Year-End Corporate Transparency Act Reporting - Benefits Highlights

As we approach the end of 2024, companies that existed prior to January 1, 2024, should already have on their radar the Corporate Transparency Act (“CTA”) beneficial ownership (“BOI”) reporting requirements or determine whether they meet an applicable exemption. The CTA, effective January 1, 2024, requires certain entities to file reports with the Financial Crimes Enforcement Network (“FinCEN”) of the Department of Treasury. Companies in existence prior to January 1, 2024, only have until December 31, 2024, to make their registration. Companies established after January 1, 2024, have 90 days after they are created to register. Going forward, entities formed on or after January 1, 2025, will only have 30 days from the date of formation to meet the required reporting requirements.

You can read our previous newsletter article on general requirements under the Corporate Transparency Act here, as well as access our Corporate Transparency Act Resource Center here.

From a benefits perspective, two of the CTA exemptions merit closer consideration, especially in the context of entities having complicated equity incentive arrangements or for ESOP-owned companies.

The Large Operating Employer Exemption May Not Apply to Affiliated Companies

The large operating company exemption applies to an entity that: (i) employs more than 20 employees on a full-time basis, as calculated under federal law; (ii) filed its prior year federal income tax return demonstrating more than $5,000,000 in gross receipts or sales in the United States; and (iii) has an operating presence at a physical office within the United States. In general, “full-time employee” means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week or 130 hours per month with an employer. “Operating presence at a physical office within the United States” means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity.

In the benefits space, affiliated companies are often able to use the economies of scale of multiple entities having shared ownership and/or shared service arrangements to leverage more competitive rates in healthcare arrangements and to simplify reporting requirements. For purposes of meeting the large operating employer exemption to the CTA, however, affiliated companies must independently satisfy the employee headcount requirement, and companies with fewer than 21 full-time employees are unlikely to be able to qualify for the exemption despite meeting the gross receipts or sales requirements in the aggregate as shown on a consolidated return.

ESOP-Owned Companies May Need to Report Beneficial Ownership

An employee stock ownership plan (“ESOP”) is a company-paid retirement benefit that primarily invests in stock of the employer. The shareholder of an ESOP-owned corporation is an ESOP Trust, which holds the shares of the corporation on behalf of the plan participants. Because ESOP-owned corporations often have a holding company structure where the entity directly owned by the ESOP houses nothing other than sponsorship of the ESOP, an ESOP-owned corporation with a similar arrangement will likely not meet the large operating employer exemption, for example, if the holding company does not have more than 20 employees.

If an ESOP-owned corporation does not otherwise qualify for another exemption, the BOI reporting requirements will likely apply. A beneficial owner is an individual who exercises “substantial control” over the entity or who owns or controls 25% or more of the ownership interest of the entity. An individual that directs, determines, or has substantial influence over important decisions exercises substantial control over a company, for example, the officers or directors of a company or individuals having similar authority.

For corporations that are owned 25% or more by an ESOP, the trustee of the ESOP Trust is likely a beneficial owner for CTA reporting purposes. However, it is unlikely that any individual plan participant would own more than 25% of the allocated shares of an ESOP solely through the plan, so most plan participants would likely not be subject to BOI reporting requirements unless they exert control over the entity in some other way, such as an officer or director of the corporation.

The Subsidiary Exemption May Not Apply to Entities with Complicated Incentive Interests

Under the subsidiary exemption, a subsidiary whose ownership interests are controlled or wholly owned, directly or indirectly, by another exempt entity is exempt from the BOI reporting requirements. Any type of equity or debt-related arrangement could potentially be implicated by the CTA definition of “control” for the purposes of this exemption. The CTA definition of “control” is much broader than any other traditional corporate definition of “control” of an entity, as the CTA regulations encompass financial rights (including debt arrangements) and contractual relationships within its scope. Similarly, the definition of “ownership interests” includes a variety of voting and non-voting contractual or financial rights such as options and convertible debt instruments. For this exemption, this broad definition of “control” could raise some ambiguity as to its application for entities that issue incentive interests that would not typically be considered to represent “control” of an entity.

According to FinCEN FAQs (last updated October 3, 2024), for the purposes of the subsidiary exemption, control means “the exempt entity or entities entirely control all of the ownership interests in the reporting company, in the same way that an exempt entity or entities must wholly own all of a subsidiary’s ownership interests for the exemption to apply.” If the subsidiary’s ownership interests are controlled or wholly owned by more than one exempt entity, the subsidiary may still qualify for the exemption even if the entities are unaffiliated, so long as every controlling or owning entity is an exempt entity.

Thus, this broad application of “control” could mean that entities with management carried interests, options, or other forms of incentive interests in the form of equity, including interests convertible into equity, that may be issued to individuals, as well as joint ventures with non-exempt entities as minority investors, may be disqualified from the subsidiary exemption because one or more exempt entities will not be deemed to “control” or own 100% of the ownership interests. FinCEN FAQs do not yet include more specific examples as to how “control” of the ownership interests of an entity can be established in the context of the subsidiary exemption, including whether the control test can be satisfied through voting agreements, non-voting interests, restrictions on transfer, pledges or other similar arrangements.

For entities otherwise hoping to qualify for the subsidiary exemption that have similar equity or incentive arrangements, please reach out to your corporate or benefits counsel to evaluate whether the exemption is likely to apply.