IRS SPECIFIES PROCEDURES FOR ADMINISTRATIVE SCRUTINY DETERMINATIONS.

Rev. Proc. 93-41

                          TABLE OF CONTENTS

.01 This revenue procedure sets forth the procedures of the Internal Revenue Service relating to the issuance of an administrative scrutiny determination, which is a determination by the Service as to whether a separate line of business satisfies the requirement of administrative scrutiny, within the meaning of section 1.414(r)-6 of the Income Tax Regulations, for the testing year. As such, this revenue procedure prescribes the conditions under which an employer is permitted to request a determination that a separate line of business meets administrative scrutiny and describes the factors the Service will take into account in determining whether to grant a determination that a separate line of business meets administrative scrutiny.

.02 This revenue procedure does not provide guidance regarding the determination as to whether a plan maintained by an employer operating separate lines of business is a qualified plan under section 401(a) of the Code. A sponsor who wants such guidance should refer to the Service's general determination letter procedures under Rev. Proc. 93-6, 1993-1 I.R.B. 135, and the special procedures for employers requesting determination letters that take into account the requirements of the Tax Reform Act of 1986 ("TRA '86"), Pub. L. 99- 514, 1986-3 C.B. 1, and later laws, under procedures published by the Service in Rev. Proc. 93-39, this Bulletin.

SEC. 2. BACKGROUND

.01 Section 414(r) of the Code generally provides that an employer is treated as operating qualified 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 qualified separate lines of business for the year, the employer may apply the minimum coverage requirements of section 410(b) (including the nondiscrimination requirements of section 401(a)(4)) of the Code and the minimum participation requirements of section 401(a)(26) of the Code separately with respect to employees of each qualified separate line of business.

.02 Section 414(r)(2) of the Code provides that each separate line of business must meet certain statutory requirements to be considered a qualified separate line of business. Section 414(r)(2)(A) requires that a line of business must have at least 50 employees who are not excluded under section 414(q)(8) of the Code. Section 414(r)(2)(B) provides that the employer must notify the Secretary that such line of business is being treated as separate. Section 414(r)(2)(C) provides that either such line of business must meet the administrative scrutiny guidelines prescribed by the Secretary or the employer must receive a determination from the Secretary that such line of business may be treated as meeting administrative scrutiny.

.03 On December 4, 1991, the Service published final regulations which relate to the requirements under section 414(r) of the Code, 56 Fed. Reg. 63420. On September 7, 1993, the Service published proposed amendments to the final regulations under section 414(r) of the Code, 58 Fed. Reg. 47090.

.04 Section 1.414(r)-1 of the regulations provides that an employer is treated as operating qualified separate lines of business only if: (1) the employer designates its lines of business by reference to the property or services provided by each line of business; (2) each line of business is organized and operated separately from the remainder of the employer; and (3) each of these separate lines of business meets additional statutory requirements (including administrative scrutiny) and thus constitutes a qualified separate line of business.

.05 A separate line of business automatically meets the administrative scrutiny requirement of section 414(r)(2)(C) of the Code if it meets the statutory safe harbor of section 414(r)(3)(A).

.06 Section 1.414(r)-1 of the regulations provides that a separate line of business can also automatically meet the administrative scrutiny requirement of section 414(r)(2)(C) of the Code if it meets one of the regulatory administrative scrutiny safe harbors in section 1.414(r)-5(c) through (g).

.07 A separate line of business that does not satisfy any of these safe harbors nonetheless satisfies the administrative scrutiny requirement if the employer requests and receives a determination from the Service, under a program implemented pursuant to section 1.414(r)-6 of the regulations, that the separate line of business satisfies the requirement of administrative scrutiny.

.08 Rev. Proc. 91-64, 1991-2 C.B. 866, sets forth the industry categories established by the Service for purposes of the safe harbor in section 1.414(r)-5(c) of the regulations and administrative scrutiny determinations in section 1.414(r)-6 and this revenue procedure.

.09 Rev. Proc. 93-40, this Bulletin, sets forth the procedures of the Service for satisfying the requirement under section 414(r)(2)(B) of the Code that an employer notify the Secretary that the employer treats itself as operating a separate line of business under section 414(r).

SEC. 3. APPLICABILITY

.01 Effective October 12, 1993, the Service will begin accepting requests from employers for administrative scrutiny determinations. The procedures described in this revenue procedure provide the sole method by which an employer can request and receive a determination from the Service as to whether a separate line of business satisfies the administrative scrutiny requirement pursuant to section 1.414(r)- 6 of the regulations.

