Controlled group receives more time for QSLOB election

Plain-English summary

A controlled group maintained separate businesses, but its pension-plan service provider tested one subsidiary's plan without obtaining employee data for the whole group. The companies did not learn until due diligence years later that proper coverage testing required an election to treat the businesses as qualified separate lines of business, or QSLOBs. The IRS found reasonable reliance on the service provider, good faith, and no prejudice to the government even though some affected years were closed. It granted 60 days to file Form 5310-A for the 2007 testing year and every later year. The ruling did not decide whether the subsidiary otherwise met the substantive QSLOB requirements.

Ruling snapshot

• Question: Could the controlled group make a late QSLOB election for 2007 and later testing years?
• Outcome: Approved, with 60 days to file Form 5310-A
• Key authorities: IRC §§ 401(a), 410(b), and 414(r); Treas. Reg. §§ 1.414(r)-6 and 301.9100-1 through 301.9100-3; Rev. Proc. 93-40

Full text (IRS public release)

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DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND OCT 08 2014

GOVERNMENT ENTITIES
DIVISION

Uniform Issue List: 9100.00-00

T:EP:RA:T1

Legend:
Company A=
Company B =
Plan C =
Firm D =
Dear

This is in response to a letter dated May 19, 2014, in which you request, through your
authorized representatives, an extension of time pursuant to section 301.9100-1 of the
Procedure and Administration Regulations (the “P&A Regulations”) to file the notice of
election described in Section 3 of Revenue Procedure 93-40,1993-2 C.B. 535 (“Rev.
Proc. 93-40”) to be treated as operating qualified separate lines of business (“QSLOBs”)
under section 414(r)(2) of the Internal Revenue Code (the “Code”).

The following facts and representations have been submitted under penalties of perjury
in support of the ruling request.

Company A is the parent company in a controlled group of corporations that includes
Company B. Company A and Company B are separate corporate entities that maintain
separate lines of business. Company B established Plan C, a defined benefit pension
plan, in 1999, when it acquired the assets of Company B’s predecessor. Plan C covers
only Company B’s non-union employees. Company B maintains a separate retirement
plan for its union employees. In addition, another controlled group member maintains a
qualified 401(k) plan in which certain Company B employees may participate.

Effective October 31, 2006, Company B closed the entry of new participants in Plan C
and froze both (1) the accrued benefits of participants with less than five years of
service and (2) the accrued benefits of participants with five or more years of service

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who elected to cease to accrue future benefits under Plan C. Those participants whose
accrued benefits under Plan C were frozen as of October 31, 2006, became eligible to
participate in the 401(k) plan maintained by another controlled group member. Also, in
2006, Plan C’s assets were invested in annuity contracts issued by Firm D. Firm D also
became Plan C’s actuary, contract administrator and investment advisor.

Firm D was responsible for performing coverage and nondiscrimination testing for Plan
C. Firm D provided Company B with a questionnaire to collect information about Plan
C. Company B’s accounting manager completed the questionnaire and provided
answers specific to Company B and Plan C. The questionnaire reported that Company
B was a member of a controlled group of corporations, but it provided information
specific only to Company B, because information on the other members of the
controlled group was not available to the accounting manager.

Firm D’s questionnaire also included a census form on which Firm D indicated that
benefits under Plan C were frozen, that no future accrual would occur, that Plan C
satisfied the minimum coverage rules, and it did not need to be tested. This statement
on the questionnaire was not entirely accurate, because the accrued benefits of all
participants were not frozen as of October 31, 2006, due to the continued participation
of those participants who had five or more years of service and who had elected to
continue to accrue future benefits under Plan C. Nonetheless, Company B’s accounting
manager completed the census portion of the questionnaire by answering on behalf of
Company B with information available to him. As such, he indicated that Company B
itself did not have separate lines of business and that Company B itself had not filed
Form 5310-A, Notice of Qualified Separate Lines of Business.

