Magazine article The CPA Journal

Employee Benefit Plans Update

Magazine article The CPA Journal

Employee Benefit Plans Update

Article excerpt

The IRS released final regulations concerning separate lines of businesses, making it easier to qualify for separate line of business treatment. Generally, all employees within a controlled group of corporations or within a group of commonly controlled trades or businesses are treated as having a single employer for purposes of the minimum coverage and nondiscrimination requirements. These rules are designed to make certain that an employer is providing nondiscriminatory benefits to its employees. In permitting an employer to divide its business into qualified separate lines of business, the IRS creates the opportunity for the employer to apply the minimum coverage and nondiscrimination rules separately to each line of business. This allows employers to provide different levels of benefits to employees within these separate lines of businesses.

There are four conditions which need to be satisfied in order for a line of business to be treated separately for purposes of applying the minimum coverage and nondiscrimination requirements.

A SEPARATE ORGANIZATIONAL UNIT. The line of business must be organized as a separate unit within the employer and must be set up as a separate corporation, partnership, division, or other organizational unit on each day of the year.

SEPARATE PROFIT CENTER. The line of business must be a separate profit center within the employer, and the employer must maintain records that separately account for the revenue and expenses of that line of business.

SEPARATE WORKFORCE. The line of business must have its own separate employee workforce, requiring that 90% of all employees who perform services for a particular line of business must spend at least 75% of their time working for that line of business.

SEPARATE MANAGEMENT. The line of business must have separate management. An employer must identify the top 10% of highly compensated employees (HCE) who perform at least 25% of their service for that line of business and, of those employees, at least 80% must provide at least 75% of their services to that line of business. Employers that maintain centralized support services may not be able to satisfy the separate line of business requirements if the support staff performed more than 25% but less than 75% of their services for the separate line of business.

Furthermore, on each day of the year there must be at least 50 employees who provide services exclusively for the separate line of business. The employer must notify the IRS that it is treating itself as operating a separate line of business for purposes of applying the minimum coverage and non-discrimination tests.

PAYMENT OF PLAN EXPENSES WITH PLAN ASSETS

Employers are increasingly interested in reducing the cost of maintaining their benefit programs and, therefore, desire to use plan asses for the payment of expenses related to plan operation. More specifically, sponsors of overfunded defined benefit plans desire to use excess assets of the plan without effecting a termination. In addition, as part of a program to shift costs to the employee, an employer may have a plan (or the subaccounts under a Sec. 401(k) plan) directly pay for certain administrative services or otherwise receive reimbursement from the plan for the employer's costs. The Department of Labor (DOL) has increased its enforcement program involving payments received by plan sponsors from their employee benefit plans. Generally, the employer may be reimbursed for expenses incurred in maintaining a plan if 1) reimbursement is permitted by the plan, 2) the conditions of the statutory exemption under ERISA are met, and 3) the employer receives reimbursement only of its direct expenses. ERISA requires that plan assets be used for no other purposes than to provide benefits to participants and beneficiaries, and to pay "reasonable expenses of administering the plan."

Employers that sponsor benefit plans have interests which may conflict with the interests of plan participants and beneficiaries. …

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