Qualified Separate Lines of Business (QSLOB)

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in ME is representative of a common question on Qualified Separate Lines of Business (QSLOBs).

"My client is a holding company and wants the separate operating companies to continue with their own retirement plans uninterrupted. The client is asking about QSLOBs – do you have any information you can send on that topic?"

Highlights of the discussion on QSLOBs

The Qualified Separate Line of Business (QSLOB) rules can help a plan satisfy minimum coverage rules. Among other requirements, a defined contribution plan must cover or “benefit” a minimum number of a firm’s employees in order to remain qualified and receive favorable tax treatment from the IRS [Treasury Regulation Section (Treas. Reg. §) 1.410(b)-1]. Generally, when applying the minimum coverage requirements, the IRS requires that all employees of a single employer be considered. One exception to applying this test on a firm-wide basis exists by following the QSLOB rules of Treas. Reg. §1.414(r)-8. If an employer operates QSLOBs, then it may apply the minimum coverage requirement separately with respect to the employees of each QSLOB. That could make it easier for the employer to pass testing.

Source: Treas. Reg. §1.414(r)-1

The above flow chart from the IRS is a helpful guide. A quick summary follows. A line of business (LOB) is a portion of an employer that is identified by the property or services it provides to customers of the employer. For this purpose, the IRS permits the employer to determine the LOBs it operates by designating the property and services that each of its LOBs provides to customers of the employer.

A separate LOB (SLOB) is a line of business that is organized and operated separately from the remainder of the employer. In order to be a SLOB, the LOB must satisfy four statutory requirements 1) separate organizational unit; 2) separate financial accountability; 3) separate employee workforce; and 4) separate management [Treas. Reg. §1.414(r)-3].

In order to be a qualified SLOB (QSLOB), the SLOB must meet three additional requirements: 1) it must have 50 dedicated employees at all times during the testing year; 2) the employer must notify the Secretary of the Treasury that it intends to treat a SLOB as a QSLOB (by filing IRS Form 5310-A, Notice of Plan Merger or Consolidation, Spinoff, or Transfer of Plan Assets or Liabilities; Notice of Qualified Separate Lines of Business; and the SLOB must satisfy the administrative scrutiny test—for which there are seven safe harbor options (see Treas. Reg. §1.414(r)-5 and Treas. Reg. §1.414(r)-6).

Finally, if the QSLOBs provide all the property and services of the business, then the employer may test the QSLOBs separately to satisfy the minimum coverage rules. A couple additional notes:

The QSLOB testing exception can be used in controlled group situations but not with affiliated service groups [see IRC §414(r)(8)].

Defined benefit plans may use the exception for minimum coverage testing, and for minimum participation testing pursuant to IRC §401(a)(26) with IRS approval.

A complete analysis of the QSLOB rules is beyond the scope of this writing.

Conclusion

The QSLOB testing exception for minimum coverage can be beneficial, but, as one can see, it is complicated. Employers considering its application should consult with tax attorneys or advisors who are well-versed in the subject.