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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.

Conclusion

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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What is the Definition of Compensation for HCEs

What is the definition of compensation for determining HCEs?

“What definition of compensation is used to determine who is considered an HCE for nondiscrimination testing in a 401(k) 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 and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

A plan must use an Internal Revenue Code Section (IRC §) 415 definition of compensation when determining which employees are HCEs under IRC §414(q).

  • More specifically, according to  Temporary Treasury Regulation 1.414(q)-1T, Q&A 13, the term “compensation” for HCE determination means compensation within the meaning of IRC §415(c)(3) without regard to §§125, 402(a)(8), and 402(h)(1)(B) and, in the case of employer contributions made pursuant to a salary reduction agreement, without regard to § 403(b). Thus, compensation for this purpose includes elective or salary reduction contributions to a cafeteria plan, cash or deferred arrangement or tax-sheltered annuity.

 

  • Only compensation an employee received during the “applicable period” is considered in determining HCE status.  HCE status based on compensation (not on ownership) is determined using compensation earned during the preceding year or 12-month period, referred to as the “look-back year.” If the year for which HCE status is being determined is not a calendar year, the sponsor may make a calendar year election so that HCE status is determined based on compensation earned during the calendar year beginning with or within the look-back year.

 

  • A compensation threshold applies for determining HCE status. This amount is subject to indexing.  When the amount is indexed, the new dollar amount applies to the year in which the compensation is earned, not the year in which HCE status is determined.  For example, when determining HCE status for 2017 based on compensation, plans must use the indexed amount for 2016, which was $120,000.  When determining HCE status for 2018 based on compensation, plans must use the indexed amount for 2017, which is $120,000.

Conclusion

Plans must follow a specific definition of compensation as defined in the IRC and supporting Treasury regulations when determining whether an employee is or is not an HCE.

 

© Copyright 2019 Retirement Learning Center, all rights reserved