SLOB regulations finalized.
The separate line of business (SLOB) rules under Sec. 414(r) allow an employer to divide its business into qualified SLOBs and to apply the minimum coverage and nondiscrimination rules independently to the employees of each SLOB. This allows employers that operate qualified SLOBs some flexibility to offer different benefits to employees within different businesses.
There are a number of objective tests used to determine whether an employer operates lines of business that may be treated independently for purposes of applying the minimum coverage and nondiscrimination tests. As in the proposed regulations, the final regulations focus primarily on the degree to which the employer's lines of business are organized and operated separately rather than on the degree to which the business lines are different.
The final regulations provide a three-step process for determining whether an employer is operating an SLOB. First, the employer must determine how many lines of business it operates. Second, the employer must demonstrate that its lines of business are truly separate from one another. Finally, the employer must show that its SLOBs meet the requirements for qualified lines of business.
As in the proposed regulations, the final regulations give employers a great deal of discretion in determining how many lines of business are being operated. However, each line of business must satisfy certain objective tests to qualify for SLOB treatment.
The final regulations generally retain the objective tests from the proposed regulations for determining whether a line of business is operated separately. The proposed regulations set forth five conditions that had to be satisfied to qualify as an SLOB. The final regulations generally retain these tests, with the exception of the separate tangible asset test (Regs. Sec. 1.414(r)-3(b) and (c)). * Separate organizational unit: The line of business must be organized as a separate organizational unit within the employer. The line of business must be set up as a separate corporation, partnership, division or other organizational unit on each day of the year. * Separate financial accountability: The line of business must be a separate profit center within the employer. In addition, the employer must maintain records that separately account for the revenue and expenses of that line of business. * Separate employee work force: The line of business must have its own separate employee work force. To satisfy this requirement, 90% of all employees who perform service for a particular line of business must spend at least 75 % of their time working for that line of business. * Separate management: The line of business must have separate management. To satisfy this test, an employer must identify the top 10% highly paid employees who perform at least 25% of their services for a line of business. Then, of those employees, at least 80% must provide at least 75% of their services to that line of business. The final regulations do not provide special rules for employers with centralized support functions such as legal, financial, tax, accounting, payroll and data processing. Companies that maintain such centralized support functions may still have difficulty satisfying the separate management test if the support staff are highly compensated and perform more than 25% but less than 75% of their services for the lines of business. * Separate tangible assets: The final regulations eliminated the requirement that each line of business have its own tangible assets. This would have required extensive collection of data that was not currently available to employers.
The final regulations contain special optional rules for determining if certain "vertically integrated lines of business" are SLOBs. In general, two lines of business may be treated as being vertically integrated if one of the lines of business (the "upstream" line of business) provides property or service to the other line of business (the "downstream" line of business) and also provides the same type of property or services to customers (e.g., an oil company that also operates retail filling stations). As in the proposed regulations, the final regulations allow the employer to allocate certain employees solely to the upstream line of business even though those employees would normally be included in both the upstream and downstream lines of business for purposes of the separate work force and separate management tests. In addition, the final regulations liberalize the definition of an upstream line of business to allow companies that provide only 25% (rather than 50%) of all property or services to customers to qualify under the special rules for vertically integrated lines of business (Regs. Sec. 1.414(r)-3(d)).
Once an employer satisfies the SLOB tests for each of its lines of business, it must then satisfy certain additional requirements to be a qualified SLOB. 1. Fifty-employee requirement: on each day of the year there must be at least 50 employees who provide services exclusively to the SLOB (Regs. Sec. 1.414(r)-4(b)). 2. Notice requirement: The employer must notify the IRS that it is treating itself as operating an SLOB for purposes of applying the minimum coverage and nondiscrimination tests (Regs. Sec. 1.414(r)-4(c)). (The IRS will be issuing additional guidance as to the form this notice should take. Pending this additional guidance, the IRS has waived the notice requirement.) 3. Administrative scrutiny requirement: Each SLOB must also satisfy the administrative scrutiny test to qualify for SLOB treatment (Regs. Sec. 1.414(r)-5). * Statutory safe harbor: The percentage of the SLOB's employees who are highly compensated generally must not be less than 50% or more than 200% of the percentage of all the employer's highly compensated employees. Thus, an SLOB will meet the administrative scrutiny requirement if the concentration of highly compensated employees to nonhighly compensated employees in that SLOB is not significantly different from the concentration of highly compensated to nonhighly compensated employees on a company-wide basis. * Different industry safe harbor: This safe harbor is satisfied if the SLOB is in a different industry from every other SLOB of the employer, based on industry categories (Regs. Sec. 1.414(r)-5(c)). An employer may disregard its foreign operations in determining whether an SLOB satisfies this safe harbor (Regs. Sec. 1.414(r)-5(c)(2)). * Industry segment safe harbor: An SLOB satisfies this safe harbor if it is reported as a separate industry segment on the annual report required to be filed with the Securities and Exchange Commission (Regs. Sec. 1.414(r)-5(e)). * Maximum or minimum benefit safe harbor: This safe harbor is satisfied if the level of benefits provided to employees of the SLOB satisfies certain maximum or minimum benefit requirements. * Merger and acquisition safe harbor: SLOBs acquired in a merger or acquisition may automatically satisfy the administrative scrutiny requirement for up to four years if there are no significant changes in the work force of the acquired line of business (Regs. Sec. 1.414(r)-5(d)). * Average benefits safe harbor: This safe harbor is satisfied if the benefits provided to nonhighly or highly compensated employees in that SLOB are comparable to the benefits to all other nonhighly or highly compensated employees (Regs. Sec. 1.414(r)-5(f)).
