CTA Exemption For Large Operating Companies: Counting Full-Time Employees

Effective January 1, 2024, most non-exempt companies formed or doing business in the U.S. will need to file a beneficial ownership information (BOI) report with FinCEN with information about themselves and their beneficial owners in compliance with the Corporate Transparency Act (CTA). Companies in existence prior to January 1, 2024 must submit an initial report within one year of the effective date but entities formed on or after January 1, 2024 will need to file an initial report within 30 days after formation.  

The Large Operating Company Exemption

The CTA provides several exemptions from its reporting companies. Importantly, it exempts large operating companies, which are defined as companies that have (1) 20 or more full-time employees in the U.S., (2) reported gross receipts of $5 million or more in the prior year’s tax return and (3) an operating presence at a physical office within the United States. The exemption extends to any reporting company that is 100% owned by an exempt large operating company.

The CTA Refers to the Employer Shared Responsibility Definition of Full-Time Employee

The test’s first prong requires that the entity have “more than 20 full-time employees in the United States.” The CTA refers to the same section of the Internal Revenue Code (Code) that is used to define “full-time employee” for the Affordable Care Act’s Employer Shared Responsibility (ESR) penalty, with one notable exception.¹  The CTA excludes the section of the Code that requires companies to calculate the number of their “full-time equivalent” (FTE) employees.²   While FinCEN has yet to confirm, this means that companies only have to look at the service hours performed by their hourly and non-hourly employees for the CTA exemption.

Because the penalty for not filing a BOI report can be severe, any reporting company that hopes to rely on the large operating company exemption to avoid filing will need to make certain it is entitled to the exemption by examining closely each of its prongs, including the prong that counts the number of “employees.”

Definition of Full-Time Employee and Hour of Service

Under the Code’s relevant sections, a full-time employee is a common-law employee (which excludes leased employees, sole proprietors, a partner in a partnership, and 2% S Corp shareholders) who works an average of 30 hours of service a week or 130 hours of service a month. An hour of service is any hour for which an employee is paid or entitled to payment (e.g., vacation, illness, or leave of absence).

Hours of service for hourly employees are calculated by counting actual hours of service from records of hours worked and hours for which payment is made or due.

Hours of service for non-hourly employees can be determined by (1) counting actual hours of service from records of hours worked and hours for which payment is made or due, (2) using a days-worked equivalency, or (3) using a weeks-worked equivalency. Options (2) and (3) can’t be used if they substantially understate the employee’s hours of service. A company can use different methods for different groups of non-hourly employees if the categories are consistent and reasonable. A company can change the method of calculating the hours of service of non-hourly employees for each calendar year.

Companies Cannot Consolidate Employee Headcount Across Affiliated Companies

The Preamble to the final Beneficial Ownership Information Reporting Requirement regulations (hereafter, “the final regulations”) specifically cites the statutory exemption language, which states that “the determination of the number of employees is to be made on an entity-by-entity basis.” This is the opposite treatment under prong two of the large operating company exemption, reported gross receipts of $5 million or more in the prior year’s tax return, which allow gross receipts and sales to be consolidated across affiliated companies.

Changes in Status

In general, companies that experience a change in status or a change in previously reported information have 30 days to file an amended BOI report with FinCEN.

A reporting company that satisfies the test for the large operating company exemption is exempt from having to file a BOI report FinCEN.  If a company loses large operating company status, it has 30 days from the date it stopped being a large operating company to file an initial BOI report FinCEN. However, the Preamble to the final regulations provides a limited grace period for companies that are exempt prior to the effective date but subsequently lose exempt status. These companies will have the longer of the end of the initial one-year filing period or the general 30 calendar-day reporting period to file a BOI report.

A reporting company that filed an initial BOI report but subsequently becomes exempt by satisfying the conditions of the large operating company exemption will have 30 days from the date it becomes a large operating company to file an amended BOI report with FinCEN that announces its exempt status.

When to Conduct a Full-Time Employee Headcount

The Preamble to the final regulations clarifies that a full-time employee headcount cannot be calculated as an average of several numbers over a period of time. FinCEN “expects that companies will regularly evaluate whether they qualify (or no longer qualify) for the exemption” and advises that evaluations should be as simple and consistent as possible. FinCEN has not defined “regularly” yet; however, because of the 30 calendar-day reporting requirement, a company should evaluate its full-time employees at least monthly if its annual income tax return exceeds $5 million.

Open Questions

There are open questions regarding how to count full-time employees for the large operating company exemption, and FinCEN is considering additional guidance and FAQs.

In addition to needing further clarification regarding the omission of full-time equivalent employees from the exemption headcount, additional guidance is required regarding calculating hours of service for non-hourly employees. The CTA and ESR rely on the same Code section definition of full-time employee, and each requires an employer to use consistent methods for counting hours of service for non-hourly employees. The final CTA regulations are silent about whether the method chosen to calculate non-hourly employee hours of service has to be the same for both CTA and ESR purposes.

Unlike the CTA, the ESR regulations require affiliated employers to aggregate their full-time employees. A company that chooses a non-hourly employee calculation method for the CTA large operating company exemption that inflates its full-time employee headcount may inadvertently reach the ESR employee threshold, individually or as an affiliated group, requiring it (and each affiliated employer, if applicable) to offer Affordable Care Act-compliant health coverage.³   Absent further guidance, companies should weigh the benefits of the exemption against the possibility of ESR penalties. More information regarding the ESR requirements and penalties can be found here.

The author submitted these questions to FinCEN, and it is hoped that answers will be provided in future guidance. In the meantime, companies should consult with legal counsel regarding the most appropriate method for calculating the service hours of non-hourly employees for the purposes of the CTA exemption.

Conclusion

The exempt status of a large operating company extends beyond the reporting requirement. If a beneficial owner’s interests in a reporting company are held through one or more exempt companies, the reporting company only has to report the names of the exempt entities and not the personal identifying information of the beneficial owner.

All companies, whether or not required to report with FinCEN, must add a periodic full-time employee headcount to their CTA compliance task list.

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[1] The ESR imposes a penalty on an “Applicable Large Employer” if it does not offer coverage or coverage that meets Affordable Care Act requirements.

[2] An FTE is a unit of measurement equivalent to one full-time employee, arrived at by dividing the total hours worked by employees by the maximum number of compensable hours.  

[3] A company is an “Applicable Large Employer” subject to the ESR requirements and penalties once it employs at least 50 full-time and full-time equivalent employees.

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