Understanding ACA Controlled Group Rules: A Complete Guide for Employers

Introduction: What Are ACA Controlled Group Rules and Why Do They Matter?

If you own multiple businesses or have ownership interests in related companies, the ACA controlled group rules could significantly impact your Affordable Care Act obligations. Under these rules, the IRS requires related businesses under common ownership to combine their employees when determining whether they meet the 50-employee threshold that triggers ACA employer mandate requirements. This means that even if each of your individual companies has fewer than 50 employees, you may still be classified as an Applicable Large Employer (ALE) subject to ACA reporting and coverage requirements.

The ACA controlled group rules borrow heavily from existing tax code provisions under Internal Revenue Code (IRC) Sections 414(b), 414(c), and 414(m). These rules were originally designed to prevent employers from fragmenting their workforce across multiple entities to avoid employee benefit requirements. In the context of the ACA, they ensure that business owners cannot escape employer mandate obligations simply by dividing employees among separate legal entities. Understanding these rules is essential because the penalties for non-compliance are substantial, reaching up to $2,970 per full-time employee per year under the Section 4980H(a) penalty.

This comprehensive guide will explain exactly how ACA controlled group rules work, help you determine whether your businesses form a controlled group, walk you through the different types of controlled groups, and show you how to properly aggregate employees across related entities. Whether you're a business owner with multiple LLCs, a family enterprise with various holdings, or an HR professional managing compliance for a corporate group, this guide provides the information you need to navigate controlled group requirements confidently.

  • Key concepts explained: Parent-subsidiary groups, brother-sister groups, combined groups, and affiliated service groups
  • Ownership thresholds covered: 80% control tests, 50% common ownership tests, and attribution rules
  • Employee aggregation: How to count employees across all controlled group members
  • Compliance implications: Filing requirements, coverage obligations, and penalty exposure

What is an ACA Controlled Group?

The Legal Foundation of Controlled Group Rules

An ACA controlled group exists when two or more businesses are connected through common ownership or control that meets specific IRS thresholds. The ACA incorporates the controlled group definitions from IRC Section 414, which was originally written for retirement plan purposes. Under Section 4980H(c)(2)(C)(i), all employers treated as a single employer under Section 414(b), (c), (m), or (o) are also treated as a single employer for ACA purposes. This means that if your companies form a controlled group under the retirement plan rules, they also form a controlled group for ACA purposes.

The significance of being in a controlled group cannot be overstated. When businesses are part of the same controlled group:

  • Employees across all group members are aggregated for the 50 full-time equivalent employee threshold
  • Each member employer is separately liable for its own ACA reporting obligations
  • Each member must offer coverage to its own full-time employees to avoid penalties
  • The coverage offered by one group member cannot satisfy another member's obligations (with limited exceptions)

It's critical to understand that while employees are combined to determine ALE status, each company in the controlled group remains individually responsible for offering health coverage to its own employees and filing its own Form 1095-C returns. One member cannot fulfill another member's coverage obligations simply by being in the same controlled group.

Why the IRS Requires Controlled Group Aggregation

Congress included the controlled group rules in the ACA specifically to prevent businesses from avoiding employer mandate requirements through corporate restructuring. Without these rules, a company with 100 employees could theoretically split into three separate entities with 33 employees each, with none qualifying as an ALE. The ACA controlled group rules close this loophole by requiring related businesses to look through the corporate structure and count employees as if they were a single employer.

The IRS has consistently enforced these rules since the ACA's employer mandate took effect in 2015. In numerous Letter 226-J penalty assessments, the IRS has applied controlled group aggregation to assess penalties against employers who failed to recognize their ALE status. Understanding and properly applying these rules is therefore essential for compliance and penalty avoidance.

Types of ACA Controlled Groups

Parent-Subsidiary Controlled Groups

A parent-subsidiary controlled group exists when one corporation (the parent) owns at least 80% of the voting power or value of the stock of another corporation (the subsidiary). This is the most straightforward type of ACA controlled group. The ownership chain can extend through multiple tiers of subsidiaries, as long as each link in the chain meets the 80% ownership test.

Example 1: Simple Parent-Subsidiary Group

Company A owns 100% of Company B. Company A has 30 full-time employees, and Company B has 25 full-time employees. Because Company A owns at least 80% of Company B, they form a parent-subsidiary controlled group. Their employees are aggregated: 30 + 25 = 55 full-time employees. Both companies are now considered ALEs subject to ACA employer mandate requirements.