Company B represents that Firm D did not follow up regarding Company B’s statement
that Company B was part of a controlled group. Firm D also did not explain the
consequences of a Qualified Separate Line of Business (QSLOB) election. For its part,
Company B acknowledges that it did not question Firm D’s statement regarding non-
discrimination testing and the effect of Plan C’s status as a “frozen” plan.

Thereafter, Company B submitted demographic information to Firm D based solely on
the employees of Company B and not on any other employees in the controlled group.
Company B asserts that when active participation under the Plan fell below 50
employees in 2008, Firm D indicated that Plan C satisfied coverage rules, because at
least 40% of the employees of the employer were covered. Company B did not learn of
the error until December 2013, in the course of the due diligence process for Company
A’s acquisition by another entity. Until the end of 2013, Company B was not aware that
the way it was reporting demographic census data was insufficient to permit proper
coverage testing unless a QSLOB election was in effect.

Company B provided an affidavit signed by its Chief Financial Officer. He describes the
events that led to the failure to make the QSLOB election and how Company B
reasonably relied on Firm D to advise it on matters such as the adequacy of its reporting
demographic information and the need for a QSLOB election.

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Company A and Company B request a ruling that the Service grant an extension of time
pursuant to section 301.9100-1 of the P&A Regulations to file the notice of an election
described in Section 3 of Rev. Proc. 93-40 to be treated as a QSLOB under section
414(r) of the Code for the 2007 testing year and each subsequent year thereafter.

In general, section 414(r) of the Code provides that for purposes of sections 129(d)(8)
and 410(b) an employer shall be treated as operating separate lines of business during
any year if the employer operates separate lines of business for bona fide business
reasons and satisfies certain other conditions under the Code. If the employer is treated
as operating QSLOBs for the year, the employer may apply the minimum coverage
requirements of section 410(b) (including the nondiscrimination requirements of section
401(a)(4) and the minimum participation requirements of section 401(a)(26)) separately
with respect to the employees in each qualified separate business line.

Section 414(r)(2)(B) of the Code requires that an employer notify the Secretary of the
Treasury that a line of business is being treated as separate for purposes of sections
129(d)(8) and 410(b).

Section 3 of Rev. Proc. 93-40 sets forth the exclusive rules for satisfying the notice
requirement of section 414(r)(2)(B) of the Code. Section 3.03 of Rev. Proc. 93-40
provides that notice must be given by filing Form 5310-A. Section 3.05 of Rev. Proc. 93-
40 provides that notice for a testing year must be given on or before the Notification
Date for the testing year. The Notification Date for a testing year is the later of October
15 of the year following the testing year or the 15th day of the 10th month after the close
of the plan year of the plan of the employer that begins earliest in the testing year.
Section 3.06 of Rev. Proc. 93-40 provides that after the Notification Date, notice cannot
be modified, withdrawn or revoked, and will be treated as applying to subsequent
testing years unless the employer takes timely action to provide a new notice.

Section 301.9100-1(a) of the P&A Regulations states that the regulations under
sections 301.9100-1, 301.9100-2 and 301.9100-3 provide the standards the
Commissioner of Internal Revenue (“Commissioner”) will use to determine whether to
grant an extension of time to make a regulatory election. It further provides that the
granting of an extension of time is not a determination that the taxpayer is otherwise
eligible to make the election.

Section 301.9100-1(b) of the P&A Regulations defines a “regulatory election” to mean
an election whose due date is prescribed by a regulation, revenue ruling, revenue
procedure, notice, or announcement published in the Internal Revenue Bulletin. Notice
that an employer elects to be treated as operating qualified separate lines of business
pursuant to section 414(r) of the Code and Section 3 of Rev. Proc. 93-40 constitutes a
regulatory election.

Section 301.9100-1(c) of the P&A Regulations provides that the Commissioner, in the
Commissioner's discretion, may grant a reasonable extension of time under the rules of
sections 301.9100-2 and 301.9100-3 to make a regulatory election.

