[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.414(r)-1]

[Page 720-725]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.414(r)-1  Requirements applicable to qualified separate lines 
of business.

    (a) In general. Section 414(r) prescribes the conditions under which 
an employer is treated as operating qualified separate lines of 
business. If an employer is treated as operating qualified separate 
lines of business under section 414(r), certain requirements

[[Page 721]]

under the Code may be applied separately with respect to the employees 
of each qualified separate line of business. These requirements are 
limited to the minimum coverage requirements of section 410(b) 
(including the nondiscrimination requirements of section 401(a)(4)), the 
minimum participation requirements of section 401(a)(26), and the 55-
percent average benefits test of section 129(d)(8). This section 
provides the exclusive rules for determining whether an employer is 
treated as operating qualified separate lines of business under section 
414(r), as well as rules for applying the requirements of sections 
410(b), 401(a)(26), and 129(d)(8) separately with respect to the 
employees of a qualified separate line of business.
    (b) Conditions under which an employer is treated as operating 
qualified separate lines of business--(1) In general. An employer is 
treated as operating qualified separate lines of business under section 
414(r) only if all property and services provided by the employer to its 
customers are provided exclusively by qualified separate lines of 
business. Thus, once an employer has determined its qualified separate 
lines of business under paragraph (b)(2) of this section, no portion of 
the employer may remain that is not included in a qualified separate 
line of business. In addition, once the employer has determined the 
employees of its qualified separate lines of business under paragraph 
(b)(3) of this section, every employee must be treated as an employee of 
a qualified separate line of business, and no employee may be treated as 
an employee of more than one qualified separate line of business.
    (2) Qualified separate line of business--(i) In general. A qualified 
separate line of business is a portion of the employer that is a line of 
business within the meaning of paragraph (b)(2)(ii) of this section, 
that is also a separate line of business within the meaning of paragraph 
(b)(2)(iii) of this section, and, finally, that satisfies the 
requirements of section 414(r)(2) in accordance with paragraph 
(b)(2)(iv) of this section.
    (ii) Line of business. A line of business is a portion of an 
employer that is identified by the property or services it provides to 
customers of the employer. For this purpose, the employer is permitted 
to determine the lines of business it operates by designating the 
property and services that each of its lines of business provides to 
customers of the employer. Rules for determining an employer's lines of 
business are provided in Sec. 1.414(r)-2.
    (iii) Separate line of business. A separate line of business is a 
line of business that is organized and operated separately from the 
remainder of the employer. The determination of whether a line of 
business is organized and operated separately from the remainder of the 
employer is made on the basis of objective criteria. These criteria 
generally require that the line of business be organized into one or 
more separate organizational units (e.g., corporations, partnerships, or 
divisions), that the line of business constitute one or more distinct 
profit centers within the employer, and that no more than a moderate 
overlap exist between the employee workforce and management employed by 
the line of business and those employed by the remainder of the 
employer. Rules for determining whether a line of business is organized 
and operated separately from the remainder of the employer and thus 
constitutes a separate line of business are provided in Sec. 1.414(r)-
3. These rules include an optional rule for vertically integrated lines 
of business.
    (iv) Qualified separate line of business--(A) In general. A 
qualified separate line of business must satisfy the three statutory 
requirements in section 414(r)(2). A separate line of business that 
satisfies these three statutory requirements in accordance with 
paragraphs (b)(2)(iv)(B) through (b)(2)(iv)(D) of this section 
constitutes a qualified separate line of business.
    (B) Fifty-employee requirement. Under section 414(r)(2)(A), a 
separate line of business must have at least 50 employees. Rules for 
determining whether this requirement is satisfied are provided in Sec. 
1.414(r)-4(b).
    (C) Notice requirement. Under section 414(r)(2)(B), the employer 
must notify the Secretary that it treats itself as operating qualified 
separate lines of business under section 414(r) for purposes of applying 
the requirements of section 410(b), 401(a)(26), or 129(d)(8)

[[Page 722]]

separately with respect to the employees of the separate line of 
business. Rules and procedures for complying with this requirement are 
provided in Sec. 1.414(r)-4(c).
    (D) Requirement of administrative scrutiny. Under section 
414(r)(2)(C), a separate line of business must pass administrative 
scrutiny. A separate line of business may satisfy this requirement in 
one of two ways. First, a separate line of business that satisfies any 
of the safe harbors in Sec. 1.414(r)-5 satisfies the requirement of 
administrative scrutiny. These safe harbors implement the statutory safe 
harbor of section 414(r)(3) as well as the guidelines prescribed under 
section 414(r)(2)(C). Second, a separate line of business that does not 
satisfy any of the safe harbors in Sec. 1.414(r)-5 nonetheless 
satisfies the requirement of administrative scrutiny if the employer 
requests and receives an individual determination from the Commissioner 
that the separate line of business satisfies the requirement of 
administrative scrutiny. Rules and procedures applicable to requesting 
and receiving an individual determination are provided in Sec. 
1.414(r)-6. A separate line of business is permitted to satisfy the 
requirement of administrative scrutiny in any manner permitted under 
this paragraph (b)(2)(iv)(D), regardless of how any other separate line 
of business of the employer satisfies the requirement.
    (3) Determining the employees of a qualified separate line of 
business. In order to apply certain provisions under these regulations, 
it is necessary to determine the employees of a qualified separate line 
of business. For these purposes, the employees of a qualified separate 
line of business consist of all employees who are substantial-service 
employees with respect to the qualified separate line of business, and 
all other employees who are assigned to the qualified separate line of 
business. Rules for making these determinations are provided in Sec. 
1.414(r)-7. These rules apply solely for the purposes specified in these 
regulations (see Sec. 1.414(r)-7(a)(2) for a comprehensive listing of 
these purposes). These rules do not apply for any other purpose (e.g., 
the determination under Sec. 1.414(r)-3 of whether a line of business 
is organized and operated separately from the remainder of the 
employer).
    (c) Separate application of certain Code requirements to employees 
of a qualified separate line of business--(1) In general. If an employer 
is treated as operating qualified separate lines of business under 
section 414(r) in accordance with paragraph (b) of this section, the 
requirements of sections 410(b), 401(a)(26), and 129(d)(8) may be 
applied separately with respect to the employees of each qualified 
separate line of business. Paragraphs (c)(2) through (c)(4) of this 
section provide for the separate application of these requirements. In 
general, the requirements of a Code section are applied separately with 
respect to the employees of a qualified separate line of business by 
treating those employees as if they were the only employees of the 
employer. Paragraph (c)(5) of this section prescribes the limited 
conditions under which other Code requirements may be applied separately 
with respect to the employees of a qualified separate line of business.
    (2) Separate application of section 410(b)--(i) General rule. Except 
as provided in paragraph (c)(2)(ii) of this section, an employer is 
permitted to apply the requirements of section 410(b) separately with 
respect to the employees of each qualified separate line of business 
operated by the employer only if the employer does so with respect to 
all its plans, all its employees, and all its qualified separate lines 
of business. For this purpose, the requirements of section 410(b) 
encompass the requirements of section 401(a)(4) (including, but not 
limited to, the permitted disparity rules of section 401(l), the actual 
deferral percentage test of section 401(k)(3) and the actual 
contribution percentage test of section 401(m)(2)). Rules for applying 
section 410(b) separately with respect to the employees of a qualified 
separate line of business are provided in Sec. 1.414(r)-8. An employer 
may apply the rules of section 414(r) for purposes of section 410(b) 
even if it does not apply the rules of section 414(r) for purposes of 
section 401(a)(26).
    (ii) Special rule for employer-wide plans. Notwithstanding paragraph 
(c)(2)(i) of this section, an employer that is treated as operating 
qualified