.02 An employer may request a determination as to whether a separate line of business satisfies the requirement of administrative scrutiny under section 1.414(r)-6 of the regulations for a specified testing year, as defined in section 1.414(r)-11 of the regulations, with respect to a separate line of business described in either subsection .03 or subsection .04 of this section. An employer cannot make a request for a testing year that ends prior to the date of the request.

.03 A separate line of business is described in this subsection .03 if it --

(1) meets the criteria for a line of business for the testing year under section 1.414(r)-2 of the regulations and for a separate line of business for the testing year under section 1.414(r)-3 of the regulations;

(2) meets the 50 employee requirement of section 414(r)(2)(A) of the Code on each day of the testing year;

(3) does not satisfy any of the administrative scrutiny safe harbors of section 1.414(r)-5(b) through (g) of the regulations; and

(4) satisfies at least one of the following standard access alternatives:

(a) The highly compensated employee percentage ratio of the separate line of business for the testing year, as determined under section 1.414(r)-5(b) of the regulations, is at least 40 percent and not more than 250 percent;

(b) Ninety percent of the gross revenues of the separate line of business result from the provision of property or services that fall exclusively within one or more industry categories established by the Service (through Rev. Proc. 91- 64), under section 1.414(r)-5(c) of the regulations, and no more than ten percent of the gross revenues of any of the employer's other separate lines of business result from property or services provided to customers of the employer that fall within the same industry category or categories;

(c) The employer is not required to file Form 10-K or 20-F, but there is a certification from an independent certified public accountant that the employer would have been required to report the separate line of business as one or more reportable industry segments on either the Form 10-K or the Form 20-F if the employer had been required to file the applicable SEC report for the employer's fiscal year ending in the testing year, and the separate line of business therefore would have satisfied the administrative scrutiny safe harbor in section 1.414(r)-5(e) of the regulations;

(d) The separate line of business has a highly compensated employee percentage ratio, as determined under section 1.414(r)-5(b) of the regulations, of less than 40 percent, and either --

(i) The separate line of business would satisfy the average benefits safe harbor of section 1.414(r)- 5(f)(2)(ii) of the regulations if the actual benefit percentage of the nonhighly compensated employees of the other separate lines of business were reduced by one-third, or

(ii) The separate line of business would satisfy the minimum benefit safe harbor of section 1.414(r)- 5(g) of the regulations if the minimum benefit were reduced by one-third;

(e) The separate line of business has a highly compensated employee percentage ratio, as determined under section 1.414(r)-5(b) of the regulations, of more than 250 percent, and either --

(i) The separate line of business would satisfy the average benefits safe harbor of section 1.414(r)- 5(f)(3)(ii) of the regulations if the actual benefit percentage of the highly compensated employees of the other separate lines of business were increased by one-third, or

(ii) The separate line of business would satisfy the maximum benefit safe harbor of section 1.414(r)- 5(g) of the regulations if the maximum benefit were increased by one-third; or

(f) The separate line of business manages a government facility pursuant to a government contract that specifies the benefits to be provided under a qualified plan.

.04 A separate line of business is described in this subsection .04 if it meets paragraphs (1) through (3) of subsection .03, but fails to satisfy any of the standard access alternatives of paragraph (4) of subsection .03.

SEC. 4. ISSUANCE OF DETERMINATIONS

.01 The Service will issue a determination as to whether a separate line of business meets the requirement of administrative scrutiny only in response to requests filed with the Service in accordance with the instructions in section 7.

.02 As provided in section 1.414(r)-6(a) of the proposed regulations, the Service will issue a determination that a separate line of business meets the requirement of administrative scrutiny only when such a determination is consistent with the purpose of section 414(r) of the Code, taking into account the nondiscrimination requirements of sections 401(a)(4) and 410(b).

.03 For a separate line of business described in section 3.03, the Service will take into account the factors enumerated in section 5 below and any other relevant facts and circumstances in determining whether such separate line of business satisfies administrative scrutiny.

.04 For a separate line of business described in section 3.04, the Service will scrutinize all the relevant facts and circumstances, including the factors enumerated in section 5 below, more closely in determining whether a separate line of business satisfies administrative scrutiny. It is anticipated that in these cases the Service will determine that the separate line of business satisfies administrative scrutiny only in exceptional circumstances. Thus, an additional burden rests on the employer to demonstrate to the Service that relevant facts and circumstances unique to the employer support a determination that the separate line of business meets administrative scrutiny, despite its failure to satisfy any of the standard access alternatives of section 3.03(4)(a) through (f).

SEC. 5. FACTORS TAKEN INTO ACCOUNT

In accordance with section 4.03 and 4.04, in determining whether a separate line of business satisfies the requirement of administrative scrutiny, the Service will take into account all the facts and circumstances that it deems relevant, including, but not limited to, the factors listed below. No one factor is necessarily determinative.

