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Qualified Separate Line of Business

“How are the qualified separate line of business (QSLOB) rules helpful for a defined contribution plan?”  

ERISA consultants at the Retirement Learning Center Resource Desk 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, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to plan testing.

Highlights of the Discussion

The 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, all employees of a single employer are considered when applying the minimum coverage requirements. 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.

Treas. Reg. §1.414(r)-1

The above flow chart from the IRS is a helpful guide and is explained as 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 employer is permitted 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 3) 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 all the property and services of the business are provided by the QSLOBs, then the employer may test the QSLOBs separately in order 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 are beyond the scope of this writing.


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


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