Example 2: Multi-Tier Parent-Subsidiary Group

Corporation P owns 85% of Corporation S1. Corporation S1 owns 90% of Corporation S2. Corporation S2 owns 80% of Corporation S3. All four corporations are part of the same parent-subsidiary controlled group because each ownership link meets or exceeds the 80% threshold. Employees across all four entities must be aggregated when determining ALE status.

Ownership Scenario Controlled Group? Reason
Parent owns 80% of subsidiary Yes Meets 80% threshold exactly
Parent owns 79% of subsidiary No Below 80% threshold
Parent owns 100% of Sub A; Sub A owns 100% of Sub B Yes All entities connected through 80%+ ownership
Parent owns 85% of Sub A; Sub A owns 75% of Sub B Partial - only Parent and Sub A Sub B ownership falls below 80%

Brother-Sister Controlled Groups

A brother-sister controlled group exists when five or fewer individuals, estates, or trusts own controlling interests in two or more businesses. This type of controlled group is common among family businesses, partnerships, and closely-held corporations where the same owners have interests in multiple entities. The brother-sister rules have two separate tests that must both be met:

The 80% Common Ownership Test:

The same five or fewer persons must own at least 80% of the voting power or value of each corporation in the group (or at least 80% of the profits or capital interest in each partnership/LLC).

The 50% Identical Ownership Test:

The same five or fewer persons must have identical ownership of more than 50% when comparing their ownership across all organizations. "Identical ownership" means the smaller of the percentages that a person owns in each entity being compared.

Example 3: Brother-Sister Group

Consider the following ownership structure:

Owner Company X Company Y Identical Ownership
John 60% 40% 40% (smaller of 60% and 40%)
Mary 40% 60% 40% (smaller of 40% and 60%)
Total 100% 100% 80%

In this example:

  • The 80% test is met: John and Mary together own 100% of both companies (exceeds 80%)
  • The 50% test is met: The identical ownership totals 80% (40% + 40%), which exceeds 50%
  • Companies X and Y form a brother-sister controlled group

Example 4: Not a Brother-Sister Group

Owner Company A Company B Identical Ownership
Owner 1 80% 10% 10%
Owner 2 20% 90% 20%
Total 100% 100% 30%

In this example:

  • The 80% test is met: Owners 1 and 2 together own 100% of both companies
  • The 50% test is NOT met: The identical ownership totals only 30%, which is less than 50%
  • Companies A and B do NOT form a brother-sister controlled group

Combined Groups

A combined group exists when three or more organizations are connected through both parent-subsidiary and brother-sister relationships. Specifically, a combined group occurs when:

  • Each organization is a member of either a parent-subsidiary group or a brother-sister group
  • At least one organization is the common parent of a parent-subsidiary group AND is also a member of a brother-sister group

Combined groups can be complex and often require professional analysis to properly identify. They typically arise in sophisticated corporate structures where holding companies own subsidiaries while also being commonly owned with other holding companies.

Affiliated Service Groups

Under IRC Section 414(m), an affiliated service group can also trigger controlled group treatment for ACA purposes. Affiliated service groups exist when service organizations have certain ownership and service relationships with each other. Common examples include:

  • Medical practices that share administrative services
  • Law firms with affiliated real estate or consulting entities
  • Accounting firms with related advisory businesses
  • Engineering firms with shared back-office operations

The affiliated service group rules are particularly complex and involve analyzing both ownership percentages and the nature of services provided between organizations. If your business operates in a service industry and has arrangements with related service providers, you should consult with a tax professional to determine whether affiliated service group rules apply.

