Late notice extension to treat two subsidiaries as separate lines of business for retirement-plan testing

Plain-English summary

An employer that runs genuinely separate businesses can test its retirement plans for coverage and nondiscrimination line-by-line instead of across the whole controlled group, but only if it files a notice (Form 5310-A) electing "qualified separate line of business" (QSLOB) treatment under Section 414(r). A parent company acquired two subsidiaries, each with its own 401(k) plan, and kept running them as separate lines of business. During a later acquisition audit it discovered the required QSLOB notices had never been filed for several years, even though it had used tax advisers throughout. It fixed the current year and asked the IRS for extra time to file the missing notices for four earlier years under the Section 301.9100 late-election relief rules. The IRS granted 60 days to file them, finding the company acted reasonably and in good faith, came forward before the IRS caught the lapse, and that relief would not lower its overall tax or harm the government. The IRS did not decide whether the businesses actually qualify as separate lines of business, only that the late notices may be filed.

Ruling snapshot

• Question: May the employer get more time to file late QSLOB notices (Form 5310-A) under Section 414(r) for four prior years?
• Outcome: approved (60-day extension granted)
• Key authorities: IRC § 414(r); Treas. Reg. §§ 301.9100-1, 301.9100-3; Rev. Proc. 93-40

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202033004 Third Party Communication: None
Release Date: 8/14/2020 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
------------------------ ----------------, ID No. -----------------
----------------------------------- Telephone Number:
------------------------- --------------------
---------------------------- Refer Reply To:
CC:TEGE:EB:QP1
PLR-127354-19
Date:
May 13, 2020

Legend

Company A = ------------------------------------------------------------------------------
-----------------------
Company B = ------------------------------------------------------------------------------
-----------------------
Company C = ------------------------------------------------------------------------------
-----------------------
State X = ----------------
State Y = -------------
Plan A = -------------------------------------------------------------------
Plan B = ----------------------------------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------
Year 7 = -------

Dear --------------------:

This is in response to a letter dated November 4, 2019, in which you request, through
your authorized representative, an extension of time pursuant to § 301.9100-1 of the
Procedure and Administration 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
PLR-127354-19 2

in support of your ruling request.

Company A is a State X limited liability company that elects to be treated as a corporation
for federal income tax purposes. Company A uses an accrual method of accounting as
its overall method of accounting and uses the calendar year as its annual accounting
period. Company B is a State Y corporation. Company B uses an accrual method of
accounting as its overall method of accounting and uses the calendar year as its annual
accounting period. Company A and Company B are both wholly-owned subsidiaries of
Company C and are members of a controlled group of corporations within the meaning
of sections 414(b) and 1563(a). Company C is a State Y limited liability company that
elects to be treated as a corporation for federal income tax purposes. Company C has an
accrual method of accounting as its overall method of accounting and uses the calendar
year as its annual accounting period.

Company A sponsors a defined contribution plan with a cash or deferred arrangement
(“CODA”) under section 401(k) (Plan A) that covers eligible employees of Company A
and their beneficiaries. Company A has sponsored and maintained Plan A since Year 1.
Company B sponsors a defined contribution plan with a CODA under section 401(k) (Plan
B) that covers eligible employees of Company B and their employees. Company B has
sponsored and maintained Plan B since Year 1.

Company C acquired Company A and Company B in Year 2. Prior to Year 2, Plan A and
Plan B each met the required nondiscrimination and coverage testing requirements set
forth in sections 401(a)(4) and 410(b). Following the expiration of the post-transaction
transition period under section 410(b), Plan A and Plan B continued to be administered
and operated as separate plans based on separate lines of business, and Company A
and Company B each operated as separate lines of business under section 414(r) and
the regulations thereunder.

In the course of a corporate acquisition, Company C underwent a detailed audit of its
current benefit plans and discovered that, although Company A, Company B, and
Company C have consistently worked with legal counsel, tax professionals, and
consultants to ensure that they complied with the QSLOB rules, no Form 5310-A notice
regarding QSLOB status for Plan A or Plan B had been filed. Company C immediately
retained outside legal counsel and conducted a QSLOB analysis. Company C
subsequently filed the appropriate Form 5310-A notice for Year 3.

