
our belts to manage rising costs, and we are very much still 
feeling the impact, including double-digit health insurance 
premium increases even since the law was passed. This puts 
pressure on our team, our vendors, our pricing, and in the end, 
our customers. I see the cost associated with the way the 
healthcare law has been implemented as adding significantly to 
that pressure. In addition to the aggregation rules, there are 
several other sections of the law that impact restaurant 
operations and similar small businesses.
    While the increasing cost of offering coverage remains a 
major concern, I am also very concerned about the 
administrative demands that compliance with this law will 
impose on our businesses. The restaurant and food service 
industry attracts people seeking a flexible work environment, 
whether they are students, between careers, or just looking for 
a second job to make ends meet. There is significant movement 
in and out of the industry and between employers.
    Given the short-term nature of individual employment, the 
administrative burden of educating and processing enrollments 
and declinations could prove almost as expensive as the 
coverage itself. Restaurants cannot absorb this cost and 
ultimately the cost will be borne by the public as a whole. The 
implementation also threatens the safe haven of the flexible 
work environment for those who depend on it.
    Thank you again for the opportunity to testify before you 
today regarding the healthcare law and its effects of the 
business aggregation rules on small businesses like ours. I am 
both proud and grateful for the responsibility of serving my 
community in Austin, Texas, creating jobs, boosting the 
economy, and serving our customers. We are committed to working 
with Congress to find solutions that foster growth and truly 
benefit the communities we serve.
    Mr. COLLINS. Thank you, Mr. Winstanley.
    Our final witness is Donna Baker. Ms. Baker is a certified 
public accountant in Adrian, Michigan. She holds an MBA from 
Michigan State University and a B.A. in accounting from Siena 
Heights University. Welcome.

                    STATEMENT OF DONNA BAKER

    Ms. BAKER. Thank you, Chairman Collins, and Ranking Member 
Velazquez, and members of the Committee. It is really an honor 
to be here to testify on this subject.
    I am Donna Baker, CPA. I have been a CPA for 25 years and I 
have owned my own accounting firm for the last 13 years. I live 
and practice in Lenawee County, Michigan, which is a very 
small, rural area. On top of owning my own CPA firm, I also own 
a small payroll company. I have invested in a retail store, and 
my husband Kim, who is also with me here today, is a partner in 
a family dairy farm.
    As you have already heard, the business aggregation rules 
require any group of companies under common control to be 
treated as a single employer. The primary key in determining 
which companies should be combined is either direct or 
attributed ownership or affiliated service but not operational 
control. These rules may cause unrelated businesses held by 
family members or trusts to be aggregated. Companies within a 
control group do not need to have the same management or even 
be in the same industry. Also, the business aggregation rules 
are very complicated, as you have heard, and are rarely 
applicable to small businesses. Therefore, they are unfamiliar 
to both small businesses and small business advisors. I have 
had many webinars and training on the ACA rules, and most of 
the materials will mention that the controlled group rules 
apply but do not cover the specifics of these rules. And 
unfortunately, I think many business advisors that deal with 
just primarily small businesses assume that controlled groups 
means hands-on control instead of the actual emphasis of 
director-attributed ownership.
    I have two examples of applying these control groups to two 
businesses. One is my own personal business. Like I said, I own 
100 percent of a very small CPA firm that I also manage, along 
with a payroll company that I manage. And I have invested in 
the retail store. However, that is an investment. I do not 
manage that or operate that on a day-to-day basis. And then, of 
course, my husband's farm. He is a partner with his brother in 
the dairy farm. I have no management responsibilities. I do not 
make decisions for that company, but my name is on some of the 
land and I do provide some bookkeeping services. So based on 
the business aggregation rules, we would have to combine all 
four of those entities. We are not quite close to 50 employees 
yet but close, and the payroll company is new and very quickly 
growing.
    My second example is one of my clients. I have an elderly 
woman that owns 100 percent of two local restaurants, and her 
son manages and controls all of the business decisions in those 
two restaurants. She recently provided the capital for a nephew 
to open a restaurant in Florida in which the restaurant in 
Florida, the nephew manages and makes all the business 
decisions for that restaurant. Under the current business 
aggregation rules, those three entities would be combined and 
they would exceed the 50 full-time equivalents and require them 
to provide the minimum essential health insurance benefits.
    So those two examples illustrate how the control group 
rules will aggregate businesses that are not directly owned by 
the same person, they do not have the same management, are not 
in the same industry, and may not even be in the same state.
    Therefore, the implications of requiring small businesses 
to use these aggregation rules could create several negative 
effects. It could hinder growth and discourage owners from 
hiring new employees. It can create that environment where the 
owners try to manipulate their ownership percentages or 
minimize their employees and keep them within the 30 hours. It 
could discourage small business owners from investing in other 
businesses, and it could require them to provide health 
insurance benefits in industries where it is not typically the 
norm, and the additional cost could create it difficult for 
them to compete in those industries.
    Lastly, I would like to mention the increased cost of my 
own plan. I do provide basic health insurance for the people in 
my accounting firm and my payroll company. This policy has been 
canceled, and the closest policy, I have been quoted a 40 to 44 
percent increase that would have reduced benefits. It would 
have higher copays and higher maximum out-of-pocket expenses. 
So these increased costs would be very difficult to absorb. 
Thank you.
    Mr. COLLINS. Thank you very much, Ms. Baker.
    We will now enter a questioning period, and I guess I would 
like to start by just stating the obvious. Hearings like the 
one that we are having today give us all an opportunity to 
obtain testimony on the record that will highlight the 
consequences, intended and unintended, of various laws and 
regulations. And it is very helpful then, as Ms. Velazquez 
said, as we move down the road and we look at potential changes 
that we need. And again, to state the obvious, we all need and 
want more jobs in the economy. The economy is kind of 
languishing today and more jobs is what everything is about, 
getting the unemployment down and increasing payroll across the 
country to drive the economy.
    Ms. VELAZQUEZ. Will you yield?
    Mr. COLLINS. Certainly.
    Ms. VELAZQUEZ. So I will join you in supporting legislation 
that--passing the jobs bill. What we need is to pass 
legislation to create jobs and we are just waiting for the 
leadership to do so.
    Mr. COLLINS. I can appreciate that. It is jobs. We may 
disagree though on what stimulates jobs. I know, myself, I 
believe in lower taxes, less regulation, less government 
interference, and certainly, we will have some other questions 
today to indicate the impact of the ACA.
    What I heard today though, and again, I am a small business 
guy. We have the mantra ``grow or die.'' And if you are not 
growing, you are not doing what you should do as an 
entrepreneur. But growth requires capital. Accounts receivable, 
inventory, et cetera, et cetera. And any and all dollars wasted 
on regulatory burdens, such as the business aggregation rule 
and hiring a tax expert is, in fact, a dollar that is not 
available to invest in growth.
    So I guess briefly, we have a lot of members to ask 
questions, but just to reconfirm, I think I heard it in your 
testimony, but I would like to go down the line starting with 
Ms. Walker and just ask you if you think this business 
aggregation rule is, as it is currently written, would have a 
negative impact on jobs and the economy hindering job creation 
and economic growth and therefore should be altered.
    Ms. WALKER. I think anytime that you have a bright-line 
test it is going to hinder people that do not want to cross the 
bright-line test. And that, in this case, is going to hinder 
hiring, hinder expansion, and the ``grow or die,'' they are 
just going to choose to stop growth and perhaps move over to 
other forms of business, other ownership. So yes.
    Mr. COLLINS. Thank you.
    Ms. Bogardus.
    Ms. BOGARDUS. Yes, Mr. Chairman, the provisions definitely 
do hinder job growth, and they hinder strong job growth. And by 
that I mean that the jobs that could be created in the future 
would instead be part-time jobs. That is, of course, advisers 
on this topic have their own bag of tricks and it is definitely 
possible to stay outside of compliance with respect to each 
individual employee if you can keep that individual in a part-
time position. Full-time jobs are absolutely necessary. You 
cannot serve two masters. It is hard to have coordination just 
on the part of the employee, much less between two separate 
employers. So strong job growth is necessary. And of course, 
there are other issues involved as well but I agree that the 
funds that are spent to analyze the issue and then also to 
comply are extremely high, and it is not just the initial cost. 
It is the participation every single year in the premium 
payment.
    Mr. COLLINS. Thank you.
    Mr. Winstanley.
    Mr. WINSTANLEY. Yes. I think what we are seeing now is less 
people have insurance than have had insurance. We are seeing 
the reverse effect of what we were hoping to achieve here. And 
I think we have also, in the restaurant industry specifically, 
you hear a lot of talk about people getting pushed below 30 
hours a week, and that being the reaction, you see that being 
tried around the country, and I think that is extremely 
negative for the industry. I think that is negative for the 
employees. I think long term, while some groups I think feel 
that that is their only option, but I think in the long run 
that is not healthy for our economy.
    Mr. COLLINS. Thank you.
    Ms. Baker.
    Ms. BAKER. Yes, I do. As in the testimony, I think there is 
a lot of concern with that. But I am also concerned with those 
that have the true entrepreneurial spirit to be discouraged 
from investing in more small businesses and expanding in other 
areas. That would definitely hinder.
    Mr. COLLINS. One more quick question and then I will yield 
to Ms. Velazquez.
    Kind of a yes/no. You know, we are focused today on the 
complex business aggregation rules but we are talking about 
other issues, and certainly, Mr. Winstanley has talked about 
the impact and the employees getting their hours cut and the 
like to get them under the 30-hour rule. So, as we look and try 
to message some changes that could be made, I would first like 
to ask each of you if you think in your opinion the 30-hour 
definition of full-time should be increased back to 40 hours.
    Ms. Walker.
    Ms. WALKER. Yes. It will prevent the people from ratcheting 
down workers to 30 hours and leave them at 40.
    Mr. COLLINS. Yeah.
    Ms. Bogardus.
    Ms. BOGARDUS. Yes.
    Mr. COLLINS. Okay.
    Mr. Winstanley.
    Mr. WINSTANLEY. Yes, I do.
    Mr. COLLINS. Ms. Baker.
    Ms. BAKER. Yes. Absolutely.
    Mr. COLLINS. Very succinct.
    Now, the other question, we talk a lot about the 50 
employee threshold, and there are a lot of companies in that 
40-plus, going to 50, wanting to go to 75, and under Obamacare, 
this arbitrary selection of 50 now defining a large 
corporation, does not fit with the entrepreneurial spirit. So 
in the same, what do you think, yes or no, do you think we 
should increase beyond 50 the number of FTEs that would trigger 
the Affordable Care Act? I do not know if it is 100 or 150, but 
do you believe that 50 is too low and stifles job creation and 
therefore, we as Congress should increase it to a number higher 
than 50?
    Ms. WALKER. I think the bright-line test of a certain 
number of people is the wrong test. You need a facts and 
circumstances test on who has day-to-day control. If you 
increase it to 50, then the same thing that happens at 50 will 
happen beyond 50, whether it is 75, 150, 200, or 500.
    Mr. COLLINS. Yeah.
    Ms. Bogardus.
    Ms. BOGARDUS. As with the 30-hour rule, I would agree that 
increasing the number above 50 would alleviate a number of the 
issues. But as with the 30-hour rule, it is a legislative fix. 
There would have to be the change to the statute itself.
    Mr. COLLINS. Right.
    Mr. Winstanley.
    Mr. WINSTANLEY. I think that the challenge comes in that 
every industry cannot be put in the same box. I think in the 
evaluation of really any organization that tries to encapsulate 
multiple industries, there is always different criteria for 
different industries, and I think looking at an industry with a 
somewhat mobile workforce or by general definition, a short-
term workforce, I think the costs are going to be significantly 
higher for the same number of employees, the same number of 
FTEs than it would be with a longer term workforce. So yes, I 
think it should be higher, but I do not think it can be the 
same number for every industry.
    Mr. COLLINS. Okay. Thank you.
    Ms. Baker.
    Ms. BAKER. Yes. I think that would definitely help, but 
then I, you know, support what has previously been said. A 
facts and circumstance would make a whole lot more sense when 
it comes to defining control. And then when you do have 
something that crosses different industries, it is adding 
additional complications.
    Mr. COLLINS. Thank you all. I will yield to Ranking Member 
Velazquez.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    I would like to call the attention of committee members to 
the hearing that we conducted on October 9th, ``The Effect of 
the Law and Definition of Full-Time Employee on Small 
Businesses.'' And one of the expert witnesses was Dean Baker, 
the executive director for the Center for Economic and Policy 
Research, who analyzed data right after we passed the 
Affordable Care Act and where small businesses were expecting 
the employer mandate to go into effect. Since then, he did not 
find any data that showed small businesses were not hiring 
employees or increasing the 30 hours because the Affordable 
Care Act going into effect and when people were expecting the 
employer mandate to go into effect. The Federal Reserve from 
San Francisco conducted research demonstrating that it has not 
had any effect. But like any law, we will continue to monitor 
it and make the fixes that are necessary.
    My question to the panel of witnesses, the business 
aggregation rules are meant to prevent skirting the law. In 
your opinion, what is the correct balance between preventing 
abuses and protecting closely-held businesses from potential 
penalties?
    Ms. Walker.
    Ms. WALKER. I think anytime that you have a bright-line 
test, you are going to end up with abuses because people will 
walk right up to that bright line and not cross it. So what you 
have to do is come back and put it into a facts and 
circumstances test where you apply judgment, I apply judgment, 
the IRS applies judgment, and each person decides based on the 
facts and circumstances in that situation whether there should 
be an aggregation, whether it truly operates as an employer.
    Ms. VELAZQUEZ. So do you consider that a final regulation 
should incorporate a fact and circumstances test?
    Ms. WALKER. Yes. That would be a statutory change, however.
    Ms. VELAZQUEZ. Ms. Bogardus.
    Ms. BOGARDUS. I agree with Ms. Walker that the facts and 
circumstances test is a much better standard, again, requiring 
a legislative change.
    Ms. VELAZQUEZ. And that will create more jobs?
    Ms. BOGARDUS. I think it would, and I think also serious 
consideration should be given to changing the threshold from 50 
to perhaps 250 and look at it on an industry basis instead, or 
perhaps blend the two. There are some precedents for using 250, 
such as the W-2 payroll reporting rule.
    Ms. VELAZQUEZ. Mr. Winstanley.
    Mr. WINSTANLEY. Sure. I think when you look at the original 
context that the control group provision was put together per 
the IRS, it was put out there to stimulate the use of 
corporations and companies growing, and I think the way it is 
being implemented now is having the alternate effect. I think 
what businesses need is clarity around what the rules are they 
need some rules that they can reasonably work with based on the 
industry they are in. And then I think that job growth will 
loosen up.
    Ms. VELAZQUEZ. Thank you.
    Ms. Baker, I would like to ask you another question.
    When it comes to contracting programs in the federal 
government, or maybe Ms. Bogardus, you may be willing to answer 
this question, a business must meet not only ownership by 
holding a majority of shares, but also demonstrate active 
control over business operation and you described that in your 
testimony. Yet, for purposes of the ACA and business 
aggregation rules, only common ownership is considered. Which 
standard, in your opinion, is a better indicator of ownership?
    Ms. Baker.
    Ms. BAKER. I am not sure if I really got that but to me it 
would be control over the entity, the day-to-day operations, 
the decision-making, not just investment. So the day-to-day 
operations, which supports the facts and circumstance that they 
have been discussing here.
    Ms. VELAZQUEZ. Ms. Bogardus.
    Ms. BOGARDUS. I would agree. Actual control and the facts 
and circumstances of the day-to-day operations, which is also 
necessary, absolutely necessary for compliance. And as I said 
before, the small businesses do not have centralized systems, 
payroll, HR.
    Ms. VELAZQUEZ. Thank you. I would like to ask other 
questions but I know that all the members would like to ask 
their questions as well.
    Mr. COLLINS. Thank you.
    At this point I would like to yield five minutes to 
Representative Tipton.
    Mr. TIPTON. Thank you, Mr. Chairman. I think I would like 
to start out with Mr. Winstanley. When you are talking about 
the variety of businesses you have, do you file separate tax 
returns?
    Mr. WINSTANLEY. Yes. They all file separate tax returns.
    Mr. TIPTON. Are you allowed, if you have a loss on your 
small software business versus your restaurant, can you write 
that loss off against your restaurant?
    Mr. WINSTANLEY. No, they are separate.
    Mr. TIPTON. What happened to business aggregation?
    Mr. WINSTANLEY. Right. There is a significant 
administrative burden that goes into running the multiple 
entities separately and there is value to doing so.
    Mr. TIPTON. So effectively what we are seeing through this 
administration is a policy to be able to force you to be able 
to provide the healthcare. Has that impacted your ability to be 
able to create jobs?
    Mr. WINSTANLEY. Yes.
    Mr. TIPTON. You are living in the real world.
    You know, we just heard comment that there is no data. I 
will quote that, again, that there is no data that small 
businesses are not hiring as a result of the implementation of 
the president's Affordable Healthcare Act, no effect on job 
hiring. Is that your experience?
    Mr. WINSTANLEY. No, it is not.
    Mr. TIPTON. Anyone else care to comment?
    Ms. WALKER. No, it is not. I see it in small businesses and 
large businesses.
    Mr. TIPTON. The businesses are not hiring because of the 
Affordable Care Act?
    Mr. WINSTANLEY. I believe it is draining resources from the 
companies that would otherwise be going to be used to grow the 
businesses.
    Mr. TIPTON. Very interesting, because we are dealing with 
theoretical data. We are dealing with real life experiences. I 
appreciate that testimony.
    I come from rural Colorado. I am a small business guy. Do 
you have any experience--and perhaps the CPA on the panel can 
address this the best--are you seeing insurance cost 
differences between businesses in rural areas versus urban 
areas? And what I can speak to is in the state of Colorado, if 
you punch in a rural zip code for your healthcare insurance, 
you are paying a 65 percent premium compared to people that are 
living in urban Colorado. Are you seeing those same sorts of 
circumstances.
    Ms. WALKER. I am sorry. I am going to have to pass that to 
the insurance person.
    Ms. BOGARDUS. That is happening and it does happen because 
there is less competition. There are fewer facilities in the 
rural areas, and they can charge what they want to charge 
because that is the only hospital, the only emergency room in 
some cases.
    Mr. TIPTON. Since you have a little bit of experience with 
this, is it a little more typical in these rural areas to see a 
lower income than we do in urban America?
    Ms. BOGARDUS. It is? You know, we hear a lot of talk here 
in Washington coming out of this administration about income 
inequality, but I am just hearing testimony that the 
administration, through its policies, are forcing you to cut 
the incomes of people by reducing their hours. We are hearing 
that people that live now in rural America, who earn less, are 
going to be paying more for what is now law that you must obey 
and buy insurance. Is that correct?
    Ms. WALKER. The simple answer is yes.
    Mr. TIPTON. The simple answer is yes. So effectively, what 
we are seeing is a system that is not affordable and we can 
certainly get into the accessibility issues as well.
    But going back to the aggregation rules we are specifically 
trying to address on this, can anyone on the panel give me, 
small business guy, I just want to be able to produce my 
product, to be able to sell, to be able to provide for my 
family. Can you give me two sentences to be able to define the 
aggregation rule? Can anyone?
    Ms. BOGARDUS. A parent subsidiary group where you own 80 
percent of a chain of corporations, a brother-sister 
corporation where the same five or fewer own 50 percent and in 
conjunction 80 percent, and then the affiliated service group 
rules. Those rules do not necessarily have ownership, but if I 
provide management services to another business, that will be 
aggregated.
    Mr. TIPTON. As a small business guy to have to tell you, 
you are a CPA, that is about as clear as mud to me to really be 
able to understand that.
    We have had abundant testimony on this Committee that rules 
and regulations--and this is another one that we are talking 
about today--are killing jobs in America, killing job-hiring 
prospects in America today when we need to be able to hire 
people. How much more is this going to cost small businesses, 
like Mr. Winstanley's, who are working on a narrow profit 
margin, just to be able to comply with another government 
mandate. Any idea?
    Ms. BOGARDUS. Any time you look at these rules in a 
situation as complicated as his with different ownership, you 
are going to have to sit down with a chart. When he transfers 
ownership to ownership, to other people, you are going to have 
to go through the chart. You are going to have to ask him who 
does the management for his different businesses. Does the 
software company, in fact, do some payroll for the restaurants, 
those types of questions, and then you are going to put it all 
together. Once you reach 50 people, he will have to comply with 
the rules and then he knows which companies in that pot he has 
to provide minimum essential coverage to the workers for.
    Mr. TIPTON. A lot of money.
    Thank you, Mr. Chairman. I yield back.
    Mr. COLLINS. Thank you.
    At this point, I would like to yield five minutes to 
Representative Meng.
    Ms. MENG. Thank you, Mr. Chair. Thank you, Ranking Member 
Velazquez.
    I had a question. I think it was Mr. Winstanley who 
testified, if I heard correctly, that you believe that fewer 
people have health insurance now.
    Mr. WINSTANLEY. I believe that fewer people are accepting 
health insurance now that it is available to them.
    Ms. MENG. I am just curious. I know that there are a lot of 
good employers out there, like you, Ms. Baker, who have always 
provided health insurance to your employees. I represent a 
district in Queens, New York City, where a lot of employers 
have not always done the right thing, like you, Ms. Baker, and 
have not provided health insurance to their employees and have 
taken advantage of many employees around the country who do not 
speak English and are not familiar with rules. Statistics have 
shown that on Sunday and Monday alone, 29,000 people signed up 
for the new healthcare law just on the website in two days and 
I was just wondering what advice could you have given or would 
you give to a lot of these employees or small business 
employers who have not provided insurance in the past? And 
anyone can answer.
    Mr. WINSTANLEY. Sure. We like to consider ourselves a good 
employer and we have provided insurance in the past. The nature 
of it is that the cost of insurance has risen drastically in 
the last few years and most of the young people who are healthy 
simply drop off the plan, which makes the cost go up even more. 
And so we have got a situation where people are not willing to 
pay for the insurance, despite the fact that we are continuing 
to increase our contribution. And it has become a situation 