Attribution Rules: When Others' Ownership Counts as Yours

Understanding Stock Attribution

The ACA controlled group analysis becomes more complex when attribution rules apply. Attribution rules treat you as owning stock or interests that are actually owned by certain related parties. These rules exist to prevent taxpayers from using family members or related entities as intermediaries to avoid controlled group status. The main categories of attribution are:

Family Attribution:

  • Ownership by a spouse is attributed to the taxpayer
  • Ownership by children, grandchildren, and parents is attributed to the taxpayer
  • Ownership by minor children under 21 is always attributed
  • For adult children, attribution only applies if the parent owns more than 50% of the entity

Entity Attribution:

  • A partner is treated as owning a proportionate share of stock owned by the partnership
  • A shareholder owning 5% or more of a corporation is treated as owning a proportionate share of stock owned by the corporation
  • A beneficiary of an estate or trust is treated as owning a proportionate share of stock owned by the estate or trust

Option Attribution:

  • If you have an option to acquire stock, you may be treated as already owning that stock for controlled group purposes

Example 5: Family Attribution Impact

John owns 100% of Company A. John's adult son, Michael, owns 100% of Company B. Company A has 30 employees and Company B has 40 employees. At first glance, these might appear to be separate businesses. However, under family attribution rules, John is treated as owning Michael's stock in Company B because parents and children have attributed ownership. Similarly, Michael is treated as owning John's stock in Company A. The result is that John and Michael are treated as owning 100% of both companies, creating a brother-sister controlled group. The 70 combined employees make both companies ALEs.

Applying Attribution Rules Correctly

Attribution rules can significantly expand the scope of controlled groups beyond what appears obvious from direct ownership. Key points to remember:

  • Family attribution is automatic for spouses and minor children
  • Attribution from adult family members depends on ownership thresholds
  • Attribution can be "chained" in some circumstances (e.g., from a trust to a beneficiary, then to the beneficiary's spouse)
  • Some anti-abuse rules prevent certain chain attributions

Given the complexity of attribution rules, many business owners benefit from working with tax professionals who specialize in controlled group analysis. Incorrect application of these rules can lead to either unnecessary compliance burdens or, worse, unexpected penalty assessments from the IRS.

How to Count Employees Across a Controlled Group

Step-by-Step Employee Aggregation Process

Once you've determined that your businesses form an ACA controlled group, you must aggregate employees across all group members to determine ALE status. Here's the process:

Step 1: Identify All Controlled Group Members

List every business entity that is part of your controlled group. Include corporations, partnerships, LLCs, and sole proprietorships. Don't forget entities that might be included through attribution rules.

Step 2: Count Full-Time Employees for Each Entity

For each controlled group member, count the number of full-time employees. Under the ACA, a full-time employee is anyone who works an average of 30 or more hours per week (or 130 hours per month). Count full-time employees for each month of the measurement year.

Step 3: Calculate Full-Time Equivalent Employees

For part-time employees (those working less than 30 hours per week), calculate FTE equivalents:

  • Add up all hours worked by part-time employees during each month
  • Divide by 120 to get the FTE count
  • Cap any individual part-time employee at 120 hours per month

Step 4: Sum Employees Across All Entities

For each month, add together:

  • All full-time employees from all controlled group members
  • All FTE equivalents from all controlled group members

Step 5: Calculate the Annual Average

Add the monthly totals from Step 4 for all 12 months, then divide by 12. If this average is 50 or more, the controlled group is an ALE, and each member company with full-time employees has ACA obligations.

Example 6: Controlled Group Employee Count

Company Full-Time Employees Part-Time Hours (Monthly Avg) Part-Time FTE Total Contribution
Company A 25 1,200 10 35
Company B 15 600 5 20
Company C 8 240 2 10
Controlled Group Total 48 - 17 65

In this example, the controlled group has 65 FTE employees, making all three companies ALEs. Even Company C with only 8 full-time employees must comply with ACA employer mandate requirements because it's part of a controlled group that exceeds the 50-employee threshold.

Special Counting Rules

Several special rules apply when counting employees across controlled groups:

Seasonal Worker Exception:

If your employee count exceeds 50 for 120 days or fewer during the year, and the employees who cause you to exceed 50 are seasonal workers, you may not be an ALE. Seasonal workers are those who work in positions for which the customary annual employment is six months or less.

New Employer Rules:

If a controlled group member is a new employer with no prior year to measure, base ALE status on whether you reasonably expect to employ 50+ FTE employees during the current year.

Mergers and Acquisitions:

When companies join or leave a controlled group, special transition rules may apply. Generally, ALE status is determined based on the prior year, so changes during the current year affect the following year's status.

ACA Compliance Obligations for Controlled Groups

Individual Employer Responsibility

A critical concept in ACA controlled group compliance is that while employees are aggregated to determine ALE status, each employer in the group is individually responsible for its own compliance. This means:

  • Each ALE member must offer coverage to its own full-time employees - One company cannot satisfy another company's coverage obligation
  • Each ALE member files its own Forms 1094-C and 1095-C - There is no consolidated controlled group filing
  • Each ALE member is assessed penalties individually - If Company A fails to offer coverage, Company B isn't penalized (unless it also fails)
  • The 30-employee reduction for penalties is shared - The controlled group gets only one 30-employee reduction, allocated among members

Example 7: Penalty Allocation

A controlled group consists of three companies with full-time employees as follows: Company A (100), Company B (75), Company C (25). If Company A fails to offer minimum essential coverage to at least 95% of its full-time employees, the Section 4980H(a) penalty would be calculated as:

  • Total controlled group full-time employees: 200
  • Minus 30-employee reduction: 200 - 30 = 170
  • Company A's share of the reduction: 30 x (100/200) = 15
  • Company A's penalty: (100 - 15) x $2,970 = $252,450 per year

Filing Requirements for Controlled Group Members

Each ALE member in a controlled group must file ACA information returns with the IRS:

Form 1094-C (Transmittal):

  • Each member files its own 1094-C
  • Indicate whether this is the "Authoritative Transmittal" (one member must be designated)
  • Report controlled group membership information on Part IV
  • The authoritative transmittal should include information about all group members

Form 1095-C (Employee Statements):

  • Each member files 1095-C forms for its own full-time employees
  • Use appropriate Line 14 and Line 16 codes based on coverage offers
  • Report the employee's share of the lowest-cost monthly premium on Line 15

Filing Deadlines:

For tax year 2025 (filed in 2026):

  • Employee copies: Must be furnished by March 3, 2026
  • IRS electronic filing: Due by March 31, 2026
  • Paper filing (if permitted): Due by February 28, 2026

Common Controlled Group Mistakes and How to Avoid Them

Mistake 1: Failing to Recognize Controlled Group Status

The most common mistake is simply not realizing that your businesses form a controlled group. This often happens when:

  • Business owners don't understand the 80% ownership thresholds
  • Family attribution rules are overlooked
  • Multiple LLCs are treated as completely separate
  • Ownership through trusts or estates is not properly analyzed

How to avoid: Conduct a thorough controlled group analysis at least annually. Document all ownership percentages, including family relationships that could trigger attribution. Consider hiring a tax professional if your ownership structure is complex.

Mistake 2: Assuming One Coverage Plan Covers All Entities

Some employers mistakenly believe that offering coverage through one controlled group member satisfies obligations for all members. This is generally not correct. Each ALE member must offer coverage to its own employees.

How to avoid: Ensure each controlled group member with full-time employees has its own coverage arrangement or is specifically named as a participating employer in a group health plan. Document which employees are covered under which plan.

Mistake 3: Incorrectly Allocating the 30-Employee Reduction

The 30-employee penalty reduction is shared across the controlled group, but some employers either forget to allocate it or allocate it incorrectly.

How to avoid: Determine a rational allocation method (typically based on the proportion of full-time employees at each member) and apply it consistently. Document the allocation in case of IRS inquiry.

Mistake 4: Not Coordinating 1094-C Filings

Controlled group members often file 1094-C forms without coordinating information about other group members, leading to inconsistencies the IRS may question.

How to avoid: Designate one member to file the "Authoritative Transmittal" and ensure all members report consistent controlled group information. Use ACA reporting software that supports controlled group coordination.

Mistake 5: Ignoring Changes to Group Composition

When companies join or leave a controlled group (through acquisitions, sales, or ownership changes), employers sometimes fail to update their ACA compliance approach.

How to avoid: Monitor ownership changes throughout the year. Understand that ALE status is generally based on the prior year, so ownership changes affect next year's obligations. Consult with professionals when significant transactions occur.

ACA Controlled Group Penalties and How to Avoid Them

Section 4980H(a) Penalty: Failure to Offer Coverage

If an ALE member in a controlled group fails to offer minimum essential coverage to at least 95% of its full-time employees (and their dependents), and at least one full-time employee receives a premium tax credit for marketplace coverage, the 4980H(a) penalty applies.

For 2025, this penalty is $2,970 per full-time employee per year (adjusted annually for inflation). The penalty is calculated based on the total number of full-time employees minus a 30-employee reduction that's shared across the controlled group.

