Determining Qualified Separate Line of Business status

[Guest Mike Melnick]

A company seeking QSLOB status has 3 divisions with the following distribution of HCE's and NHCE's:

Division 1&2 has 32 HCE's and 40 NHCE's.

Dviision 3 has 14 HCE's and 714 NHCE's.

Divisions 1, 2, and 3 all have completely separate workforces, separate management, and separate financial reporting. There is only one employee allocable to more than 1 division, and that is the president of the company. The company is not publicly-traded, and there are no union employees.

The company designs, manufactures, and distributes machines for the gaming industry. Divisions 1&2 are located in Silicon Valley, CA, and employ the college-educated designers and engineers. Division 3 is in the midwest and employs lower-level manufacturing personnel. Currently, there is a single 401(k) plan, which has a matching formula, applicable to all 3 divisions. Divisions 1&2 would like to become a QSLOB, because they want to liberalize eligibility for the plan, and perhaps improve the vesting and matching formulas. The plan currently regularly fails ADP/ACP tests, and so the refunds adversely affect division 1&2 personnel more than division 3 personnel. It isn't practical to consider either 401(k) safe harbors or QNECs, because of the costs involved.

ANALYSIS

I believe the employer can successfully demonstrate that it maintains separate lines of business. However, I have determined that the lines of business do not satisfy the statutory safe harbor or the normal administrative safe harbors (for qualification). It therefore appears that the only remaining hope is to request and receive an individual determination from the IRS.

QUESTION

Has anyone had favorable experience with the Service in granting QSLOB status to a group such as this? If so, would the employer have to submit such an individual request on an annual basis? What arguments might be persuasive to the Service?