where I have got to believe--I only know from my own 
experiences what we are dealing with, but I have got to believe 
that there are a lot of other small businesses around the 
country that have experienced the exact same thing. And I think 
if you multiply all those that the net loss is significant.
    Ms. VELAZQUEZ. Would the gentle lady yield?
    I would like to relate the fact that in Massachusetts, when 
they passed the law and implemented it, the targeted young 
people were not signing up, and then later on they enrolled. So 
we believe that that type of trend that we saw in Massachusetts 
will be seen throughout the country.
    Ms. BAKER. Can I answer yours?
    Okay. So for my own personal situation, I am in one of the 
rural areas with very high health insurance and lower income. 
Our county has about 99,000 as a population with an average 
household income of middle 40,000s. So as I struggle to provide 
more health insurance and they aggregate the businesses to make 
it--if I can stay under that 50 I will--I mean, it will be 
extremely expensive for me. And in the meantime, to absorb a 40 
to 44 percent health insurance increase, it would be much 
easier for me to put my employees out on the exchange. It is a 
lot cheaper for them to provide that than for me to absorb that 
additional cost within my small profit margins anyway. Thank 
you.
    Ms. BOGARDUS. I would just comment that if the additional 
cost of adding each employee would be approximately $4,000 to 
provide insurance to that individual at an affordable rate--it 
may be a smaller figure in some places, higher in others--that 
does stunt the job growth. I will say that the law itself is 
having an impact on the cost, and we are seeing people not 
enroll in the coverage that maybe in the past they would have 
enrolled in because the costs are just higher. And we do see, 
and traditionally have seen, young individuals not enroll in 
the coverage, even if it costs them $20 a pay period. And it is 
a matter of individual choice. They are looking at the coverage 
and they are saying I would rather have the money. And in the 
bigger picture, in the context of wages, if people would rather 
have the money, the Affordable Care Act takes that off the 
table if they have to be offered the insurance.
    Mr. COLLINS. We would like to yield five minutes to 
Representative Luetkemeyer.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    One of the things that I think we are seeing and you have 
discussed today is the problem with companies trying to deal 
with this. I know there was an economist in Committee here 
recently and they had done a small business survey, and 76 
percent of the businesses that were surveyed said they were not 
going to hire in the next six months.
    Ms. Walker, you have mentioned in your testimony here 
something like not hiring workers or limiting working hours. 
Have you seen this already with your practice that businesses 
are starting to limit their hours, and can you give me an idea 
of the number of businesses you are talking about?
    Ms. WALKER. What I have seen is that businesses tend to 
hire new workers at less than 30 hours. So when we have to 
expand, we are going to expand on a part-time basis.
    One of the other things I saw in a statistic yesterday for 
a slide presentation, if you go back two years, there were six 
full-time workers hired for every one part-time worker. That 
has flipped now and such that it is one full-time worker is 
hired for every four part-time workers, and those are DOL 
statistics.
    Mr. LUETKEMEYER. Thank you for that.
    Ms. Bogardus, in your comments a while ago you said that--
if I got this right, correct me if I am wrong here--you made 
the comment that your company does not write some groups 
because they may not be a related business. So in other words, 
you are not sure if they would fall under this rule or not, so 
as a result you back away from doing it. Did I understand that 
correctly?
    Ms. BOGARDUS. Actually, we are an insurance consulting and 
brokerage firm, so we see the insurance carriers doing that and 
refusing to write certain groups. And some of it may be the 
confusion among the carriers, but they are still exercising 
their leeway when they can to refuse to write a policy.
    Mr. LUETKEMEYER. So even though they may technically, if 
they did the research and they dotted their I's and crossed 
their T's, may actually qualify, just the unintended 
consequence, just the concern about they may be in 
noncompliance is enough to back them away from that. Is that 
what you are saying?
    Ms. BOGARDUS. That is correct. It may be a smaller entity, 
a smaller subsidiary in one state without the headquarters 
location, and so it could not be the location or site as for 
the insurance contract as a whole and they back away from it.
    Mr. LUETKEMEYER. Now, you work with this every day. Are all 
the rules promulgated on the president's healthcare law?
    Ms. BOGARDUS. No, sir. They are not. The rules we have 
currently on the very important issues of play or pay, the 
employer mandate, were issued in early January last year. We 
have a lack of final guidance, a lack of guidance on very 
industry- and employee-specific issues. There are impacts and 
unintended consequences of the rules that have already been 
issued that need to be fixed and resolved, and we do not know 
basic information, such as whether we will get transition 
relief for particular situations, such as counting the 
employees for purposes of 2015. We are less than a month away 
from the calendar year that is most at issue, 2014, starting 
January 1st, and an employer needs to know. So we are lacking 
guidance. We are kind of operating in an area of this is what 
we know today which is the case.
    Mr. LUETKEMEYER. How can you help that company plan with 
the uncertainty that just sort of hangs over them with regards 
to the rules are not promulgated yet, as well as do not know 
the unintended consequences of what may or may not happen here?
    Ms. BOGARDUS. We like to address that with a three- to 
five-year strategy and we always have a plan B. If they change 
the rules in this manner, then we will go this direction. But 
we advise, we do have some small business clients, but we 
advise many, many large employers. And I know that not every 
small employer has access to advisors with the level of 
sophistication that we would bring.
    Mr. LUETKEMEYER. Mr. Winstanley, thank you for being here 
today. It is always great to have someone who deals with this 
on a daily basis. Ms. Baker, you as well, because you give us 
the real-life experience of how the consequences and unintended 
consequences of stuff that goes on here in Washington affects 
real people in the real world.
    How much time and how much money do you spend on compliance 
with this healthcare law?
    Mr. Winstanley.
    Mr. WINSTANLEY. It has been a very significant distraction 
from our business over the last couple of years, especially as 
we try to ascertain where it is going to go and where things 
are going to land. Some of the folks that help with our 
administrative stuff, they spend a lot of time. I have spent a 
lot of time on it. It takes a lot of our energy.
    Mr. LUETKEMEYER. Ms. Baker.
    Ms. BAKER. I have been flooded with questions and phone 
calls over the last year with my clients. There is a lot of 
confusion, wondering if they have to start providing the health 
insurance, when would it be mandated, what do they have to do. 
So I guess I have not tracked the time specifically, but it has 
definitely been a burden on my practice to try to answer all 
the questions that are out there.
    Mr. LUETKEMEYER. And that cost and all those man-hours are 
all borne by your business and therefore, that is not making 
you any money?
    Ms. BAKER. Absolutely.
    Mr. LUETKEMEYER. Thank you very much for your testimony.
    Mr. COLLINS. Although they have called votes, we do have 
time for another question or two, so at this point I will yield 
five minutes to Representative Hahn.
    Ms. HAHN. Thank you, Mr. Chairman, Ranking Member 
Velazquez, for holding this hearing.
    It would be nice to hold these hearings with the thought 
that if we did hear some unintended consequences that impact 
our small business that we had the belief that our friends on 
the other side would actually like to work on fixing some of 
these problems. I get frustrated in these hearings because I 
know the main purposes is just to have more bad stuff to talk 
about and to attack the Affordable Care Act. I would love for 
this Committee to actually work on some fixes, and I think we 
even heard some offers of compromises that might make it 
better. But I will tell you, you know, that is not going to 
happen. We do not have partners on the other side that actually 
want to look at this law, how it does impact your businesses, 
and take any time or effort to fix it. We are more than willing 
to work with our friends on the other side to fix things that 
maybe nobody thought about or that do have unintended 
consequences because being members of the Small Business 
Committee, we love our small businesses. We are for our small 
businesses. This is one of the Committees that I enjoy when I 
go back home to my district in Los Angeles, is talking to my 
small businesses and finding out what we can do here to help 
them out. So it is frustrating to know that there is no 
intention on the other side. All the testimony you give, nobody 
is willing to work with us to try to fix this law.
    Having said that, I will ask this to Ms. Bogardus. So these 
business aggregation rules already apply to many aspects of 
business law, like ERISA and COBRA. So I know some of these 
small businesses found it a surprise possibly that it also 
included their compliance as it related to the Affordable Care 
Act. So maybe you can explain to us why it came as a surprise 
when these aggregation rules already existed and small 
businesses were in compliance in other areas, and maybe there 
are some small businesses that are having to come in contact or 
in compliance with these aggregation laws for the first time, 
and let us know why it was a surprise.
    And maybe, two, what kinds of small businesses are 
experiencing this for the first time; what kinds of businesses 
that may be never had to comply with this law before even in 
other areas?
    Ms. WALKER. Yes, Representative Hahn, thank you.
    The answer to that is that while these rules have been in 
effect for quite some time--they affect ERISA, COBRA, Medicare 
secondary to a number of technical issues, including retirement 
plans--if a business has not offered a retirement plan and has 
not offered a health plan, then the analysis simply has not 
been done. Even if the small businesses offered a health plan, 
again, there has not been the analysis. The insurance carrier 
says, ``How many employees do you have?'' The small business 
owner answers for the group that he is covering. There is not 
an analysis. No one has the ability, time, or authority to sit 
down from the insurance carrier and work with that employer to 
determine its size in particular over the entire control group. 
And that is just simply not done. The carrier has no obligation 
or consideration for whether the rest of the control group is 
addressed or not. So it does come as quite a surprise. I think 
the difference is this is a mandate whereas it is providing 
health insurance. I can provide health insurance to just some 
of my workers and not others. So it has all been voluntary 
before.
    Ms. VELAZQUEZ. Will you yield?
    Ms. HAHN. Yes.
    Ms. VELAZQUEZ. And what criteria will you use to decide 
which workers will get health insurance? Is it driven by job 
retention?
    Ms. WALKER. It is often driven by the industry.
    Ms. VELAZQUEZ. Okay.
    Ms. WALKER. It is, you know, different industries have 
different types of retirement plans, different types of health 
benefits.
    Ms. VELAZQUEZ. But when people say more companies will be 
dropping their plans, the health care plans, I do not know what 
facts or empirical data or research will drive anyone to 
conclude that, in fact, companies will drop health insurance 
because when we hold hearings, one of the biggest issues that 
companies and small business bring to us is to find skilled 
workers. And I am sure that in order to retain those skilled 
workers, if you provide health care as one of the package job 
offers, then they will be more than willing to come to your 
company.
    Thank you.
    Ms. HAHN. Thank you. Before I yield back no balance of my 
time, I just want to throw out one more statistic today. The 
ADP National Employment Report, which measures private 
employment, says small businesses led the way in job creation 
with 102,000 jobs this November.
    Ms. VELAZQUEZ. Two hundred fifteen thousand.
    Ms. HAHN. Thank you.
    Mr. COLLINS. There are never enough jobs, so I would like 
more jobs.
    We will cut it down to the wire, but Mr. Schweikert, you 
are good to go.
    Mr. SCHWEIKERT. Thank you, Mr. Chairman. And having just 
looked at those employment statistics, considering we need to 
be around 300-350,000 creation every month, we are still 
devastated upside down when you look at our workforce 
participation.
    Ms. VELAZQUEZ. Gentleman yield?
    Mr. SCHWEIKERT. No.
    Our workforce participation numbers. Because we are up 
against the clock, I am sure the Chairman will hand you some 
time when we are done.
    Is it Bogardus? Am I even close?
    Ms. BOGARDUS. Bogardus.
    Mr. SCHWEIKERT. Just because I have heard some discussion--
you have already explained it twice--I want to ask you to do it 
again the third time. On the aggregation rules, how different 
these aggregation rules are in regards to what you are seeing 
in the new healthcare law compared to what we have done in the 
past in pension and tax and mechanics. Can you sort of help 
explain some of the mechanics and how they are different?
    Ms. BOGARDUS. I may yield part of this question to Ms. 
Walker as to some of the technical issues.
    The mechanics are different simply because employers have 
not done this in the past unless they have offered the 
retirement plan, and in many cases, if they are operating under 
a safe harbor they may not have done all of the analysis or 
they have been able to pull out certain business classification 
units.
    In terms of what we are seeing in actual real life, I know 
there has been discussion of jobs creation and whether 
employers are hiring or not hiring. I would caution you on the 
statistics that you hear and answers to surveys because I know 
that many of our clients will not answer that question because 
they have seen the fallout in the industry, whether it is 
restaurants or other industries from answering and addressing 
questions like that, so I do not believe that you are getting a 
complete picture.
    Mr. SCHWEIKERT. Mr. Chairman, one day that might be a 
complete different hearing because we had that happen once in 
Arizona where some voluntary surveys that were filled out 
turned out to being, you know, waking up and being audited the 
next day.
    Ms. Baker, now with your background in the CPA world, or I 
could always turn back to our lawyer friend, let us deal with 
the reality of businesses trying to survive. We had a hearing 
yesterday about what many of the small banks are having to do 
to survive. Have you started to have clients with smart lawyers 
coming to you saying how do we have to now gain the system? Do 
we have to put this in a trust? Do we have to hide this, hide 
that? You do not have to throw anyone under the bus, but have 
those conversations begun?
    Ms. BAKER. I think most of the businesses that I deal with, 
that is the first question they ask me is what do I do to avoid 
this.
    Mr. SCHWEIKERT. So in other words, one more time as our 
regulatory command and control society grows out of Washington, 
we are going to turn a lot of our friends out their businesses 
into trying to find a way to game the law in many ways just to 
survive.
    Ms. BAKER. Of course I advise them not to. But that is 
their first reaction, is what do I have to do to avoid this?
    Mr. SCHWEIKERT. Is it Mr. Winstanley?
    Mr. WINSTANLEY. Yes.
    Mr. SCHWEIKERT. Now, you have actually, if I remember your 
testimony, some of which you wrote, you have actually reached 
out and invested some of your capital to start other 
businesses, and yet that may be now pulling you into the 
business aggregation. Does this become sort of a chilling 
effect on you helping capitalize new economic growth around 
you? And have you actually been approached on how to game the 
system?
    Mr. WINSTANLEY. It is one more variable to take into 
account every time we do something. About gaming the system, 
there is always how do you figure? Where do we stand on this? 
How are we set up so that it is applicable, so it is not 
applicable? One, we have to figure it out, which is taking 
considerable resources and we think we understand it, but, you 
know, I think the issue is in the distraction from the 
business.
    Mr. SCHWEIKERT. Mr. Chairman, just because we are down to 
that about three and a half minutes, we actually sort of heard 
a lot of this in yesterday's hearing where how do the small 
banks help economic growth, create jobs, take care of a lot of 
our brothers and sisters out there, and the arrogance that we 
as policymakers keep dumping onto our country and our job 
creators. At some point we have got to wake up and decide this 
is not a partisan; it actually should be about the people we 
represent and not the vanity here of trying to justify things 
that we have done that do not work.
    And Mr. Chairman, with that I yield back.
    Mr. COLLINS. Thank you. At this point in time we do have 
votes, as you can see. So we will adjourn for, I would say, 
give or take, 30 minutes, after which we will reconvene. So for 
right now we will be adjourned.
    [Recess]
    Mr. COLLINS. Mr. Bentivolio.
    Mr. BENTIVOLIO. Thank you, Mr. Chairman.
    Ms. Walker. And thank you, all of you, by the way, for 
coming in today and testifying.
    Ms. Walker, in your practice, you advise small employers; 
correct?
    Ms. WALKER. Yes.
    Mr. BENTIVOLIO. Have you found that their situations 
present difficult issues under the rule, such as complicated 
family business arrangements, overlapping shareholders? Would 
you discuss some of these situations, please?
    Ms. BAKER. Are you referring to me?
    Mr. BENTIVOLIO. Oh, I am sorry. Walker. Right. Ms. Walker.
    Ms. WALKER. I think one of the best examples is the one 
that Donna used. And that was an elderly woman who had invested 
in two restaurants. She invested in a restaurant for her son in 
one state and a restaurant for her nephew in another state and 
that required aggregation rules.
    The other situation was a family business where they were 
making investments and one of the investments was a golf 
course. The golf course was not in the same area and those two 
businesses then had to be aggregated.
    Ms. VELAZQUEZ. Mr. Chairman, we need to have the clerk 
here.
    Mr. COLLINS. Are we missing someone?
    Thank you, Ms. Velazquez. I guess we will pause 
momentarily.
    Oh, okay. We can continue. Go ahead.
    Mr. BENTIVOLIO. Am I still on my time?
    Mr. COLLINS. Yes.
    Mr. BENTIVOLIO. Thank you.
    Is it Mr. Winstanley?
    Mr. WINSTANLEY. Yes, sir. Winstanley.
    Mr. BENTIVOLIO. Thank you.
    Do you have a tax specialist on your staff?
    Mr. WINSTANLEY. No, not on our staff.
    Mr. BENTIVOLIO. So who would you consult for guidance on 
the business aggregation rules?
    Mr. WINSTANLEY. We would hire outside counsel for that. We 
have attempted to read them ourselves but we will have to hire 
somebody outside.
    Mr. BENTIVOLIO. And how much is it to hire somebody?
    Mr. WINSTANLEY. It ranges but it is expensive.
    Mr. BENTIVOLIO. Very expensive. I mean, lawyer by the hour; 
right?
    Mr. WINSTANLEY. Right.
    Mr. BENTIVOLIO. Okay. And so it is pretty costly?
    Mr. WINSTANLEY. Yes.
    Mr. BENTIVOLIO. A thousand dollars? Two thousand dollars?
    Mr. WINSTANLEY. I imagine with the nature of our businesses 
it will be significantly more than that.
    Mr. BENTIVOLIO. Are you talking $5,000? $10,000?
    Mr. WINSTANLEY. Maybe more.
    Mr. BENTIVOLIO. More than that? Oh, my goodness.
    Ms. Bogardus. Did I pronounce it right?
    Ms. BOGARDUS. Yes, sir. Bogardus.
    Mr. BENTIVOLIO. Thank you.
    Most webinars or PowerPoint presentations on the healthcare 
law for small businesses do not include materials on the 
business aggregation rules. Do your companies?
    Ms. BOGARDUS. We address the issue. We consistently refer--
we are an insurance consulting and brokerage firm. We 
consistently refer our clients to their tax and legal advisors 
because it is so complicated. They will have a better 
understanding of any corporations, any business arrangements 
that they created. It also requires in many cases an analysis 
of options, family trusts, documents that were created for 
purposes other than addressing business aggregation. So it can 
get extremely detailed.
    Mr. BENTIVOLIO. Well, how do small businesses know about 
these aggregation rules and how they affect them? How do they 
find out about this?
    Ms. BOGARDUS. You know, quite frankly, their advisor, if 
they are working with an advisor who mentions it to them. So if 
they have a current relationship----
    Mr. BENTIVOLIO. An advisor that costs more than $10,000?
    Ms. BOGARDUS. If they have current legal counsel, if they 
are working with a consultant or a brokerage firm that raises 
the issue to them, if they read about it on their own. I know 
there is information posted on the IRS website as well.
    Mr. BENTIVOLIO. Now, forgive me. Are you an attorney? I did 
not read----
    Ms. BOGARDUS. Yes, sir.
    Mr. BENTIVOLIO. You are an attorney. So now the way I 
understand attorneys charge is they charge by the hour, and 
that includes research; correct?
    So if I had my attorney, I want to know about the 
healthcare law, he would have to read thousands of pages of 
regulations and he would be charging me by the hour to do that?
    Ms. BOGARDUS. It would not necessarily require the attorney 
to read the entire Health Reform Act, but it would require an 
analysis, and quite frankly, experience with the control group 
rules, which are very specific, very detailed, and that is a 
very specialized area of the law.
    Mr. BENTIVOLIO. So if my attorney, my normal business 
attorney, is unfamiliar with that, I have to go find another 
attorney, and he is going to charge me--holy cow.
    Okay. Thank you. I see my time has pretty much run out. I 
yield back my time. Thank you, Mr. Chairman.
    Mr. COLLINS. Thank you, Mr. Bentivolio.
    At this point we will yield five minutes to Representative 
Barber.
    Mr. BARBER. Thank you, Mr. Chairman, and Ranking Member for 
having this hearing. I appreciate the witnesses' testimony. It 
is very helpful to hear directly from individuals who are 
affected or are trying to help others who are affected by the 
law.
    My wife and I ran a small business in our community for 22 
years, so we know a little bit about what it takes to meet a 
payroll, keep the doors open, keep customers coming back, and 
deal with regulations and taxation issues. So we are very 
sympathetic to small businesses on a number of levels, and we 
also know that businesses have to stay profitable and they have 
to find a way to grow. So all of these issues are very 
important to me. That is why I wanted to be a member of this 
Committee, so I could see, along with my colleagues, what we 
could do to help small businesses be more successful.
    Since I have come here last year in June, I have been 
trying to partner with people on both sides of the aisle to 
find reasonable fixes for the Affordable Care Act. I think 
there are many benefits. We have realized many of them already, 
individuals and so on, and now we are into the larger 
implementation with small businesses and individuals. The 
benefits are real but the issues are real as well. And I think 
with any major piece of legislation, over the decades we have 
always had to make amendments and revisions to a bill of that 
size and magnitude. So I am clearly interested in learning more 
about that from you.
    Clearly, as I look at this, and I have heard your 
testimony, and when I listen to people back home, small 
business owners, I am reminded that there are three Cs that 
they often talk about. They talk about the ACA's complexity, 
that it is confusing, and that it is challenging. And my job as 
a member of Congress, and I believe that all of our jobs is to 
get through all of that and help people be successful and 
understand the law.
    So I have the same question for each of the witnesses. If 
you could make one change, or if you could ask one question to 
be resolved by the agencies that are responsible for the 
Affordable Care Act, what would your top priority be? Because I 
think we need to have some instruction or some ideas from 
witnesses about what we can do. My colleague, Ms. Hahn, was 
asking about let us figure out what to do that makes things 
better, not just talking about it back and forth arguing; let 
us talk about what we can do to fix things. What would those 
things be from each of you if you could?
    Mr. WINSTANLEY. I will go first. I would position the 
aggregation rule to fulfill the scope that it was originally 
designed to fulfill, which was promoting the growth of 
business. I would treat the industries separately within the 
context of what the industry is and deal with the workforces 
within the context of what they are to position the law to be 
viable for all industries.
    Mr. BARBER. Ms. Baker. It is hard to choose I imagine.
    Ms. BAKER. It is. It is. I would definitely support looking 
at it industry by industry; looking at it by control, true 
control, not just ownership or indirect attributed ownership, 
you know, someone that is actually making day-to-day decisions. 
And I do think that the 50 employees is too small. It is too 
small.
    Mr. BARBER. Thank you.
    Ms. Bogardus.
    Ms. BOGARDUS. With respect to the rules that impact small 
businesses, I would suggest taking a second look at where the 
rules are with respect to the insurance carriers because there 
is not the same level of compliance required of them that would 
support the employer mandate. And I think some of those gaps in 
the law, which make it difficult, if not impossible for 
businesses to actually get the coverage, would specifically 
need to be addressed.
    If I can go off the top of small businesses, I would say it 
would be revisiting the definition of minimum essential 
coverage, and the plans that will be offered, and I am sure 
that some of you have read about them in the Wall Street 
Journal, the skinny plans. There was an article that was about 
six or eight months ago. They will not be sufficient coverage 
but they will satisfy the employer mandate. And I think when 
individuals realize that they have coverage that is not 
sufficient but it is what the law required employers to 
purchase and provide, there will be significant backlash, like 
none of the backlash that we have seen so far to date.
    Mr. BARBER. Thank you.
    Ms. WALKER. I take the same approach. We are looking at the 
insurance product. I think the real issue with healthcare in 
this country is that the quality of care is not what it needs 
to be and the ACA did not really focus on quality except in a 
very small segment with some research, so there is a lot more 
that needs to be done there.
    And again, I think that the required insurance, the types 
of insurance, does not make it very easy for people to comply 
with the rules.
    Mr. BARBER. Thank you for your testimony and your good 
answers, and I yield back.
    Mr. COLLINS. Thank you.
    At this point I think Mr. Bentivolio wanted to have a few 
add-on questions.
    Oh, Mr. Huelskamp, I guess we will yield to you first.
    Mr. HUELSKAMP. Thank you, Mr. Chairman. I apologize for 
sliding in a little late here, and I thank the witnesses for 
joining us today.
    A couple questions or a comment at the beginning. I think 
it was Ms. Walker and others have mentioned that the changes 
you were looking for would take a legislative change in order 
to make that happen. And I appreciate that perspective, but 
what we have seen with the Affordable Care Act, that is not 
necessary to make the changes from this administration. We have 
had 10 executive actions, and the employer mandate is one of 
those. You know what? You have got another year. And I do not 
know, and Ms. Baker, when people call you, I do not know as a 
consultant, it makes your job really tough if you do not know 
what the rules are or they tell you the rules and say they 
might delay it for another year. I know that has happened in 
other arenas but we have 10 different areas of the Affordable 
Care mandate which is the law of the land where the 
administration has, by executive action, said you know what? We 
are not going to make employers do the reporting requirements. 
How do you handle that? How do you answer that question when 
the IRS has not finalized rules on this and they could change 
the rules?
    I will give you one example. I had a business in Solana, 
Kansas. They were noted in the local paper, on July 1st they 
made their changes. That was the renewal period and they did 
everything they had to do. What a mistake. On July 2nd, the 
president said, ``Just kidding.'' We are going to suspend that 
part for another year or delay the mandate and those kind of 
things. I mean, what is the answer you give to folks that 
definitely must be calling in saying, well, what does a one-
year delay mean? And I will ask that question to Ms. Baker 
first.
    Ms. BAKER. It does make it very difficult, especially for a 
small firm like mine because we have such limited resources, so 
when you take the initiative to communicate everything and then 
all of a sudden it changes, and so you reach out and have to 
recommunicate. So the amount of time and the expense associated 
with that is great.
    Mr. BENTIVOLIO. Other responses from the panel?
    Mr. WINSTANLEY. Sure. It consumes a phenomenal amount of 
energy that is not used on something else constructive. And 
fortunately for the restaurant side of our business, we are 
looking at it saying this just is not sustainable with our 
current business model, so something has got to be done before 
this gets rolled out so we can feel some level of comfort that 
something will happen. Hopefully that is not a pipe dream.
    Mr. BENTIVOLIO. And I have yet to see anything from the 
White House that they want to make any changes legislatively to 
this act. I mean, there have been many suggestions of things we 
can fix. We have heard them here. Heard them multiple times in 
this Committee. We mention the SBA as representing the 
administration and no interest in changing one letter of the 
law unless it is by executive action, and that is certainly 
unacceptable to me.
    One thing I would like to ask Ms. Walker on another issue 
as far as the trend of basically a part-time economy. The new 
hires, according to the Department of Labor, I did not know 
that they are that bad, that in this economy four out of five 
new jobs--was that the figure that you had--that are created 
are part-time?
    Ms. WALKER. For every one full-time job that is created 
there are four part-time jobs created.
    Mr. BENTIVOLIO. So when you average the hours that is not 
quite four to one.
    Ms. WALKER. Right.
    Mr. BENTIVOLIO. That makes sense. Four out of five new jobs 
created.
    Ms. WALKER. Well, that is surprising in and of itself to 
me, but the trend, and I am not sure whether it was 2010 to 
2012 or what the years were, but the trend, it is flipped. It 
used to be six full-times to one part-time versus one to four.
    Mr. BENTIVOLIO. That is really a devastating figure. I 
mean, it is not devastating for us in this room, definitely, it 
is the folks out there looking for a job, particularly young 
people which have been the most devastated in this lack of 
long-term economic recovery.
    Can you describe a little more what happens, and basically 
this part-time economy where you are trying to work around, 
trying to avoid these mandates. I mean, people might say, well, 
why are you not providing health insurance for somebody who 
works 20 hours a week? There are reasons. It is costly.
    Ms. WALKER. Right.
    Mr. BENTIVOLIO. And trying to make those demands in a 
changing, uncertain environment where you have got to look and 
say you cannot work that much this weekend, and the reality is 
it is not just figures. I have heard from my district story 
after story of small business owners saying, you know, 
``Congressman, I did not hire anybody this week. I am not going 
to hire anybody next year because I am worried about the 
threshold. I do not know what the rules are going to be. I am 
not going to take that risk.'' And these are successful 
businessmen and women. But the message we are sending from 
Washington is that we will let you know next year, and it does 
not work that way.
    Any further comments from you all? I know I am about out of 
time on that, but that is the frustration I am hearing, which 
is matching what the panel has.
    Ms. Bogardus.
    Ms. BOGARDUS. Thank you. I would just add that it is an 
issue that is crying out for leadership, and leadership in 
terms of what you are doing here today, and that is seeking out 
the truth. What is the truth, what are the facts, and then 
coming to at least some sort of agreement on what you can agree 
on. I mean, the American people, the small business owners, the 
large business owners, they want to see some sort of solution 
to these problems other than the issues being raised and the 
lack of a solution just being acceptable or considered 
inevitable. And we need somebody, and a group of people 
perhaps, to step up and say something has got to change because 
we cannot sit back and watch the train go down the tracks with 
the bolts flying off because we know what is going to happen. 
And this is our country, our economy, our fellow citizens, the 
children, the young people who are trying to get jobs, people 
who are trying to grow a business, business owners who are 
trying to do planning who are putting off expansion, putting 
off buildings, putting off all kinds of things that could 
create and generate other jobs, not just within their own 
businesses, construction work and other things. So it is crying 
out for leadership, and I would say this is a great start and I 
would continue down that path.
    Mr. BENTIVOLIO. Thank you. And I yield back, Mr. Chairman.
    Mr. COLLINS. Thank you, Ms. Bogardus. That was a great 
summary, actually.
    At this point I would like to yield five minutes to Mr. 
Payne.
    Mr. PAYNE. Thank you, Mr. Chairman.
    Ms. VELAZQUEZ. Mr. Payne, will you yield for one second?
    Mr. PAYNE. Yes.
    Ms. VELAZQUEZ. I just--if not----
    Mr. PAYNE. You are the ranking member. Please.
    Ms. VELAZQUEZ. Go ahead and use your five minutes. I will 
come back. I just did not want to----
    Mr. PAYNE. No, please.
    Ms. VELAZQUEZ. I did not want to lose the train here.
    Ms. Walker, you mentioned--a number that struck me, one out 
of five jobs are part-time jobs. What was the number?
    Ms. WALKER. For every one full-time job created, there are 
four part-time jobs created.
    Ms. VELAZQUEZ. There was a hearing that I mentioned before, 
where we had the expert witness Dean Baker from the Center for 
Economic and Policy Research, and he said the vast majority of 
people who work part-time do so voluntarily. In many cases, 
they have family or other obligations that make part-time 
employment decidable. Even with the current weak labor market, 
more than two-thirds of the people who work part-time report 
that they do so voluntarily.
    Thank you for yielding.
    Mr. PAYNE. Well, you know, this is an observation, and the 
Affordable Health Care Act is the law, very new in its infancy, 
and naturally there are going to be issues around the 
implementation. We know the problems that we have had to this 
point, but the meat of the act I think will revolutionize 
healthcare in this nation. If we look back at other large 
programs that have been implemented over the course of time, 
one being social security is probably the easiest one to 
mention, when it was implemented it was going to destroy this 
nation and we were going to socialism and how could we do this? 
It was going to ruin the nation. And I think most American now 
think social security is part of the fabric of this country. 
And so I see the Affordable Care Act having the same type of 
life in this nation.
    When they started social security they used your name as an 
identifier. Well, guess what? They had to tweak the system 
because there were a lot of Donald Paynes and Ms. Bakers and 
what have you. So they went to a social security number. So 
nothing is perfect when it starts. You have to let it evolve 
into something that is going to work. So I like to use that 
example because it is probably the easiest example to use in 
terms of rough starts for large programs that are successful 
over the course of time.
    And Ms. Baker, in your testimony you state that this law 
leads small business owners to provide health coverage in an 
industry where that is not the norm. Well, let me just say 
that--I want to say setting the norm is precisely what the 
Affordable Care Act is about. Over the last decade, health 
insurance premiums for small firms have increased 113 percent 
leading to dropped coverage. The Affordable Care Act was 
enacted to upset this norm and make it easier for small 
businesses to compete and offer quality benefits. The norm 
prior to the law allowed insurance companies to drop coverage 
for employees when they needed coverage the most and 
discriminate against people with preexisting conditions. The 
law upsets this norm.
    Prior to the Affordable Care Act, it was normal for an 
average U.S. family and their employer to pay an additional 
$1,000 for insured people to cover that cost. The Affordable 
Care Act aims to upset this norm by bringing the uninsured into 
the system, driving overall costs down.
    Now, there are issues with the law that need to be tweaked, 
but the bones and the substance of the law are good and are 
here to stay. Further, 96 percent of U.S. businesses have fewer 
than 50 employees, and according to the last census data, less 
than 1 percent of businesses have between 45 and 49 employees, 
placing them at risk of falling into the abyss of the employer 
mandate. Again, that is less than 1 percent.
    Now, I am interested in addressing valid concerns about the 
Affordable Care Act and you have stated many today, such as the 
compliance and the burden on small businesses. However, I 
really find it nonconstructive to continue to play on the fears 
of the American people rather than work on ways to make this 
law better and see it implemented successfully. So over the 
course of the last two days I have heard the president speaking 
before groups and saying if you have ideas, and I believe he is 
reaching out to our colleagues on the other side, if you have 
ideas that will strengthen the law, then let us discuss it. But 
to continue to try to tear it down and sabotage it and not even 
allow it to go through its natural courses is 
counterproductive.
    So in terms of solutions, and I am very open to the 
criticism and the potential of making it stronger, so I am glad 
to hear your testimony.
    Mr. Winstanley, you mentioned--I am sorry.
    Mr. WINSTANLEY. Yes, sir.
    Mr. PAYNE. Did I pronounce it correct?
    Mr. WINSTANLEY. Yes. Winstanley. Yes.
    Mr. PAYNE. Winstanley. I am sorry.
    You mention an E-FLEX coalition that advocates for greater 
flexibility and options within the law. I understand that the 
restaurant industry has a unique makeup. What proposal does the 
coalition have to provide flexibility while upholding the law's 
goal of expanding insurance coverage for all?
    Mr. WINSTANLEY. Where do you see the E-FLEX? Oh, it was 
referenced in the regulations?
    Mr. PAYNE. Yeah.
    Mr. WINSTANLEY. I am not familiar enough with that. I am 
not familiar enough with that to speak to that. What I would 
like to speak to though is you mentioned social security, and 
to my generation and every generation behind us, what social 
security is known for is being a completely unsustainable 
program. I would also like to mention that when I got started, 
I got started with a 24-hour diner. It had about 10 or 12 
employees. My twin brother and I stayed up all night building 
that place and rebuilding it and turning it into a real 
business and there was nothing we wanted more than to build our 
business and add to it. And I have been fortunate to have some 
very good advice from people over the years that have done 
similar things, and what they have shared with me time and 
again, which turned out to be true in our case, is that every 
next step you take is harder than the step behind you, and 
there is significant growth burden that comes with trying to 
build a real business. And the 50 employees, regardless of what 
industry I believe you are in, the 50 employees presents an 
additional significant hurdle for people who are trying to 
build something meaningful, and I think it is counter to the 
spirit of this country.
    Mr. COLLINS. Thank you. The gentleman's time has expired.
    Mr. Bentivolio wanted to ask a follow-on question, so Mr. 
Bentivolio.
    Mr. BENTIVOLIO. Thank you, Mr. Chairman.
    Just a few short questions.
    Mr. Winstanley.
    Mr. WINSTANLEY. Yes, sir.
    Mr. BENTIVOLIO. Healthcare law requires you to inform your 
employees about the health insurance choices available to them. 
Is this an additional burden and expense for your companies?
    Mr. WINSTANLEY. I am sorry, requires us to inform them 
about the health care?
    Mr. BENTIVOLIO. Yes, sir. There is a significant amount of 
education that goes on and as anybody with kids knows, it is 
hard to educate somebody who is not interested to hear what you 
are saying.
    It has traditionally been very challenging for us to 
educate to the groups of people that we were able to provide 
health insurance to. And so, yeah, I see that as being very 
significant. Yes, sir. I see it as being a very significant 
challenge.
    Mr. BENTIVOLIO. Now, while I was back in the District last 
weekend, I had dinner at a restaurant, and the waitress came 
over and she recognized me and a big supporter and told me her 
story; that she lost her job, now is working two jobs, all 
because of the health care. She lost it when they found out 
about this employer mandate, before they delayed that. Right? 
And they had to reduce their employees. And now she is working 
two jobs. Do you have a lot of waitresses or people on your 
staff that are working two jobs to make ends meet?
    Mr. WINSTANLEY. We have a significant number of people 
doing that, and what we have seen is there are a lot of people 
who need part-time jobs and that is because wage and job growth 
in permanent, full-time positions has not been there while the 
cost of childcare and housing continue to increase.
    Mr. BENTIVOLIO. Do you think that is largely attributable 
to the Unaffordable--excuse me--Affordable--this is really 
confusing--Unaffordable Health Care Act? I got it right. 
Washington got it wrong.
    Mr. WINSTANLEY. I think it is attributable to a general 
slowdown, which the healthcare act is very much influencing.
    Mr. BENTIVOLIO. Great. So let us see. Ms. Baker, under the 
aggregate rules, a controlled group is a collection of two or 
more corporations with common stock ownership that are 
connected in one of several ways. Many small businesses do not 
issue stock. How would the rules be applied in those cases?
    Ms. Baker, CPA; right?
    Ms. BAKER. Yes.
    They look at ownership. So if you are not a corporation, 
they look at investment and equity within those companies. So 
in my example, when I invested in a small women's boutique just 
as an investment, I do not manage or operate that on a day-to-
day basis. Those employees are then pulled into my CPA firm as 
part of the rules of aggregation.
    Mr. BENTIVOLIO. And increasing the cost?
    Ms. BAKER. And increasing the cost. And even though Mr. 
Payne mentioned the norm, I think the norm is we would all love 
to provide health insurance in every industry, but that is a 
very small women's boutique. There are very few other women's 
boutiques that would have to require health insurance because 
they are small businesses and they are not meeting the 50 
employees. So for me to have to provide health insurance for 
them makes me not competitive in that market just because I am 
an entrepreneur and own businesses in different industries.
    Mr. BENTIVOLIO. So let us see if we can sum up. Higher 
deductibles, higher premiums, additional legal costs; correct? 
Tens of thousands of dollars for a small business. And you are 
less competitive.
    Thank you very much. I yield back.
    Mr. COLLINS. At this point we will call the hearing to a 
close. I want to thank all of our witnesses for being here 
today. It is very timely.
    I think what some people do forget is even though the 
employer mandate, the penalty portion has been delayed a year, 
the calculations as to whether or not you will have to comply 
with the law start in three weeks time. So on January 1st, that 
is the beginning of what will be 12 monthly buckets of keeping 
track of the hours and the employees to see if you hit the 50 
FTEs or not. So it is a very timely situation. We certainly 
heard a lot of give and take. I think we all recognize that 
there will be changes that will be needed in this law and 
hopefully now the president would agree to make some changes. 
He has not up till this point in time recognized that, but I 
think an overwhelming number of Americans today are expressing 
displeasure in the law. And certainly, as we heard today, 
compliance with the law and the application of the complex 
aggregation rules is burdensome and is confusing for business, 
and I think it almost goes without saying that a big 
government, ``one size fits all'' set of regulations and laws 
that tell a business what benefits they have to offer, whether 
that is a restaurant, a construction company, or a high-tech 
manufacturing company is, in fact, a drag on the economy.
    Today's hearing did highlight another example of the 
unintended consequences of the Affordable Care Act, namely the 
high cost to business of hiring a CPA or other tax advisor to 
give advice on the IRS aggregation rules, money that is better 
spent on growth and the creation of jobs.
    We on this Committee will continue to closely follow the 
implementation of this law and its effect on small business.
    I would ask unanimous consent that members have five 
legislative days to submit statements and supporting materials 
for the record.
    Ms. VELAZQUEZ. Yes, Mr. Chairman, before we close, I would 
like to thank all the witnesses. It is a breath of fresh air to 
hear that we are talking now about fixing and looking at ways 
where we could improve the implementation of the health care 
law. So it is great to know that we are moving beyond repealing 
Obamacare to finding common ground to make it work because it 
is the law of the land. Thank you.
    Mr. COLLINS. Thank you, Ranking Member Velazquez. And with 
that, without objection, this hearing is now adjourned.
    [Whereupon, at 3:15 p.m., the Committee was adjourned.]
                            A P P E N D I X