Section 4980H(b) Penalty: Coverage Not Affordable or Minimum Value

If an ALE member offers coverage but it's either not affordable or doesn't provide minimum value, and a full-time employee receives a premium tax credit, the 4980H(b) penalty applies.

For 2025, this penalty is $4,460 per employee who receives a premium tax credit. This penalty is not reduced by 30 employees, but it cannot exceed the 4980H(a) penalty amount.

Strategies to Avoid Controlled Group Penalties

  • Conduct annual controlled group analysis: Verify which entities are in your controlled group and aggregate employees accurately
  • Offer coverage to at least 95% of full-time employees: At each ALE member, ensure coverage offers meet the 95% threshold
  • Use safe harbor methods: Apply affordability safe harbors (W-2, Rate of Pay, or Federal Poverty Line) to demonstrate coverage is affordable
  • Track employee coverage elections: Document coverage offers and employee responses
  • File accurate 1095-C forms: Use correct codes and timely file to demonstrate compliance
  • Respond promptly to IRS notices: If you receive a Letter 226-J, respond within 30 days with supporting documentation

Frequently Asked Questions About ACA Controlled Groups

What is an ACA controlled group?

An ACA controlled group consists of two or more businesses that are related through common ownership meeting IRS thresholds. Under the Affordable Care Act, these related businesses must combine their employees when determining whether they meet the 50 full-time equivalent employee threshold that triggers employer mandate requirements. The controlled group rules are based on IRC Section 414 and include parent-subsidiary groups, brother-sister groups, combined groups, and affiliated service groups.

How do I know if my businesses form a controlled group?

Your businesses form a controlled group if they meet specific ownership tests. For parent-subsidiary groups, one entity must own at least 80% of another. For brother-sister groups, five or fewer common owners must own at least 80% of each business AND have more than 50% identical ownership across businesses. Attribution rules may cause you to be treated as owning stock held by family members, trusts, or other entities, expanding controlled group status beyond direct ownership.

If I'm in a controlled group, do I have to file ACA forms?

If your controlled group has 50 or more full-time equivalent employees in the aggregate, each member of the group that employs full-time employees must file Forms 1094-C and 1095-C with the IRS and furnish Form 1095-C copies to employees. Each ALE member files separately; there is no consolidated filing option. One member should be designated to file the "Authoritative Transmittal" that includes information about all group members.

Can one controlled group member's health plan cover employees of other members?

Yes, but it must be properly structured. A controlled group can establish a single health plan that names all member employers as participating employers. Employees of each participating employer would then be eligible for coverage under that plan. However, each ALE member remains individually responsible for ensuring coverage is offered to its full-time employees, and each member files its own 1095-C forms for its employees. Proper documentation is essential.

How is the 30-employee penalty reduction shared in a controlled group?

The Section 4980H(a) penalty allows employers to reduce the employee count by 30 before calculating penalties. In a controlled group, this reduction is shared among all ALE members. The IRS permits employers to allocate the reduction in any reasonable manner, but it cannot exceed 30 total across all members. Most groups allocate proportionally based on each member's share of full-time employees.

What happens if my controlled group includes foreign entities?

Employees of foreign entities in a controlled group are generally not counted for ACA purposes because the employer mandate only applies to employees performing services in the United States. However, if a foreign parent owns U.S. subsidiaries, the U.S. subsidiaries may still form a controlled group among themselves. Careful analysis is required for multinational corporate structures, and professional guidance is recommended.

Do the controlled group rules apply to non-corporate entities like LLCs and partnerships?

Yes. The controlled group rules apply to all types of business entities, including corporations, partnerships, LLCs, and sole proprietorships. The ownership tests are adapted for non-corporate entities: instead of stock ownership, the rules look at profits or capital interests in partnerships and LLCs, or beneficial ownership in trusts and estates. Single-member LLCs are generally treated as disregarded for tax purposes and combined with their owner.

Can restructuring my business help avoid controlled group status?

While restructuring ownership to fall below controlled group thresholds is theoretically possible, the IRS closely scrutinizes transactions designed primarily to avoid ACA obligations. Anti-abuse rules may apply, and attribution rules can make restructuring more difficult than it appears. Additionally, bona fide business reasons should support any restructuring. Consult with tax and legal professionals before attempting any restructuring strategy.

How often should I analyze controlled group status?

You should analyze controlled group status annually, typically in the fourth quarter to prepare for the upcoming year's compliance obligations. Additionally, conduct an analysis whenever significant ownership changes occur, such as acquisitions, sales of businesses, changes in partnership interests, changes in family ownership, or significant gifts or inheritance of business interests. Document your analysis for audit purposes.

What records should I maintain for controlled group compliance?

Maintain records documenting ownership percentages of all related entities, family relationships that may trigger attribution, your controlled group analysis and conclusions, employee counts and FTE calculations for each member, health coverage offers made to each employee, Forms 1094-C and 1095-C filed for each member, and any correspondence with the IRS regarding ACA compliance. Keep these records for at least seven years to support your compliance in case of audit.

Does controlled group status affect anything besides the 50-employee threshold?

Yes. Beyond determining ALE status, controlled group membership affects how the 30-employee penalty reduction is allocated, which employer is designated to file the authoritative transmittal, how coverage eligibility and waiting periods may be coordinated, and potential application of nondiscrimination rules for self-insured plans. It may also impact retirement plan testing and other employee benefit compliance areas.

What if I disagree with an IRS determination that I'm in a controlled group?

If the IRS assesses penalties based on controlled group status you believe is incorrect, you have the right to dispute the determination. Respond to the Letter 226-J within 30 days, providing documentation of your ownership analysis and explaining why you believe controlled group rules don't apply. You may request a conference with the IRS, and if necessary, you can appeal to Tax Court or pay the penalty and sue for a refund in federal district court.

How BoomTax Simplifies ACA Compliance for Controlled Groups

Managing ACA compliance across multiple controlled group members can be challenging. BoomTax provides a comprehensive ACA reporting solution designed to simplify compliance for complex organizational structures:

  • Multi-EIN management: File Forms 1094-C and 1095-C for multiple controlled group members from a single account, ensuring coordinated reporting
  • Authoritative transmittal tracking: Easily designate and manage which member files the authoritative transmittal containing controlled group information
  • Comprehensive validation: BoomTax validates your data against hundreds of IRS rules, catching errors before submission that could trigger penalty notices
  • Bulk data import: Upload employee data from Excel, CSV, or integrate directly with payroll systems like ADP, Workday, and UKG across all controlled group members
  • Employee distribution: Print and mail 1095-C forms to employees at each group member, or enable secure electronic delivery for consenting employees
  • Unlimited corrections: Fix mistakes across any controlled group member without additional charges
  • State filing support: Handle California, New Jersey, Rhode Island, D.C., and Massachusetts state filings for employees across all group members
  • Audit trail: Maintain records of all filings and employee distributions to support compliance in case of IRS inquiry

BoomTax's pay-per-form pricing means you only pay for the forms you file, making it cost-effective whether you're managing a small controlled group with a few hundred employees or a large enterprise with thousands of workers across multiple entities.

Ready to simplify ACA compliance for your controlled group? Get started with BoomTax today and experience coordinated, stress-free ACA reporting across all your related businesses.

Conclusion: Taking Control of Your Controlled Group Compliance

Understanding and properly applying ACA controlled group rules is essential for any business owner with interests in multiple entities. The key takeaways from this guide are:

  • Know your ownership structure: Document all ownership percentages and family relationships that could trigger controlled group status through attribution rules
  • Understand the thresholds: Parent-subsidiary groups require 80% ownership; brother-sister groups require both 80% common ownership and more than 50% identical ownership
  • Aggregate employees correctly: Combine full-time employees and FTEs across all controlled group members to determine ALE status
  • Comply at each member level: Each ALE member must offer coverage to its own employees and file its own 1094-C/1095-C forms
  • Coordinate filings: Designate an authoritative transmittal filer and ensure consistent reporting across all members
  • Allocate penalties properly: The 30-employee reduction is shared across the controlled group
  • Document everything: Maintain records of your controlled group analysis, employee counts, and coverage offers

The penalties for controlled group non-compliance can reach millions of dollars for large groups, but with proper planning and the right tools, compliance is achievable. By conducting annual controlled group analyses, offering qualifying coverage at each ALE member, and filing accurate returns, you can avoid ACA penalties and focus on running your businesses.

References and Additional Resources

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