Company C requests a ruling that the IRS grant an extension of time pursuant to
§ 301.9100-1 to file updated Forms 5310-A for Year 4, Year 5, Year 6, and Year 7 to
reflect the treatment of Company A and Company B as separate lines of business for
QSLOB purposes. Company C has requested this relief under § 301.9100-1 prior to the
IRS discovery of any failure to file the election. Company C also represents that other
than the filing of Form 5310-A, Plan A and Plan B satisfied all the requirements of section
414(r) and regulations thereunder, for Year 4, Year 5, Year 6, and Year 7.
PLR-127354-19 3

In general, section 414(r) 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 QSLOB.

Section 414(r)(2)(B) 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). 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) states that the regulations under §§ 301.9100-1, 301.9100-2, and
301.9100-3 provide the standards the IRS 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) 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 QSLOBs pursuant to section 414(r) and section 3 of Rev. Proc.
93-40 constitutes a regulatory election.

Section 301.9100-1(c) provides that the IRS, in its discretion, may grant a reasonable
extension of time under the rules of §§ 301.9100-2 and 301.9100-3 to make a regulatory
election.

Section 301.9100-2 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 § 301.9100-2. The relief
requested in this case is not referenced in § 301.9100-2.
PLR-127354-19 4

Section 301.9100-3(a) provides that applications for relief that fall within § 301.9100-3 will
be granted when the taxpayer provides sufficient evidence (including affidavits described
in § 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) 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 IRS; (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 IRS; 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)(i) provides, in relevant part, that the interests of the Government
are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the
aggregate for all taxable years affected by the election than the taxpayer would have had
if the election had been timely made (taking into account the time value of money).

Section 301.9100-3(c)(1)(ii) provides that ordinarily the interests of the Government will
be treated as prejudiced and that ordinarily the IRS 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. The IRS may condition the grant of relief on the taxpayer providing the IRS with
a statement from an independent auditor certifying that the interests of the Government
are not prejudiced under the standards set forth in § 301.9100-3(c)(1)(i).

Company C represents that its Form 5500 filings are consistent with reliance on two
historical QSLOBs for purposes of nondiscrimination testing during Year 4, Year 5, Year
6, and Year 7. In addition, as set forth earlier, Company C requested this relief prior to
the IRS discovering the failure to file accurate Forms 5310-A. Thus, clause (i) of
§ 301.9100-3(b)(1) is satisfied. In addition, granting this relief would not result in the
taxpayer having a lower tax liability in the aggregate for all taxable years affected by the
election than the taxpayer would have had if the election had been timely made. Thus,
pursuant to § 301.9100-3(c)(1), the interests of the Government would not be prejudiced
by providing the requested relief.

Accordingly, Company C is granted an extension of 60 days from the date of the issuance
of this ruling letter to file notification of the QSLOB elections on Forms 5310-A for Year 4,
Year 5, Year 6, and Year 7 with the appropriate office of the IRS.

No opinion is expressed as to whether the separate lines of business of the taxpayer
satisfy the requirements under section 414(r).
PLR-127354-19 5

The rulings contained in this letter do not constitute a determination that a separate line
of business satisfies the requirement of administrative scrutiny within the meaning of §
1.414(r)-6 of the federal Income Tax Regulations.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2020-1, 2020-1 I.R.B. 1, section
7.01(16)(b). This office has not verified any of the material submitted in support of the
request for ruling, and such material is subject to verification on examination. The
Associate office will revoke or modify a letter ruling and apply the revocation retroactively
if there has been a misstatement or omission of controlling facts; the facts at the time of
the transaction are materially different from the controlling facts on which the ruling was
based; or, in the case of a transaction involving a continuing action or series of actions,
the controlling facts change during the course of the transaction. See Rev. Proc. 2020-
1, section 11.05.

No opinion is expressed as to the tax treatment of the transaction described herein under
any other provisions of the Code or regulations that may be applicable thereto. This ruling
letter is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

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

                                   Sincerely,



                                   Neil Sandhu
                                   Senior Technician Reviewer
                                   Qualified Plans, Branch 1
                                   (Employee Benefits, Exempt Organizations, and
                                   Employment Taxes)

cc: