QSLOB

[Walter]

We have a realtor who is an LLC and files as a sub-S. Spouse is an attorney, PA with 5 employees, Would the realtor LLC be able to qualify as a SLOB and adopt a defined benefit plan?

[ESOP Guy]

I fully admit I am not a QSLOB expert but I thought one of the requirements of a QSLOB is the separate business has to have 50 employees?  That is what kills most small business QSLOB ideas. 

Code section is here:  https://www.law.cornell.edu/cfr/text/26/1.414(r)-1

[C. B. Zeller]

Like ESOP Guy said, a QSLOB must have 50 employees.

There is an exception to spousal attribution under 1563(e)(5), which says, in short, the spouses must have nothing at all to do with each others' companies. If the exception applies, then the spouses' ownership in their respective entities is not attributed to each other for purposes of determining whether a controlled group exists. If there is no controlled group, then the companies can adopt plans independent of each other.

[Ken Marblestone]

If they have minor children together, they are a controlled group. Section 1563(e)(6)(A).

[Walter]

I agree that it is a controlled group especially since there are minor children and I'm not having a issue with 410(b) or 401(a)(4). It's the 401(a)(26) participation test I'm trying to get around. It's my understanding that there is an exception to the 50 employee requirement for a DB plan 

[Ken Marblestone]

Now you're talking about a different 50 employee requirement than the QSLOB requirement. The exception for 401(a)(26) is covering at least 40% of otherwise eligible employees. So any DB plan would have to cover at least 3 employees (which would include the realtor and presumably the attorney).

[Walter]

Thanks Ken, my understanding when applying the minimum participation test under 401(a)(26) on a QSLOB basis, a separate line of business may be treated as a QSLOB even though it does not satisfy the 50-employee requirement. So if the employer makes the election to use QSLOB testing would they not only have to test using the employee of the SLOB, i.e. the realtor LLC (of which there is only 1 employee)?

[Ken Marblestone]

I think you are confusing the two. My understanding is you cannot have a QSLOB unless you have 50 employees in each SLOB. If you do qualify as a QSLOB, you can have a DB that doesn't cover 50, as long as it covers 40%. But in this situation you never reach that issue because a one person company and a related 5 person company cannot be treated as separate lines of business for QSLOB purposes.

[Walter]

There is an exception to the 50 employee rule under IRC 401(a)(26)(G). So would I be correct in think that I can use the QSLOB election just for 401(a)(26) testing of the 1 participant DB plan?

[Ken Marblestone]

I don't think so. You still have to be classified as a QSLOB first. See Reg. 1.401(a)(26)-6(b)(8).

 

[Lou S.]

No Walter you first need to be a QSLOB and without 50 or more employees in each entity you don't qualify as a QSLOB.

These guys have a nice flowchart on if you can qualify as a QSLOB http://www.boutwellfay.com/wp-content/uploads/2017/11/FAQ-What-is-a-QSLOB.pdf

But you have a controlled group with 2 employers with 1 and 5 employees that's not going to qualify as a QSLOB.

 

[Walter]

Hi Lou, I read the link and here is what they wrote "50 employees - each separate line of business must have at least 50 employees (does not apply in determining if a defined benefit satisfies the minimum participation requirements on a separate line of business basis". It's the "does not apply" part I'm looking at. I have no problem with 410(b) coverage. It's 401(a)(26) I'm trying to get around.

[Mike Preston]

Other than the 50 employee rule, would the entities otherwise satisfy the criteria as QSLOB's?

[Walter]

Yes husband is a realtor and wife is an attorney. The two entities do not share anything. Everything is completely separate. They have minor children. The wife has 4 employees and sponsors a 401(k) plan. The employees will receive enough profit sharing contribution to pass 410(b) and 401(a)(4) as a controlled group.