(1) Differences in property or services: The degree to which the property or services provided by the separate line of business differ from the property or services provided by the employer's other separate lines of business.

(2) Separateness of organization and operation: The degree to which the separate line of business is organized and operated separately from the remainder of the employer, including the degree of vertical integration of the separate line of business with any other separate line of business of the employer and the degree to which the separate line of business has its own tangible assets.

(3) Nature of business competition: The nature of the business competition faced by the separate line of business, the degree to which competitors of the separate line of business are organized as independent stand-alone companies that do not engage in other separate lines of business, and the type and level of benefits provided by competitors of the separate line of business to their employees.

(4) Historical factors: Whether the separate line of business was acquired from another employer, whether it developed separately within the employer, and whether it was operated separately before the enactment of TRA '86.

(5) Geographic factors: The degree to which the separate line of business is operated in a distinct geographic area from the employer's other separate lines of business, and the impact geographic factors have on the employer's compensation and benefit policies.

(6) Safe harbors: The degree to which the separate line of business fails to satisfy the safe harbors of section 1.414(r)-5 of the regulations, in particular, the average benefits and minimum or maximum benefits safe harbors of sections 1.414(r)- 5(f) and (g).

(7) Size and Composition: The size and composition of the separate line of business relative to each of the employer's other separate lines of business. This factor includes the number of employees, both highly compensated and nonhighly compensated, and the highly compensated employee percentage ratio (as determined under section 1.414(r)-5(b) of the regulations), in each of the employer's separate lines of business (whether or not a separate line of business for which an administrative scrutiny determination is being requested) as determined for purposes of section 1.414(r)-7 of the regulations.

(8) Allocation method: Which allocation method for residual shared employees the employer applies under section 1.414(r)- 7(c) of the regulations, and the impact the allocation method will have on the number of employees who are treated as employees of each of the employer's separate lines of business.

(9) Benefits provided by separate lines of business: The relative level of benefits provided by each of the employer's separate lines of business and the percentage of employees benefiting in each of the employer's separate lines of business.

(10) Other separate lines of business: The degree to which the employer's other separate lines of business satisfy the requirements of a qualified separate line of business for the testing year under section 1.414(r)-1(b)(2) of the regulations.

(11) Regulated industries: Whether the separate line of business operates in a regulated industry (i.e., whether the separate line of business furnishes or sells electrical energy, water or sewage disposal services; gas or steam through a local distribution system; telephone service or other communication services; or transportation of gas or steam by pipeline) if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof.

SEC. 6. APPLICABLE USER FEE

.01 An administrative scrutiny determination user fee is collected through the user fee program. The procedures set forth in Rev. Proc. 93-23, 1993-19 I.R.B. 6, as modified by this section, apply to the administrative scrutiny determination fee. This fee is described in section 6.02.

.02 The administrative scrutiny determination user fee depends on the number of separate lines of business for which administrative scrutiny determinations are requested. Rev. Proc. 93-23 is modified to add the following new user fees:

(1) The applicable fee is $2,750 for the first separate line of business for which a determination is requested; and

(2) an additional $875 for each additional separate line of business for which a determination is requested.

SEC. 7. GENERAL INSTRUCTIONS TO EMPLOYERS

.01 This section sets forth the procedures for requesting an administrative scrutiny determination from the National Office. In general, a request consists of a submission from the employer or the employer's representative to the National Office demonstrating that each separate line of business for which a determination is desired for the testing year satisfies administrative scrutiny and other procedural items, and includes supporting information and documentation as described below.

.02 The submission from the employer or the employer's representative must contain the following:

(1) An identification of each separate line of business for which a request is made and the testing year covered by the request.

(2) A statement that each separate line of business satisfies the conditions in section 3.03 (1) through (3).

(3) For each separate line of business described in section 3.03 above for which a request is made, an identification of the standard access alternative of section 3.03(4) that is satisfied.

(4) Sufficient data (numeric, appropriate certification, or otherwise) to verify that the separate line of business satisfies the identified requirement of paragraph (3) immediately above, as well as sufficient information relating to the factors listed in section 5 for the Service to take into account to determine whether or not the separate line of business satisfies administrative scrutiny. Information may be submitted in whatever form is most clear and convenient, e.g., charts, tables, graphs, narrative, outlines. In addition to the information specifically required, the employer may submit any additional information that the employer believes is relevant and that the employer would like the Service to take into account in making this administrative scrutiny determination.

(5) The name of the Key District in which the principal place of business of the employer (within the meaning of section 414(b), (c) and (m) of the Code) is located.