``The Health Care Law, The Effect of the Business Aggregation Rules on 
                            Small Business''


                             Testimony of:


                          Deborah Walker, CPA


               National Director, Compensation & Benefits


                           Cherry Bekaert LLP


                             Washington, DC


                               Before the


                      Committee on Small Business


                 United States House of Representatives


                            December 4, 2013


               The Honorable Sam Graves (R-MO), Chairman


          The Honorable Nydia Velazquez (D-NY), Ranking Member

    Good afternoon Chairman Graves, Ranking Member Velazquez 
and members of the Committee. Thank you for hosting this 
important hearing on the effect of the business aggregation 
rules on small business in applying the health care law. I am 
Deborah Walker, a CPA with over 35 years of experience in the 
Employee Benefits area. I am currently National Director of 
Compensation and Benefits for Cherry Bekiaert LLP. I welcome 
this opportunity to discuss this important issue and offer an 
alternative approach.

                       Executive Summary

    In order to determine if an employer is subject to the 
shared responsibility rules of the Affordable Care Act, the 
employer must determine if at least 50 full time equivalents 
are employed on business days during the preceding taxable 
year. Prior to making this calculation, the business needs to 
determine what trades or businesses comprise the employer. The 
employer includes the business and related entities, including 
entities related by common ownership and by attribution of 
ownership from one party to another, and certain other 
businesses that provide services to the business. To make the 
determination, one needs detailed ownership rules and business 
relationships between the entities.

    The rules used by the Affordable Care Act are the same 
rules used for determining if qualified retirement plan 
benefits are available on a nondiscriminatory basis to a fair 
cross section of employees. The use of bright line tests has 
enabled tax planners to structure arrangements to avoid the 
application of the rules. Because the rules have been developed 
over a number of years to counteract avoidance of the rules by 
tax planners, they are voluminous and extremely detailed.

    In the health care context, this is a test that will only 
be used by businesses close exceeding the 50-employee limit 
and, as businesses grow or decline the need for applying the 
test evaporates. Such a complicated test for such few taxpayers 
is not warranted. In addition, one can expect that the 
employers close to exceeding the limit will make business 
decisions that would result in increased hiring by taking into 
account the increased cost of mandated health care.

    An employer can choose to offer a retirement plan or not, 
and in so doing accepts the application of these rules. For 
mandated health benefits, the employer does not have a choice 
of whether to be involved with these rules. For this reason, 
these rules are not appropriate to define the employer for the 
Affordable Care Act. Applying the same business aggregation 
rules to a mandated benefit that exist for purposes of 
preventing discrimination for voluntary employer provided 
benefits can lead to inefficient and unwanted economic 
behavior. This behavior constrains a small business and may 
lead to unwanted and unwelcome business decisions including not 
hiring additional works that ensure the small business is not 
subject to the rules.

    Many small employers who offer a retirement plan offer a 
safe harbor IRC Section 401(k) plan that does not require 
discrimination testing. Thus, many small employers do not have 
to make this determination except for determining the 
applicability of the shared responsibility rules of the 
Affordable Care Act and the groups of employees for whom 
minimum essential coverage is required to be provided. Because 
many small employers have never had to use these rules, 
avoiding them with the use of safe harbor qualified retirement 
plans or not offering a qualified retirement plan, the rules 
are not familiar to them. This is true for many of the advisers 
to small businesses. What we have here are rules that only a 
small subset of tax practitioners are familiar with and apply. 
Even those that apply the rules, as I and other benefits 
practitioners do, apply them on an infrequent basis, perhaps 4-
5 times a year.

    For determining who is the employer, I suggest an 
alternatives, facts and circumstances test focused on the 
entities controlled by a specific individual. Investors who had 
no control of day-to-day operations of the business would not 
need to be aggregated. Examples include the individual who 
makes hiring and firing and purchasing decisions and sets sales 
prices. By focusing on day-to-day operations, the business 
would be defined by the industry or industries with which an 
individual is involved regularly. Similarly, if a spouse were 
not involved with day-to-day operations of the other spouse's 
business, the businesses of each spouse would not be 
aggregated.

    The taxpayer would evaluate the facts and circumstances of 
each business and a determination would be made. By using a 
facts and circumstances determination, the opportunity to plan 
to avoid bright line tests is not available. A facts and 
circumstances test will use business activities and 
characteristics with which the small business operator is 
familiar. The statute or IRS guidance could outline a 
nonexclusive list of characteristics of control. This is 
similar to the rules used for determining whether an individual 
is an employee or independent contractor and parts of the rules 
that determine what is a separate line of business. As there is 
sometimes no clear-cut answer, many people may be more rather 
than less conservative in making a determination.

    The determination would be subject to audit by the IRS. In 
addition, the IRS could establish a procedure whereby taxpayers 
could obtain certainty by applying to the IRS for a 
determination of whether 2 businesses should be aggregated 
given specified facts.

    Finally, because the existing rule is the same rule used 
for qualified plan discrimination testing, some employers may 
want to continue using the existing bright line test rule, 
suggesting that a new facts and circumstances rule should be an 
alternative.

                           Background

    Under the Affordable Care Act, employers with an average of 
at least 50 full-time employees on business days during the 
preceding taxable year are subject to shared responsibility 
assessable penalties if 1) minimum essential coverage is not 
offered to full employees (and their dependents) and at least 
one full-time employee enrolls in such coverage for which a tax 
credit or cost sharing reduction is allowed, or 2) minimum 
essential coverage is offered to full-time employees (and their 
dependents) but the coverage is not affordable or does not meet 
minimum value standards and at least one full-time employee 
enrolls in such coverage for which a tax credit or cost sharing 
reduction is allowed.

                   The Controlled Group Rules

    To determine if an employer employs an average of at least 
50 full-time employees on business days during the preceding 
year, all persons treated as a single employer under IRC 
Section 414(b), (c), (m), (n) and (o) are treated as employed 
by 1 employer. This rule is known as the controlled group, 
affiliated service group and leased employee rule. Special 
rules apply for employers not in existence during the preceding 
year, for predecessor employers and for seasonal workers. In 
addition, full-time equivalent employees are treated as full-
time employees.

    The controlled group rules were originally enacted with 
ERISA in 1974, modeled after the controlled group rules for 
consolidated return purposes. In general, the employees of a 
controlled group of corporations or of commonly controlled 
partnerships or proprietorships are treated as if the same 
employer employed them all. The rules have been applied for 
many years to qualified retirement plans and even longer for 
other tax purposes. Because the purpose of the controlled group 
rules for benefit plan discrimination testing and coverage 
rules is broader than the purpose for the consolidated return 
rules, the rules apply to noncorporate trade or business 
entities using the same concepts as the corporate entities. In 
general, the rule was originally adopted to make it impossible 
for the qualified plan coverage and nondiscrimination rules to 
be circumvented by operating businesses through separate 
entities rather than as a single entity. Since that time, they 
have been used for defining the employer for testing 
discrimination for all types of benefit plans.

    The controlled group rules include parent-subsidiary 
controlled groups, brother-sister controlled group and combined 
groups.

    Parent Subsidiary Controlled Group

    A parent-subsidiary controlled group is one of 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 corporations, is 
        owned (directly and through ownership of an option) by 
        one or more of the other corporations; and

          (B) The common parent corporation owns (directly and 
        through ownership of options) 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.

    For determining stock ownership, attributions rules apply 
to attribute ownership to someone other than the legal owner of 
the stock. For purposes of determining whether a corporation is 
a member of a parent-subsidiary controlled group of 
corporations, stock owned by a partnership is considered owned 
proportionally by any partner that has an interest of five 
percent or more of the capital or profits of the partnership, 
whichever is greater. Similarly, in the case of an estate or 
trust, other than a trust holding qualified retirement plan 
assets, stock owned by the estate or trust is considered owned 
proportionally by a beneficiary who has an actuarial interest 
of five percent or more in such stock. To determine the five 
percent actuarial interest, one assumes the maximum exercise of 
discretion by the fiduciary in favor of the beneficiary and the 
maximum use of stock to satisfy the beneficiary's rights. In 
addition, the grantor of a grantor trust is considered to own 
the stock of the trust.

    For example, assume P Corporation owns 80 percent of the 
only class of stock of S Corporation and S, in turn, owns 40 
percent of the only class of stock of X Corporation, P also 
owns 80 percent of the only class of stock of Y Corporation and 
Y, in turn, owns 40 percent of the only class of stock of X. P 
is the common parent of a parent-subsidiary controlled group 
consisting of member corporations P, S, X, and Y.

    Similarly, assume P Corporation owns 75 percent of the only 
class of stock of Y and Z Corporations; Y owns all the 
remaining stock of Z; and Z owns all the remaining stock of Y. 
Since intercompany stockholdings are not treated as outstanding 
for purposes of determining whether P owns stock possessing at 
least 80 percent of the voting power or value of at least one 
of the other corporations, P is treated as the owner of stock 
possessing 100 percent of the voting power and value of Y and 
of Z. Also, stock possessing 100 percent of the voting power 
and value of Y and Z is owned by the other corporations in the 
group. P and Y together own stock possessing 100 percent of the 
voting power and value of Z, and P and Z together own stock 
possessing 100 percent of the voting power and value of Y. 
Therefore, P is the common parent of a parent-subsidiary 
controlled group of corporations consisting of member 
corporations P, Y, and Z.

    When applying these rules to noncorporate entities, a 
parent-subsidiary group of trades or businesses under common 
control include means one or more chains of organizations 
conducting trades or businesses connected through ownership of 
a controlling interest with a common parent organization if--

          (A) A controlling interest in each of the 
        organizations, except the common parent organization, 
        is owned (directly and through ownership of options) by 
        one or more of the other organizations; and

          (B) The common parent organization owns (directly and 
        through ownership of options) a controlling interest in 
        at least one of the other organizations, excluding, in 
        computing such controlling interest, any direct 
        ownership interest by such other organizations.

    For purposes of these rules, a controlling interest is 
defined as

          (A) In the case of an organization which is a 
        corporation, ownership of stock possessing at least 80 
        percent of total combined voting power of all classes 
        of stock entitled to vote of such corporation or at 
        least 80 percent of the total value of shares of all 
        classes of stock of such corporation;

          (B) In the case of an organization which is a trust 
        or estate, ownership of an actuarial interest of at 
        least 80 percent of such trust or estate;

          (C) In the case of an organization which is a 
        partnership, ownership of at least 80 percent of the 
        profits interest or capital interest of such 
        partnership; and

          (D) In the case of an organization which is a sole 
        proprietorship, ownership of such sole proprietorship.

