SLOB regulations finalized.

• Author: Lockwood, Charles
• Position: Separate line of business

A retirement plan must satisfy certain minimum coverage and nondiscrimination requirements to be qualified. These requirements are designed to ensure that an employer is providing nondiscriminatory benefits to a sufficient number of employees. To determine whether a plan passes the minimum coverage and nondiscrimination tests, all employees within a controlled group of corporations or within a group of trades or businesses that are under common control must be treated as being employed by a single employer. Thus, in determining whether a plan passes these tests, all nonexcludible employees within the controlled group must generally be counted.

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...