(6) A statement as to whether the employer has submitted or intends to submit a request for a determination letter that relies on the designation of qualified separate lines of business.

(7) A statement as to whether any plan of the employer is currently under an Employee Plans examination of a Form 5500 series return. For this purpose, examination also includes any plan for which the employer or the employer's representative has received verbal or written notification from the EP/EO Division of an impending Employee Plans examination or of an impending referral for Employee Plans examination, and also includes any plan that has been under Employee Plans examination and is now in Appeals or in litigation for issues raised in the Employee Plans examination.

.04 The submission must be signed by the employer or the employer's representative.

.05 To sign the submission or to appear before the Service in connection with the submission, the representative must comply with the requirements of section 9.02(10) of Rev. Proc. 93-4, 1993-1 I.R.B. 83.

.06 An administrative scrutiny determination submission and any factual information or change in the submission at a later time must be accompanied by the following declaration: "UNDER PENALTIES OF PERJURY, I DECLARE THAT I HAVE EXAMINED THIS SUBMISSION, INCLUDING ACCOMPANYING DOCUMENTS, AND TO THE BEST OF MY KNOWLEDGE AND BELIEF, THE FACTS PRESENTED IN SUPPORT OF THE ADMINISTRATIVE SCRUTINY DETERMINATION SUBMISSION ARE TRUE, CORRECT, AND COMPLETE." The declaration must be signed by the employer, not the employer's representative.

.07 Requests for one or more administrative scrutiny determinations filed under this revenue procedure must be accompanied by the applicable user fee described in section 6.

.08 The letter to the Service should be marked "ADMINISTRATIVE SCRUTINY" in the upper right hand corner of the letter.

.09 Requests for an administrative scrutiny determination under this revenue procedure should be sent to:

     Employee Plans Qualifications

.01 The Service reserves the right to request additional information that it deems appropriate with respect to the requested administrative scrutiny determination. If the submission fails to comply with the provisions of this revenue procedure or additional information is required, the Service representative assigned to the case will contact the employer or the employer's representative and explain what is needed to complete the submission. The employer will have 21 calendar days from the date of this contact to provide the requested information. If the information is not received within 21 days, the matter will be closed, and the user fee will not be returned. A request for extension should be submitted before the end of the 21-day period, in writing, and must be approved by the Branch Chief or group manager of the group to which the case is assigned.

.02 If the National Office initially determines that it cannot issue a favorable administrative scrutiny determination, the employer or the employer's representative will be contacted by the Service representative and offered a conference in the National Office. The conference can be held either in person or by telephone. The conference must be held within 21 calendar days of the date of contact. The employer or the employer's representative will have 21 calendar days after the date of the conference to submit additional information in support of the submission. A request for extension should be submitted before the end of the 21-day period, in writing, and must be approved by the Branch Chief or group manager of the group to which the case is assigned. Additional conferences may be held at the discretion of the National Office.

SEC. 9. RELIANCE

.01 An administrative scrutiny determination issued by the Service under this revenue procedure is limited to a determination as to whether a separate line of business satisfies administrative scrutiny. Therefore, a determination that a separate line of business satisfies administrative scrutiny may not be relied upon:

(1) with respect to whether the line of business satisfies any other requirements of the regulations, for example, whether a designated line of business is a separate line of business; or

(2) with respect to whether the plans of the separate line of business satisfy any requirements of the Code or regulations, for example, whether the plans meet the qualification requirements of section 401(a) of the Code.

.02 A determination that a separate line of business satisfies administrative scrutiny may not be relied upon if there has been a misstatement or omission of material facts. Similarly, the determination may no longer be relied upon after a change in material fact.

.03 No information provided in support of a request for determination under this revenue procedure will constitute actual or constructive notice to the Secretary, as required under section 414(r)(2)(B) of the Code, that an employer treats itself as operating qualified separate lines of business for a testing year.

.04 This revenue procedure does not pertain to the use of the separate line of business rules for purposes of the separate application of the 55-percent average benefits test of section 129(d)(8) of the Code.

SEC. 10. EFFECT ON OTHER DOCUMENTS

Revenue Procedure 93-23 is modified as provided in section 6 of this revenue procedure.

SEC. 11. EFFECTIVE DATE

This revenue procedure is effective October 12, 1993.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Steven Seelig and Joan Weiss of the Employee Plans Technical and Actuarial Division. For further information regarding this revenue procedure, please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service between the hours of 1:30 p.m. and 4 p.m. Eastern Time, Monday through Thursday by calling (202) 622-6074/6075. (These are not toll-free numbers). Mr. Seelig's and Ms. Weiss' telephone numbers are (202) 622-8519 and (202) 622-6267, respectively. (These are not toll-free numbers.)