    In determining ownership, only outstanding stock is taken 
into account. In addition, if the parent organization owns

          (A) In the case of a corporation, 50 percent or more 
        of the total combined voting power of all classes of 
        stock entitled to vote or 50 percent or more of the 
        total value of shares of all classes of stock of such 
        corporation.

          (B) In the case of a trust or an estate, an actuarial 
        interest of 50 percent or more of such trust or estate, 
        and

          (C) In the case of a partnership, 50 percent or more 
        of the profits or capital interest of such partnership.

    certain other stock ownership is excluded, including that 
held in trust for the payment of deferred compensation, 
subsidiary stock held by principal owners, officers, partners 
or fiduciaries of the parent organization, subsidiary stock 
held by employees if subject to a substantial restriction which 
limits the employees right to dispose of the stock which runs 
in favor of the parent organization and subsidiary stock held 
by an exempt organization which is controlled by the parent or 
subsidiary organization, by an individual, estate, or trust 
that is a principal owner of the parent organization, by an 
officer, partner, or fiduciary of the parent organization, or 
by an combination thereof. Whether an exempt organization is 
controlled is a facts and circumstances determination.

    As you can see, application of this rule involves knowing 
stock and option ownership of all entities, applying 
attribution rules for stock owned by partnerships, estates and 
trusts and then determining if the 80% rule is met. Note that, 
if stock ownership is 79%, then a parent subsidiary controlled 
group is not formed. Corporate tax planning often involves 
owning 79% rather than 80% of a corporation for this reason.

    Brother-Sister Controlled Group

    A brother-sister controlled group is a group of two or more 
corporations if the same five or fewer persons who are 
individuals, estates, or trusts own (directly and through the 
ownership of options) 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 stock of each corporation (the 80 percent 
        requirement);

          (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 (the more-than-50 
        percent identical ownership requirement); and

          (C) The five or fewer persons whose stock ownership 
        is considered for purposes of the 80 percent 
        requirement must be the same persons whose stock 
        ownership is considered for purposes of the more-than-
        50 percent identical ownership requirement.

    For determining stock ownership, attributions rules again 
apply to attribute ownership to someone other than the legal 
owner. For purposes of determining whether a corporation is a 
member of a brother-sister controlled group of corporations, 
stock owned by a partnership is considered owned proportionally 
by any partner that has an interest of five percent or more of 
the capital or profits of the partnership, whichever is 
greater. Similarly, in the case of an estate or trust, other 
than a qualified retirement plan, stock owned by the estate or 
trust is considered owned proportionally by a beneficiary who 
has an actuarial interest of five percent or more in such 
stock. To determine the five percent actuarial interest, one 
assumes the maximum exercise of discretion by the fiduciary in 
favor of the beneficiary and the maximum use of stock to 
satisfy the beneficiary's rights. In addition, the grantor of a 
grantor trust is considered to own the stock of the trust. One 
also needs to attribute stock held by a corporation 
proportionally to any five percent or more owner of the 
corporation.

    Finally, in the case of family attribution, stock owned by 
a spouse is considered owned by the other spouse unless each of 
the following is true:

          a) the spouse owns no stock directly at any time 
        during the taxable year,

          b) the spouse is not an employee or director or 
        participate in management of the corporation at any 
        time during the taxable year,

          c) no more than 50% of the corporation's gross income 
        was derived from rents, royalties, dividends, interest 
        and annuities during the year, and

          d) the stock of the corporation is not, at any time 
        during the taxable year, subject to conditions which 
        substantially limit or restrict the owner's right to 
        dispose of such stock which run in favor of the spouse 
        or children who have not attained age 21.

    Stock owned directly or indirectly by a child that has not 
attained age 21 is attributed to the parents and if an 
individual has not attained age 21, stock owned by the parents 
is attributed to the child. In addition, if an individual owns 
more than 50% of the total voting power or value of all classes 
of stock (after applying all attribution rules other than this 
rule and attribution from children under age 21), stock owned 
directly or indirectly by parents, grandparents, grandchildren 
and children over age 21 are attributed to the individual.

    For determining a brother-sister controlled group of 
corporations, one needs to again determine stock and option 
ownership, attributed stock ownership and also common ownership 
(including that through attribution) and then apply the 80% and 
50% test. Again, with the bright line stock ownership rules, 
individuals can structure ownership to avoid the rules. When 
applying these rules to noncorporate entities, adjustments are 
made which highlight that only trade or business entities are 
considered.

    Again, certain stock ownership can be excluded for purposes 
of determining ownership. If five or fewer persons who are 
individuals, estates, or trusts own (directly and through the 
ownership of options) own

          (A) In the case of a corporation, 50 percent or more 
        of the total combined voting power of all classes of 
        stock entitled to vote or 50 percent or more of the 
        total value of shares of all classes of stock or such 
        corporation,

          (B) In the case of a trust or an estate, an actuarial 
        interest of 50 percent or more of such trust or estate, 
        and

          (C) In the case of a partnership, 50 percent or more 
        of the profits or capital interest of such partnership.

    certain stock ownership is excluded, including that held in 
a qualified retirement plan trust, subsidiary stock held by 
employees if subject to a substantial restriction which limits 
the employees right to dispose of the stock which runs in favor 
of the parent organization and subsidiary stock held by an 
exempt organization which is controlled by the by the 
organization, by an individual, estate, or trust that is a 
principal owner of the organization, by an officer, partner, or 
fiduciary of the parent organization, or by any combination 
thereof. Whether an exempt organization is controlled is a 
facts and circumstances determination.

    The term ``brother-sister group of trades or businesses 
under common control'' means two or more organizations 
conducting trades or businesses if

          (A) the same five or fewer persons who are 
        individuals, estates, or trusts own (directly and 
        through attribution as described above) a controlling 
        interest in each organization, and

          (B) taking into account the ownership of each such 
        person only to the extent such ownership is identical 
        with respect to each such organization, such persons 
        are in effective control of each organization.

    The five or fewer persons whose ownership is considered for 
purposes of the controlling interest requirement for each 
organization must be the same persons whose ownership is 
considered for purposes of the effective control requirement.

    For purposes of these rules, a controlling interest is 
defined as

          (A) In the case of an organization which is a 
        corporation, ownership of stock possessing at least 80 
        percent of total combined voting power of all classes 
        of stock entitled to vote of such corporation or at 
        least 80 percent of the total value of shares of all 
        classes of stock of such corporation;

          (B) In the case of an organization which is a trust 
        or estate, ownership of an actuarial interest of at 
        least 80 percent of such trust or estate;

          (C) In the case of an organization which is a 
        partnership, ownership of at least 80 percent of the 
        profits interest or capital interest of such 
        partnership; and

          (D) In the case of an organization which is a sole 
        proprietorship, ownership of such sole proprietorship.

    For purposes of these rules, effective control is defined 
as

          (A) In the case of a corporation, such persons own 
        stock possessing 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 such corporation;

          (B) In the case of a trust or estate, such persons 
        own an aggregate actuarial interest of more than 50 
        percent of such trust or estate;

          (C) In the case of a partnership, such persons own an 
        aggregate of more than 50 percent of the profits 
        interest or capital interest of such partnership; and

          (D) In the case of a sole proprietorship, one of such 
        persons owns such sole proprietorship.

    For example, assume X corporation is owned by 8 unrelated 
shareholders, A, B, C and D each own 12% and E, F, G and H each 
own 13% and Y Corporation is owned by the same 8 shareholders 
with A, B, C and D each owning 13% and E, F, G and H each own 
12%. Any group of five of the shareholders will own more than 
50 percent of the stock in each corporation, in identical 
holdings. However, X and Y are not members of a brother-sister 
controlled group because at least the same five or fewer 
persons do not own 80 percent of the stock of each corporation.

    Alternatively, assume Corporation X and Y both has voting 
and nonvoting stock outstanding. Individual A owns 100% of the 
voting stock and 60% of the value of Corporation X and 75% of 
the voting stock and 60% of the value of Corporation Y. 
Unrelated individual B owns no voting stock and 10% of the 
value of Corporation X and 25% of the voting stock and 10% of 
the value of Corporation Y. No other shareholder of X owns (or 
is considered to own) any stock in Y. X and Y are a brother-
sister controlled group of corporations. The group meets the 
more-than-50 percent identical ownership requirement because A 
and B own more than 50 percent of the total value of shares of 
all classes of stock of X and Y in identical holdings. The 
group also meets the more-than-50 percent identical ownership 
requirement because of A's voting stock ownership. The group 
meets the 80 percent requirement because A and B own at least 
80 percent of the total combined voting power of all classes of 
stock entitled to vote.

    These examples highlight the detail needed for determining 
whether a brother sister controlled group exists. When one 
considers that attribution of stock ownership must be taken 
into account before this test is performed, it is evident how 
complicated the rule can be. Most tax practitioners would agree 
that non tax professional would not likely be able to make a 
correct determination of controlled group status in situations 
in which a number of entities are involved or where there is 
significant stock attribution that needs to be considered.

    Combined Group

    A combined group is any group of three or more corporations 
if

          (A) Each such corporation is a member of either a 
        parent-subsidiary controlled group of corporations or a 
        brother-sister controlled group of corporations; and

          (B) At least one of such corporations is the common 
        parent of a parent-subsidiary controlled group and also 
        is a member of a brother-sister controlled group.

    A combined group of trades or businesses under common 
control means any group of three or more organizations, if

          (1) each such organization is a member of either a 
        parent-subsidiary group of trades or businesses under 
        common control or a brother-sister group of trades or 
        businesses under common control, and

          (2) at least one such organization is the common 
        parent organization of a parent-subsidiary group of 
        trades or businesses under common control and is also a 
        member of a brother-sister group of trades or 
        businesses under common control.

                 Affiliated Service Group Rules

    As noted above, provisions that use bright line tests 
provide practitioners and their clients with the opportunity to 
structure ownership to avoid the rules. That is precisely what 
Dr. Kiddie and Dr. Garland did when they formed a partnership 
owned 50% by each of them. The partnership employed nurses and 
other staff who, as a result of plan provisions, did not 
participate in the benefit plans in which the doctors 
participated. The IRS challenged this arrangement, but the Tax 
Court upheld it. As a result, Congress expanded the controlled 
group rules by adding the affiliated service group rules in 
1980. Thus, the controlled group rules were supplemented by 
affiliated service group rules that focus on business 
relationships and activities rather than stock ownership. In 
subsequent years, more statutory changes expanded the 
definition to include groups of management organizations and 
the organizations managed, even if there was no stock 
ownership, and broadened the attribution rules that apply. For 
instance, if one entity provides management services to another 
entity, the two entities would be part of an affiliated service 
group.

    An affiliated service group is one type of group of related 
employers and refers to two or more organizations that have a 
service relationship and, in some cases, an ownership 
relationship. An affiliated service group can fall into one of 
three categories.

          1. A-Organization groups (referred to as ``A-Org'') 
        consist of an organization designated as a First-
        Service Organization (FSO) and at least one ``A 
        organization''.

          2. B-Organization groups (referred to as ``B-Org'') 
        consist of a FSO and at least one ``B organization''.

          3. Management groups.

        An FSO must be a ``service organization'', a 
        corporation, partnership or other entity whose 
        principal business is the performance of services. 
        Proposed regulations state that the principal business 
        of an organization is considered the performance of 
        services if capital is not a material income-producing 
        item. This is a facts and circumstances determination, 
        although the proposed regulations specify that capital 
        is a material income-producing item for banks and 
        similar institutions. In addition, the proposed 
        regulations note that capital is a material income-
        producing factor if a substantial portion of the gross 
        income of the business is attributable to the 
        employment of capital in the business are reflected, 
        for instance, by a substantial investment in 
        inventories, plant, machinery or other equipment. 
        Capital is not a material income-producing factor if 
        the gross income of the business consists principally 
        of fees, commissions, or other compensation for 
        personal services performed by an individual. In 
        addition to non-capital intensive organizations, an 
        organization engaged in health, law, engineering, 
        architecture, accounting, actuarial science, performing 
        arts, consulting or insurance are all considered 
        service organizations.

    To be an A-Org, an organization must satisfy an ownership 
test and a working relationship test. The ownership test is met 
if the organization is a partner or shareholder in the FSO 
(regardless of the percentage interest it owns in the FSO) 
determined by applying the constructive ownership rules. The 
working relationship test is the organization ``regularly 
performs services of the FSO,'' or ``regularly associated with 
the FSO in performing services for third parties. Facts and 
circumstances are used to determine if a working relationship 
exists.

    To be a B-Org, the organization does not need to be a 
service organization. Rather, it must meet the following 
requirements:

          - A significant portion of its business must be the 
        performance of services for a FSO, for one or more A-
        Org's determined with respect to the FSO, or for both,

          - The services must be of a type historically 
        performed by employees in the service field of the FSO 
        or the A-Org's, and

          - Ten percent or more of the interests in the 
        organization must be held, in the aggregate, by highly-
        compensated employees of the FSO or A-Org.

    Services will be considered of a type historically 
performed by employees in a particular service field if it was 
not unusual for the services to be performed by employees of 
organizations in that service field in the United States on 
December 13, 1980.

    For example, assume Allen Averett, a doctor, is 
incorporated as Allen Averett, P.C. and this professional 
corporation is a partner in the Butler Surgical Group. Allen 
Averett and Allen Averett, P.C., are regularly associated with 
the Butler Surgical Group in performing services for third 
parties. The Butler Surgical Group is an FSO. Allen Averett, 
P.C. is an A-Org because it is a partner in the medical group 
and is regularly associated with the Butler Surgical Group to 
perform services for third parties. Accordingly, Allen Averett, 
P.C. and the Butler Surgical Group would constitute an 
affiliated service group. As a result, the employees of Allen 
Averett, P.C. and the Butler Surgical Group must be aggregated 
and treated as if they were employed by a single employer.

    Similarly, assume that the Everett, Furman and Guilford 
Partnership is a law partnership with offices in numerous 
cities. EFG of Capital City, P.C., is a corporation in Capital 
City that is a partner in the law firm. EFG of Capital City, 
P.C. provides paralegal and administrative services for the 
attorneys in the law firm. All of the employees of the 
corporation work directly for the corporation, and none of them 
work directly for any of the other offices of the law firm. The 
law firm is an FSO. The corporation is an A-Org because it is a 
partner in the FSO and is regularly associated with the law 
firm in performing services for third parties. The corporation 
and the partnership would together constitute an affiliated 
service group. Therefore, the employees of EFG of Capital City, 
P.C. and the employees of The Everett, Furman and Guilford 
Partnership must be aggregated and treated as if they were 
employed as a single employer.

    Similarly, assume Reinhardt & Associates is a financial 
services organization that has 11 partners. Each partner of 
Reinhardt owns one percent of the stock in Asbury Corporation. 
Asbury provides services to the partnership of a type 
historically performed by employees in the financial services 
field. A significant portion of the business of Asbury consists 
of providing services to Reinhardt. Considering Reinhardt & 
Associates as an FSO, the Asbury Corporation is a B-Org 
because:

          1. A significant portion of its business is in the 
        performance of services for the partnership of a type 
        historically performed by employees in the financial 
        services field. And,

          2. More than 10% of the interests in the Asbury 
        Corporation is held, in the aggregate, by the highly-
        compensated employees of the FSO (consisting of the 11 
        common owners of Reinhardt and Associates).

    Accordingly, the Asbury Corporation & Reinhardt and 
Associates constitute an affiliated service group. Therefore, 
the employees of the Asbury Corporations and Reinhardt and 
Associates must be aggregated and treated as if they were 
employed by a single employer.

    A management-type affiliated service group exists when an 
organization performs management functions, and the management 
organization's principal business is performing management 
functions on a regular and continuing basis for a recipient 
organization. There does not need to be any common ownership 
between the management organization and the organization for 
which it provides service. Any person related to the 
organization performing the management function is also to be 
included in the group that is to be treated as a single 
employer.

    A recipient organization does not need to be a service 
organization. It is as organization for which management 
services are performed, any organization aggregated with the 
service organization under these controlled group and 
affiliated service group rules and all related organizations.

    For example, assume Anson and Branch Corporations are a 
brother sister corporation and Crockett and Duval Corporations 
constitute an affiliated service group. Assume Crockett or 
Duval (or both) perform management functions and other services 
for Anson or Branch (or both) and the performance of these 
management functions or services satisfy the requirements of a 
principal business on a regular and continuing basis. Crockett 
and Duval are treated as a single management organization and 
Anson and Branch are treated as a single recipient 
organization. Anson, Branch, Crockett and Duval would 
constitute an affiliated service group.

    The affiliated service group rules are very difficult to 
apply, because there are so many different iterations of 
possible structures that need to be considered. In fact, the 
IRS has not issued any final regulations providing guidance for 
applying these rules. Proposed regulations were issued in 1983 
and 1987 and portions of those were withdrawn, presumably 
because they were broader than intended and thus unworkable, in 
1993.

                        Leased Employees

    At the same time that the affiliated service group rules 
were enacted, employee leasing rules were also enacted, which 
required the inclusion in the controlled group of employees 
leased to entities. In general, a leased employee is any person 
who is not an employee of the recipient and who provides 
services to the recipient if--

          (A) such services are provided pursuant to an 
        agreement between the recipient and a leasing 
        organization,

          (B) such person has performed such services for the 
        recipient (or for the recipient and related persons) on 
        a substantially full-time basis for a period of at 
        least 1 year, and

          (C) such services are performed under primary 
        direction or control by the recipient.

    These rules were designed to prevent employers using 
independent contractors to avoid the inclusion of individuals 
in benefit plans.

    Finally, Congress gave the IRS broad regulatory authority 
to issue guidance to treat other relationships as controlled 
groups.

           The Effect of the Rules on Small Employer

    Many businesses develop as an entrepreneur sees an 
opportunity to provide a product or service. Often the 
businesses do not develop within the same industry and thus 
industry norms regarding the provision of employee benefits, 
including employer provided health care, are not the same. For 
instance, software engineers often enjoy employer provided 
healthcare, while retail workers and restaurant workers 
typically do not. It is easier to remain competitive in an 
industry if compensation and benefit arrangements conform to 
industry norms. Thus, as the entrepreneur expands into 
different industries it is often difficult if not impossible to 
use a compensation structure different than the majority of the 
industry.

    In addition, small employers cannot as easily negotiate the 
purchase of health benefits for workers or self-insure benefits 
as they have fewer covered lives. This limits the 
entrepreneur's ability to provide health care.

                      A Better Alternative

    Any time a test consists of specific levels, percentages or 
amounts, such as certain ownership percentages, there are two 
consequences: (1) complexity and (2) planning to avoid the 
``bright line'' tests. With the requirement that qualified 
plans meet certain nondiscriminatory coverage and benefits 
rules, ``bright line'' teats make sense from a tax point of 
view. The tests contained in sections 414(b), (c), (m) and (o) 
have become increasingly complicated as Congress and the IRS 
have sought to prevent taxpayers from circumventing the 
qualified plan rules by changing stock ownership percentages. 
After the Tax Court upheld the structuring of arrangements to 
avoid aggregation, Congress adopted the affiliated service 
group rules and granted the IRS the authority to adopt any 
other rules necessary to eliminate the opportunity for 
taxpayers to avoid the rules. It is not appropriate to apply 
this test is to determine the size of a business and which 
employees must be offered minimum essential coverage under the 
health care law.

    Applying these controlled group rules, affiliated service 
group rules and leased employee rules to determine whether an 
employer is subject to the shared responsibility rules would 
appear to be a convenient approach because it is an existing 
set of rules. These rules, however, are exceedingly complicated 
and well understood by only a small subset set of tax 
practitioners. Applying the qualified plan aggregation rules 
does not take into account the different purpose of the 
Affordable Care Act employer mandate from the retirement plan 
coverage and discrimination rules. Offering retirement plans is 
not mandated and thus, when the entrepreneur decides to offer a 
retirement plan, it is understood that the business aggregation 
rules will apply. The shared responsibility rules mandate the 
provision of health benefits. Applying the same business 
aggregation rules to a mandated benefit that exist for purposes 
of preventing discrimination for voluntary employer provided 
benefits can lead to inefficient and unwanted economic 
behavior. This behavior constrains a small business and may 
lead to unwanted and unwelcome business decisions including not 
hiring additional works that ensure the small business is not 
subject to the rules. This is the same behavior that has been 
exhibited by larger businesses, attempting to limit workers to 
less than 30 hours per week.

    By its very nature, this is a rule that employers will be 
clearly under or clearly over, something that by its very 
nature changes continually as businesses grow or decline. While 
the test has to be applied every year, it is only relevant for 
businesses that are not clearly above the at least 50 employee 
threshold. Those clearly above or below do not need to make any 
calculations. Thus, for any year, the test only affects a 
limited number of taxpayers and the taxpayers affected each 
year change as businesses develop or decline. However, as noted 
above, taxpayers that are approaching the 50 full time 
equivalent employee mark may decide to delay hiring to delay 
application of this rule.

    A facts and circumstances test, focusing on a specific 
individual's (or group of individuals) control of business 
decisions is a better aggregation test for mandated employer 
provided health benefits. With a facts and circumstances test, 
the employer will be able to determine whether the 50 full time 
equivalent test is met and which employees need to be covered 
without having to know detailed ownership information of 
investors and related parties, and without the cost of having 
to hire expensive outside consultants. Differences in industry 
norms can also be taken into account. The statute can include a 
non-exclusive list of items that need to be considered in 
determining who is in control of the business. Investors who 
had no control of day-to-day operations of the business would 
not need to be aggregated. Examples include the individual who 
makes hiring and firing and purchasing decisions and sets sales 
prices. By focusing on day-to-day operations, the business 
would be defined by the industry or industries with which an 
individual is involved regularly. Similarly, if a spouse were 
not involved with day-to-day operations of the other spouse's 
business, the businesses of each spouse would not be 
aggregated.

    As with a bright line test, with a facts and circumstances 
test, taxpayers and the IRS have the responsibility of making a 
determination of whether businesses should be aggregated. The 
taxpayer would evaluate the facts and circumstances of each 
business and a determination would be made. By using a facts 
and circumstances determination, the opportunity to plan to 
avoid bright line tests is not available. A facts and 
circumstances test will use business activities and 
characteristics with which the small business operator is 
familiar. As there is sometimes no clear-cut answer, many 
people will be more rather than less conservative in making a 
determination. That determination would be subject to audit by 
the IRS. IRS, through its enforcement process will need to 
understand the facts and circumstances that lead to a specific 
conclusion and taxpayers will need to support their 
conclusions.

    Facts and circumstances tests, by their very nature, are 
less likely to be applied abusively than bright line tests. 
With a facts and circumstances test, individuals would 
understand the situation and make a determination regarding the 
whether the employer should be aggregated as an employer 
operating a business or whether 2 business operations should be 
viewed separately. The Employee Stock Ownership Plan (ESOP) 
rules offer a good example of rules intended to limit abuses 
that were circumvented as never expected. Under those rules 
determining whether the ESOP is structuring arrangements to 
avoid the payment of taxes involved the conversion of benefits 
to synthetic equity and an understanding of ownership including 
synthetic equity.

    Facts and circumstances tests are used in many situations 
for determining the application of tax rules. One that comes to 
mind readily are the worker classification rules, determining 
whether someone is a common law employee or independent 
contractor. Those rules are set forth in regulations and other 
IRS guidance. In general, an employer has the right to control 
not only the amount of work to be done by an employee, but also 
how it is to be performed. This is not the case with an 
independent contractor. The name given to a service provider, 
the number of hours worked, how an individual is paid are not 
important.

    Revenue Ruling 87-41 outlines 20 factors that need to be 
considered in determining whether a service recipient exercises 
enough control over a service provider for an employee or 
independent contractor relationship to exist. The ruling 
specifically states that not all of the factors have equal 
weight and that not all need to be present. Rather the factors 
are guides to help in determining the likelihood that someone 
is more closely characterized as an employee or independent 
contractor. While tax practitioners do structure arrangements 
with workers so that the classification is more likely to be 
certain, there is no bright line test or assurance that can be 
applied. Since Revenue Ruling 87-41 was issued, the IRS has 
outlined three categories of factors that should be considered 
in conjunction with the revenue ruling. These factors are 
behavioral control, financial control and relationship of the 
parties.

    While this is a facts and circumstances determination, the 
IRS does have a process whereby either service providers or 
service recipients can file a request for determination of 
worker status by filing a Form SS-8. This form asks a number of 
questions regarding the relationship. In making the 
determination, IRS requests information from both parties and 
makes a final, binding decision regarding worker status. If a 
facts and circumstances test is applied for determining the 
employer for providing minimal essential coverage, a similar 
determination process could also be developed to all workers 
and service recipients to have certainty with respect to the 
determination.

    The IRS had to address the definition of employer under 
these rules in the tax-exempt context. Because tax exempt 
organizations do not have owners, an alternative rule was 
devised and this test gives some examples of the types of 
activities that are viewed as indicators of control. Notice 89-
23 specified, among other things, that in the tax exempt arena, 
the controlled group included each entity that provides 
directly or indirectly at least 80% of the contributing 
employer's operating funds and there is a degree of common 
management or supervision between the entities. A degree of 
common management or supervision exists if the entity providing 
the funds has the power to appoint or nominate officers, senior 
management or members of the board of directors (or other 
governing board) of the entity receiving the funds. A degree of 
common management or supervision also exists if the entity 
providing the funds is involved in the day-to-day operations of 
the entity.

    Final regulations adopting the rules detailed in this 
guidance have since been adopted. Specifically those 
regulations provide, among other things, that common control 
exists between an exempt organization and another organizations 
if at least 80 percent of the directors of trustees of one 
organization are either representatives of, or directly or 
indirectly controlled by, the other organization. A trustee or 
director is treated as a representative of another exempt 
organization if he or she also is a trustee, director, agent, 
or employee of the other exempt organization. A trustee or 
director is controlled by another organization if the other 
organization has the general power to remove such trustee or 
director and designate a new trustee or director. Whether a 
person has the power to remove or designate a trustee or 
director is based on facts and circumstances. To illustrate, if 
exempt organization A has the power to appoint at least 80 
percent of the trustees of exempt organization B (which is the 
owner of the outstanding shares of corporation C, which is not 
an exempt organization) and to control at least 80 percent of 
the directors of exempt organization D, then entities A, B, C, 
and D are treated as the same employer. While these rules have 
a bright line 80% test, they also indicate the type of 
activities that could be considered in determining whether 
control exists.

    The qualified separate line of business rules also use a 
similar rule, allowing employers to determine that certain 
businesses qualified as separate lines of businesses and thus 
do not have to be aggregated for determining qualified plan 
coverage and discrimination testing. In general, a line of 
business is a portion of an employer that is identified by the 
property or services it provides to customers of the employer. 
The employer is permitted to determine the lines of business it 
operates by designating the property and services that each of 
its lines of business provides to customers of the employer.

    A separate line of business is a line of business that is 
organized and operated separately from the remainder of the 
employer. The determination of whether a line of business is 
organized and operated separately from the remainder of the 
employer is made on the basis of objective criteria. These 
criteria generally require that the line of business be 
organized into one or more separate organizational units (e.g., 
corporations, partnerships, or divisions), that the line of 
business constitute one or more distinct profit centers within 
the employer, and that no more than a moderate overlap exist 
between the employee workforce and management employed by the 
line of business and those employed by the remainder of the 
employer. There are rules for determining whether a line of 
business is organized and operated separately from the 
remainder of the employer and thus constitutes a separate line 
of business. These rules include an optional rule for 
vertically integrated lines of business.

    A qualified separate line of business must satisfy the 
three statutory requirements including a notice requirement and 
a requirement to pass administrative scrutiny. A separate line 
of business may satisfy this administrative scrutiny rule by 
using a regulatory safe harbor or by requesting and receiving 
an individual determination from the IRS that the separate line 
of business satisfies the requirement of administrative 
scrutiny.

    Finally, some small businesses may be making annual 
determinations of the employer for qualified plan purposes and 
could easily use that for determining the employer for health 
care reform. The facts and circumstances test could be offered 
as an alternative to the mechanical tests used for qualified 
plan purposes. For those businesses already relying on this 
test, certainty would exist.

    To summarize, the mechanical tests used for qualified plan 
discrimination testing are overly complex and understood for 
only a limited number of tax professionals. A small business 
would not be able to apply those rules without professional 
help and many of the advisers to small business would not be 
familiar with the rules. In addition, the definition of 
employer for determining whether an employer has at least 50 
employees and which workforce needs to be offered minimal 
essential coverage is a test that most businesses will only 
need to run for a few years during their life cycle. It is a 
mandated test and not at est that is voluntarily assumed when a 
retirement plan is offered to workers. As businesses come close 
to the 50-employee limit, the additional cost of mandated 
health benefits will be considered in evaluating business 
expansion. For these reasons, a facts and circumstances test, 
focusing on the businesses that an individual operates on a 
day-to-day basis makes more sense. The statute or committee 
reports could list characteristics of management control and 
taxpayers would be able to make a judgment regarding what 
operations should be considered part of the employer. This 
determination would be subject to audit by the IRS, as all tax 
determinations are.