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Section 301.9100-2 of the P&A Regulations lists certain elections for which automatic
extensions of time to file are granted. Section 301.9100-3 generally provides guidance
with respect to the granting of relief with respect to those elections not referenced in
section 301.9100-2. The relief requested in this case is not referenced in section
301.9100-2.

Section 301.9100-3(a) of the P&A Regulations provides that applications for relief that
fall within section 301.9100-3 will be granted when the taxpayer provides sufficient
evidence (including affidavits described in section 301.9100-3(e)(2)) to establish that (1)
the taxpayer acted reasonably and in good faith, and (2) granting relief would not
prejudice the interests of the Government.

Section 301.9100-3(b)(1) of the P&A Regulations provides that a taxpayer will be
deemed to have acted reasonably and in good faith if (i) the taxpayer's request for relief
under this section is filed before the failure to make a timely election is discovered by
the Service; (ii) the taxpayer inadvertently failed to make the election because of
intervening events beyond the taxpayer's control; (iii) the taxpayer failed to make the
election because, after exercising reasonable diligence, the taxpayer was unaware of
the necessity for the election; (iv) the taxpayer reasonably relied upon the written advice
of the Service; or (v) the taxpayer reasonably relied on a qualified tax professional,
including a tax professional employed by the taxpayer, and the tax professional failed to
make, or advise the taxpayer to make, the election.

Section 301.9100-3(c)(1)(ii) of the P&A Regulations provides that ordinarily the interests
of the Government will be treated as prejudiced and that ordinarily the Service will not
grant relief when tax years that would have been affected by the election had it been
timely made are closed by the statute of limitations before the taxpayer's receipt of a
ruling granting relief under this section.

According to the facts, representations, and affidavits submitted, until December 2013,
Company B was unaware of the need for a QSLOB election. Company B engaged Firm
D, in 2006, to perform services for Plan C, including coverage and non-discrimination
testing, and Company B responded to Firm D's intake questionnaire based on
information available to Company B. Firm D did not follow up on responses to the
questionnaire that would reasonably have led to a determination that a QSLOB election
was necessary with respect to Company B to remain in compliance with the
requirements of section 401(a)(26) of the Code. Company B reasonably relied on Firm
D, as its third party service provider, to advise Company B of the need to file Form
5310-A. In addition, Company A and Company B requested relief under section
301.9100-1 of the P&A Regulations prior to the Service discovering the failure to file the
election. Thus, Company A satisfies clauses (i), (iii) and (v) of section 301.9100-3(b)(1).

In addition, the interests of the Government will not be prejudiced by granting the relief
requested, because granting relief will not result in the taxpayer having a lower tax
liability in the aggregate for the taxable years affected, including those years closed by
the statute of limitations. Accordingly, because the taxpayer has acted reasonably and
in good faith and the granting of relief will not prejudice the interests of the Government,

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Company A is granted an extension of 60 days from the date of the issuance of this
ruling letter to file notification of the QSLOB election on Form 5310-A with the
appropriate office of the Service for the 2007 testing year and each subsequent year
thereafter.

No opinion is expressed as to whether Company B otherwise satisfies the requirements
under section 414(r) of the Code to be treated as a QSLOB for the 2007 testing year
and subsequent years. This ruling does not constitute a determination that a separate
line of business satisfies the requirement of administrative scrutiny within the meaning
of section 1.414(r)-6 of the federal Income Tax Regulations.

No opinion is expressed as to the tax treatment of the transaction described herein
under any other provisions of the Code or regulations, which may be applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

A copy of this letter has been sent to your authorized representative in accordance with
a power of attorney on file with this office.

If you have any questions, please contact (I.D. # ) by phone at or fax
at . Please address all correspondence to
SE:T:EP:RA:T1.

Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Deleted Copy of Ruling Letter
Notice of Intention to Disclose

cc: