WASHINGTON - New rules issued by the Internal Revenue Service allowing employers that own multiple businesses to separately test pension plans for non-discrimination add more flexibility in determining who can use the rules, but are more complex, some experts said.
The final version of the separate line of business regulations loosen Internal Revenue Code regulations. The new rules allow employers operating multiple businesses (that also have separate pension plans) to use various non-discrimination tests to show each plan does not favor highly compensated employees.
"These final (regulations) make this a viable option for many companies," said Harry Conaway, a managing director with William M. Mercer Inc. Washington.
Under the new rules, employers have more flexibility in allocating workers to separate units within the company. In addition, employers whose plans previously failed non-discrimination tests will be able to prove, through facts and circumstances, that the plan does not favor highly compensated employees.
But experts said many companies would need to collect new data on employees, which could be time-consuming and costly.
"It is minutiae and it requires (employers) to collect an awful lot of data," said Chris Lindgren, a technical consultant at Towers Perrin, Valhalla, N.Y.
Although some experts thought larger businesses may start taking advantage of the new regulations, others said the complications in using the regulations outweigh the benefits.
"For tax issues, increased flexibility usually means increased complexity, and these regulations are no exception," said Kyle Brown, retirement counsel at The Wyatt Co., Washington.
In addition, companies that had tried to use the former regulations and didn't pass some of the tests, had to redesign their plans in order to provide benefits, said David Glaser, a partner with Patterson, Belknap, Webb & Tyler, New York. It wouldn't make sense for these companies to redesign their plans again to use the new regulations if their current situation is working.
Mr. Lindgren added he did not foresee a groundswell of companies opting for the so-called SLOB regulations.
"The changes aren't so dramatic that people, who had looked at the regulations before and decided not to use them, will now go back," he said.
The regulations come in response to comments experts made to the IRS after it issued proposed regulations in September 1993. Most comments expressed concerns about allocating certain employees to a specific line of business for testing purposes. Often, employees such as accountants, attorneys or headquarters staff do not belong to any one line of business and instead their services are shared among a company's different operating units.
In the former regulations, shared employees were only allowed to be included in the conglomerate's main or dominant line of business. The dominant line had to account for at least 35% of the company's "substantial service employees." (These employees spend at least 50% of their time with the dominant line.)
The final regulations were changed in two ways: first, the test of dominance was lowered to 25% from 35%. Second, after passing three requirements, shared employees could be considered a small group and the employer could assign the group to any of its lines of business.
The second major change eases the former gateway requirement. In the earlier regulations, the SLOB rules were allowed if the percentage of the non-highly paid employees in a separate unit's business was at least 90% of the percentage of the highly paid employees; if the plan did not fall into this category, but did satisfy an unsafe harbor percentage (which hinged on each employer's concentration of non-highly compensated employees in its work force), then it could also use the rules.
Some employers said it was difficult to satisfy the unsafe harbor percentage, so the new regulations state that employers can prove to the IRS, through facts and circumstances, that the plan is non-discriminatory.