[GRAPHIC(S) NOT AVAILABLE TIFF FORMAT]

                             Testimony of:


                            Donna Baker, CPA


                      Donna Baker & Associates LLC


                            Adrian, Michigan


                               Before the


                      Committee on Small Business


                 United States House of Representatives


                            December 4, 2013


               The Honorable Sam Graves (R-MO), Chairman


          The Honorable Nydia Velazquez (D-NY), Ranking Member

    Good afternoon Chairman Graves, Ranking Member Velazquez 
and members of the Committee. I am Donna Baker, a CPA with 25 
years of experience. I am an Associate Professor of Accounting 
at Siena Heights University and have owned my own CPA firm for 
the last 13 years.

                       Executive Summary

    The business aggregation rules in the Affordable Care Act 
will have a negative impact on small businesses. The 
aggregation rules require any group of companies under ``common 
control'' to be treated as a single employer. The primary key 
in determining which companies are combined is direct or 
attributed ownership, not operational control. The attributed 
ownership rules may cause unrelated businesses held by family 
members or trusts to be aggregated. Companies within a 
controlled group do not need to have the same management or 
operate in the same industry. All employees of the controlled 
group must be considered in determining if the health insurance 
mandate applies. These rules could cause employers to delay 
growth, manipulate ownership percentages or limit employees to 
less than 30 hours, discourage small businesses from investing 
in other businesses, and require health insurance coverage in 
industries where this is not the norm which will affect a 
businesses ability to compete.

    Also, the aggregation rules are vast and detailed. They are 
rarely used by small business and small business advisors. The 
level of complexity and the unfamiliarity could create 
inaccurate application of the rules.

                           Background

    I live and practice in Lenawee County, Michigan, a rural 
area with a population of 99,000 and median household income of 
$48,000. My practice includes tax and accounting services for 
several small businesses. I also own a small payroll company 
and retail store and my husband is a partner in a dairy farm.

    The business aggregation rules in the Affordable Care Act 
will impact small businesses. The Affordable Care Act requires 
a business to apply the controlled group, affiliated service 
and leased employee rules to determine what groups of companies 
are to be treated as a single employer. All employees 
(including leased employees) of companies in the controlled 
group and affiliated service group must be included in the 
calculation of full time equivalent employees (FTEs). If the 
total number of full-time employees (including FTEs) for the 
entire group is at least 50, then each entity in the controlled 
group will be subject to the employer mandate rules of the 
Affordable Care Act and must provide the minimum essential 
health insurance coverage to all full time employees and their 
dependents.

    The attribution rule applies in determining a controlled 
group and affiliated service group. Attribution is the concept 
of treating a person as owning an interest in a business that 
is not actually owned by that person. Attribution may result 
from family or business relationships. One aspect of this rule 
is the family attribution rule between spouses that requires 
the business interest of one spouse to be attributed to the 
other spouse unless there is either no direct ownership, no 
participation in the company and no more than 50% of business 
gross income is passive investments.

Implication of Requiring Small Business to use Controlled Group 
                             Rules

    Many Small Businesses and Small Business Advisors are 
Unfamiliar with the Controlled Group Rules.

    The controlled group rules are lengthy and complicated. 
These rules are typically used in determining if qualified 
retirement plan benefits are available on a nondiscriminatory 
basis. Many small employers, who offer a retirement plan, offer 
a safe harbor IRC Section 401(k) plan that does not require 
discrimination testing. Therefore, the rules are rarely 
applicable to small businesses. The lack of use of these rules, 
make them unfamiliar to both small businesses and small 
business advisors. Many CPA's, who work primarily with small 
businesses, do not have the specialized knowledge that is 
required to interpret the business aggregation rules. To add to 
the confusion, the use of ``controlled group'' is misleading 
and is often inaccurately assumed to mean ``hands on control'' 
instead of its actual emphasis on direct or attributed 
ownership.

    Most Affordable Care Act training materials do not cover 
the specifics of controlled group rules. In reviewing ACA 
training modules from typical sources that small business 
advisors would use, (Michigan Association of CPA's, Michigan 
State University, CheckPoint Learning, Thomson Reuter), most 
materials mention that controlled group rules apply, but do not 
define the rules.

    Examples of Applying Controlled Group Rules and Ownership 
Attribution.

    Example 1: This is my personal example.

    I own the following businesses:

    CPA firm - 100% owner and manager - 20 employees

    Payroll Company - 100% owner and manager - 10 employees 
(and growing!)

    Retail store - 50% owner (75% capital investment) - I have 
no management responsibility and no control over business 
decisions - 5 employees. This store was purchased as an 
investment.

    My husband is a 50% owner in a dairy farm with 8 employees. 
I have no management responsibilities and no control of 
business decisions in this entity. I am not a partner; however, 
my name is on some of the land in the partnership, therefore 
the family attribution rules apply.
    Based on the controlled group rules, the full time 
equivalents (FTE's) would be:

    CPA firm--20 employees

    Payroll Company--10 employees

    Retail Store--5 employees

    Farm--8 employees

    Total FTE's--43

    I am currently not at the 50 FTE's that would make the 
businesses subject to the shared responsibility rules of the 
Affordable Care Act. However, the payroll company is 1\1/2\ 
years old and quickly growing. I anticipate hiring 10-15 more 
employees in the next 2 years. Alternatively, I may consider 
restructuring ownership in my entities or slowing growth so 
that I do not pass the 50 FTE mark.

    Example 2: This is one of my clients.

    Jane is an elderly woman that is a 100% owner of two local 
restaurants. Her son manages these restaurants and makes all 
business decisions for both of the entities.

    Jane recently provided the capital, as an investment, for 
her nephew to start a restaurant in Florida. The nephew manages 
this restaurant and makes all business decisions for this 
entity. Jane is a 50% partner, but provided 100% of the 
capital. The controlled group rules would require all three 
entities to be treated as one employer. The number of employees 
from all three entities would exceed 50 full time equivalents 
and these entities would be required to provide the minimum 
essential health insurance coverage.

    The two examples above illustrate how the controlled group 
rules will aggregate businesses that are not directly owned by 
the same person, or do not have the same management, and may 
not be in the same industry or in the same state.

    In addition, I want to mention the increased cost of my 
health insurance plan. I currently provide basic health 
insurance for my employees in the CPA firm and the payroll 
company. My plan is being canceled and the closest plan will 
have an increased cost of 40% to 44%. This new plan also has 
reduced benefits. My businesses are located in a lower income 
area which translates into a lower profit margin. The increased 
health insurance cost will be very difficult to absorb.

    In summary, the implication of requiring small businesses 
to use the business aggregation rules will have the following 
negative effects:

          (1) Hinder growth by discouraging owners to hire.

          (2) Create an environment where owners try to 
        manipulate ownership percentages or limit employees to 
        less than 30 hours per week.

          (3) Discourage small business owners from investing 
        in other businesses.

          (4) Require small business owners to provide health 
        insurance coverage in industries where this is not the 
        norm. This additional cost would make it difficult for 
        these companies to compete.
         Effect of the Business Aggregation Rules under the ACA


                           on Small Employers


            Submitted by Linda R. Mendel and Mark A. Bodron


                           November 22, 2013


    Linda R. Mendel is of counsel in the Columbus, Ohio office 
of Vorys, Sater, Seymour and Pease L.L.P. She has more than 
thirty years experience working with businesses on employee 
benefits issues, with a particular focus on group health plan 
compliance.

    Mark A. Bodron is a partner in the Executive Compensation/
Employee Benefits practice group in the Houston office of Baker 
Botts L.L.P. He regularly assists clients with issues related 
to employee benefits, including the design and operation of 
welfare employee benefit plans and compliance with the 
Affordable Care Act.

    The comments provided below are solely those of Ms. Mendel 
and Mr. Bodron and are not submitted on behalf, and may not be 
the views, of their firms or any other person or entity.

    Application of the Business Aggregation Rules under the 
Affordable Care Act (``ACA'')

    Starting in 2015, an employer with 50 or more full-time and 
full-time equivalent (``FTE'') employees will be subject to the 
employer shared responsibility payment rules (sometimes 
referred to as the ``play or pay'' rules) under Internal 
Revenue Code (``Code'') Sec. 4980H. The ACA relies on the 
controlled group rules under Code Sec. 414 to determine which 
businesses are aggregated and treated as a single employer for 
purposes of the 50-employee threshold. Businesses are 
aggregated if the businesses are part of: (1) a controlled 
group of corporations; (b) trades or businesses under common 
control; or (c) an affiliated service group.

    The aggregation rules are complex but well established. The 
need to identify an aggregated group of businesses is not 
unique to Code Sec. 4980H. In fact:

           Businesses must apply the same aggregation 
        rules to determine whether they must offer COBRA 
        continuation coverage. A business in an aggregated 
        group with 20 or more employees is subject to COBRA.

           Businesses must apply the same aggregation 
        rules in testing a retirement plan for prohibited 
        discrimination. The proportion of highly paid employees 
        in the aggregated group who are offered retirement 
        benefits is limited by the proportion of non-highly 
        paid employees in the aggregated group who are offered 
        retirement benefits.

           Similar aggregation rules apply to determine 
        whether a business' group health plan must pay primary 
        to Medicare for health expenses incurred by a Medicare-
        eligible employee (or a Medicare-eligible family member 
        of an employee).

                  - If an aggregated group has 20 or more 
                employees, the business' group health plan must 
                pay primary to Medicare for employees entitled 
                to Medicare on the basis of age.

                  - If an aggregated group has 100 or more 
                employees, the business' group health plan must 
                pay primary to Medicare for employees entitled 
                to Medicare on the basis of disability.

           Similar aggregation rules also apply for 
        purposes of federal income taxes.

    Suggested Change to the Definition of a ``Small Employer''

    We do not think it is the complexity of the Code Sec. 414 
aggregation rules, but rather the complexity of Code 
Sec. 4980H, that presents the challenge for smaller businesses 
facing the possible application of the play or pay rules. 
Smaller businesses tend not to have in-house expertise or 
ongoing relationships with outside experts to assist them with 
the changes that may be required to avoid the Code Sec. 4980H 
penalties. Many smaller businesses are unequipped to even 
determine their responsibilities. That is the problem 
regardless of whether a small business is structured as a 
single entity or a group of aggregated entities.

    Our suggestion is to increase the threshold for the 
application of Code Sec. 4980H from 50 full-time and FTE 
employees to a higher number. For example, Congress could 
consider a modest increase from the current threshold of 50 
full-time and FTE employees to a threshold of 101 full-time FTE 
employees. We suggest the 101-employee threshold because it 
corresponds to the threshold for small employer status for the 
SHOP Exchanges and the small group health insurance market. 
Starting in 2016, the SHOP Exchanges and the small group 
insurance market will be available to aggregated groups with up 
to 100 full-time and FTE employees; an aggregated group with 
101 or more full-time and FTE employees will be considered 
large. (In fact, the same method for counting employees applies 
to Code Sec. 4980H, the SHOP Exchanges, and the small group 
health insurance market. The only difference is the employee 
threshold for status as a small employer.) It would make sense 
for an employer that is considered small for purposes of the 
SHOP Exchanges and the small group insurance market to also be 
considered small for purposes of Code Sec. 4980H.

    Suggested Simplification of Penalties under Code Sec. 4980H

    To reduce the burden on smaller businesses, we suggest that 
Congress consider simplifying Code Sec. 4980H by repealing the 
``no-offer'' penalty under Code Sec. 4980H(a).

    There are two employer pay or play penalties under Code 
Sec. 4980H:

           The ``no-offer'' penalty under Code 
        Sec. 4980H(a) applies when an employer fails to offer 
        its full-time employees health coverage and one or more 
        full-time employees buys health insurance through a 
        Marketplace with premium assistance. The penalty is 
        $2,000 multiplied by the number of full-time employees 
        (including any full-time employees who were offered and 
        enrolled in health coverage sponsored by the employer).

           The ``unaffordable/inadequate coverage'' 
        penalty under Code Sec. 4980H(b) applies when an 
        employer offers health coverage to its employees but 
        that coverage is either unaffordable or inadequate and 
        one or more full-time employees buys health insurance 
        through a Marketplace with premium assistance. The 
        penalty is $3,000 multiplied by the number of full-time 
        employees receiving premium assistance.

    The no-offer penalty under Code Sec. 4980H(a) and the 
unaffordable/inadequate coverage penalty under Code 
Sec. 4980H(b) are both applied separately to each business 
within an aggregated group; provided, however, that with 
respect to the unaffordable/inadequate coverage penalty, the 
amount is the same regardless of the structure of the group. 
(While the penalties are applied separately to each business 
within the aggregated group, the threshold issue of whether an 
employer has 50 or more full-time and FTE employees, and thus 
is subject to Code Sec. 4980H, is based on the aggregated 
group.)

    To avoid the unaffordable/inadequate coverage penalty under 
Code Sec. 4980H(b), an employer must offer its full-time 
employees a group health plan that actually provides reasonable 
access and protections. In contrast, to avoid the no-offer 
penalty under Code Sec. 4980H(a), an employer can offer a group 
health plan at inaccessible contribution levels and/or with 
very limited protections for employees. (Such plans are in fact 
being marketed for this explicit purpose.) In other words, the 
no-offer penalty is driving group health plan design but will 
not actually benefit employees, a result that we think is 
contrary to the purposes of the ACA. Yet, the implementation of 
the no-offer penalty raises issues for an aggregated group that 
would not have to be resolved if the sole penalty under Code 
Sec. 4980H was the unaffordable/inadequate coverage penalty.

    The no offer penalty is complex in its application to 
aggregated groups of all sizes. For example, it is not clear 
how the no-offer penalty should apply to shared employees or 
where one entity within the aggregated group offers health 
coverage to employees of another entity in the aggregated 
group. The reporting to support the no-offer penalty will 
require monthly identification of the aggregated group, taking 
into account acquisitions and dispositions that change the 
composition of the aggregated group.

    We suggest asking the Congressional Budget Office to 
estimate the economic impact of the implementation of the 
unaffordable/inadequate coverage penalty without the no-offer 
penalty. If the unaffordable/inadequate coverage penalty is 
sufficient inducement for businesses to maintain group health 
coverage for lower income employees (i.e., employees who are 
potentially eligible for subsidies in the Marketplaces), we 
think Congress should consider the repeal of the no-offer 
penalty.

                                ********


    We appreciate the opportunity to provide the above comments 
above to the Committee. We would be pleased to provide 
additional information at your request on this issue or other 
ACA issues.

    Linda R. Mendel
    614.464.8218 / [email protected]

    Mark A. Bodron
    713.229.1742 / [email protected]

                                 
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