In addition, an SLOB that does not satisfy one of the safe harbors may still satisfy the administrative scrutiny requirement if the employer requests and receives an individual determination from the IRS (Regs. Sec. 1.414(r)-6).
Once an employer has separated its business into qualified SLOBs, all employees of the employer must be allocated to one specific line of business for purposes of applying the minimum coverage and nondiscrimination requirements of the Code.
Under the final regulations, those employees who perform substantial services (i.e., at least 75% of their time) for one particular qualified line of business must be allocated to that line of business. in addition, employers may treat any employee who performs between 50% and 75% of his services for a particular SLOB as performing substantial service for that line for business (Regs. Sec. 1.414(r)-11(b)12)).
Employees who do not perform substantial services for any one particular line of business (for example, headquarters' employees) must be allocated to lines of business under specific allocation rules. The final regulations generally retain the methods of allocating "residual employees" from the proposed regulations. However, the final regulations expand the availability of the dominant line of business method of allocating residual employees. Under that method, all employees who do not perform services substantially for one particular line of business may be allocated to the "dominant" line of business, which is now defined as a line of business to which at least 50% of the substantial service employees are allocated. Under certain circumstances, the final regulations permit the 50% threshold to be lowered to 35% (Regs. Sec. 1.414(r)-7(c)(3)).
The dominant line of business method generally is the most attractive method available to allocate residual employees (Regs. Sec. 1.414(r)-7(c)(3)). Under this method, it may be possible to allocate all headquarters' employees to one particular line of business and cover them under the plan maintained by that dominant line of business. Normally, residual employees must be allocated among the different separate lines of business. This could result in discrimination problems if, for example, the residual employees are highly compensated and are covered under a better plan than the employees in the SLOB to which they are allocated.
In general, employees in SLOBs are treated as if they were employed by a separate employer for purposes of the minimum coverage and nondiscrimination tests. However, the final regulations retain the requirement that a plan must satisfy the nondiscriminatory classification coverage test on an employer-wide basis. Thus, to satisfy the minimum coverage requirement, a plan must satisfy the nondiscriminatory classification test for all nonexcludible employees in the control group and must also satisfy coverage independently for the employees of the SLOB (Regs. Sec. 1.414(r)-8).
Under the final nondiscrimination regulations, plans must generally provide level benefits to a group of employees that satisfies the minimum coverage requirements. Plans may be divided by levels of benefit ("rate groups") and may be restructured into separate component plans, provided that each rate group or component plan separately satisfies coverage. The final SLOB regulations clarify that for purposes of testing rate groups or component plans for nondiscrimination, the nondiscriminatory classification test must be satisfied on an employer-wide basis. Thus, to satisfy the nondiscrimination requirements for employees of an SLOB, each rate group or component plan must satisfy the nondiscriminatory classification test for all nonexcludible employees in the controlled group and must also satisfy the nondiscrimination test separately for the employees in the SLOB being tested. Similarly, each optional form of benefit, right or feature in a plan must also be available to a group that satisfies the nondiscriminatory classification test on an employer-wide basis.
The final regulations liberalize the employer-wide nondiscriminatory classification test to make it easier for companies with qualified SLOBs to pass the test. Nevertheless, the requirement that the nondiscriminatory classification test be satisfied on an employer-wide basis for purposes of testing each rate segment, component plan and optional form of benefit, right or feature under a plan may restrict the usefulness of the SLOB regulations for some companies.
Once an employer elects to apply the minimum coverage rules on an SLOB basis, it must generally do so for all of its plans. However, certain plans that satisfy coverage on an employer-wide basis may be tested on an employer-wide basis. For example, an employer that provides an employer-wide Sec. 401(k) plan for all its employees could test that plan on an employer-wide basis even though it is testing its other plans on an SLOB basis.
The final regulations are generally effective for plan years beginning on or after Jan. 1, 1992. However, for plan years beginning on or before the date the Service begins issuing determination letters under the SLOB rules, an employer will be treated as operating qualified SLOBs if the employer reasonably complies with the requirements of Sec. 414(r). Note: Although the final regulations are generally effective for plan years beginning on or after Jan. 1, 1992, the ability to rely on a good faith interpretation of Sec. 414(r) until the IRS begins issuing determination letters effectively delays the effective date until the 1993 lan ear for most plans.
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|Title Annotation:||separate line of business|
|Publication:||The Tax Adviser|
|Date:||Apr 1, 1992|
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