[[Page 723]]

separate lines of business for purposes of section 410(b) in accordance 
with paragraph (b) of this section may apply the requirements of section 
410(b) on an employer-wide rather than a qualified-separate-line-of-
business basis with respect to any plan (within the meaning of Sec. 
1.414(r)-8(d)(2), but without regard to the mandatory disaggregation 
rule of Sec. 1.410(b)-7(c)(4) for portions of a plan that benefit 
employees of different qualified separate lines of business) that 
benefits a group of employees that satisfies the percentage test of 
section 410(b)(1)(A) (i.e., benefits at least 70 percent of the 
employer's nonexcludable nonhighly compensated employees). If section 
401(a)(4) requires that a group of employees under the plan described in 
the preceding sentence satisfy section 410(b) for purposes of satisfying 
section 401(a)(4), the percentage test of section 410(b)(1)(A) must be 
satisfied by each such group of employees. See Sec. 1.414(r)-8(c). The 
rules of this paragraph (c)(2)(ii) are illustrated by the following 
example.

    Example. Employer A maintains a single profit-sharing plan, Plan W, 
and three pension plans, Plans X, Y and Z, each benefiting employees of 
a different one of Employer A's three qualified separate lines of 
business. Contributions to the profit-sharing plan are made pursuant to 
a cash or deferred arrangement in which all employees of Employer A are 
eligible to participate. Assume that, as a result, Plan W satisfies the 
requirements to be tested under this paragraph (c)(2)(ii). None of the 
pension plans benefits more than 70 percent of the nonexcludable 
nonhighly compensated employees of Employer A. Employer A is treated as 
operating qualified separate lines of business for purposes of applying 
section 410(b) to its qualified plans. The requirements of sections 
410(b) and 401(a)(4) must therefore be applied to Plans X, Y and Z 
separately with respect to the employees of each of the three qualified 
separate line of business operated by Employer A. Since Plan W benefits 
at least 70 percent of the nonexcludable nonhighly compensated employees 
of Employer A, however, the requirements of sections 410(b) and 
401(a)(4) (including section 401(k)) may be applied to Plan W on an 
employer-wide basis.

    (3) Separate application of section 401(a)(26)--(i) General rule. 
Except as provided in paragraph (c)(3)(ii) of this section, an employer 
is permitted to apply the requirements of section 401(a)(26) separately 
with respect to the employees of each qualified separate line of 
business operated by the employer only if the employer does so with 
respect to all its plans, all its employees, and all its qualified 
separate lines of business. Rules for applying the requirements of 
section 401(a)(26) separately with respect to the employees of a 
qualified separate line of business are provided in Sec. 1.414(r)-9. An 
employer may apply the rules of section 414(r) for purposes of section 
401(a)(26) even if it does not apply the rules of section 414(r) for 
purposes of section 410(b).
    (ii) Special rule for employer-wide plans. Notwithstanding the first 
sentence of paragraph (c)(3)(i) of this section, an employer that is 
treated as operating qualified separate lines of business in accordance 
with paragraph (b) of this section for purposes of both sections 410(b) 
and 401(a)(26) may apply the requirements of section 401(a)(26) on an 
employer-wide rather than a qualified-separate-line-of-business basis 
with respect to any plan (within the meaning of Sec. 1.414(r)-9(c)(2), 
but without regard to the mandatory disaggregation rule of Sec. 
1.401(a)(26)-2(d)(1)(iv) for portions of a plan that benefit employees 
of different qualified separate lines of business), but only if the 
special rule for employer-wide plans in paragraph (c)(2)(ii) of this 
section is applied to the same plan for the same plan year.
    (4) Separate application of section 129(d)(8). [Reserved]
    (5) Separate application of other Code requirements. Under no 
circumstance may the requirements of any section of the Code (other than 
a section described in paragraphs (c)(2) through (c)(4) of this section) 
be applied separately with respect to the employees of a qualified 
separate line of business unless the section specifically cross-
references, or is specifically cross-referenced by, section 414(r). The 
Code sections whose requirements may not be applied separately with 
respect to the employees of a qualified separate line of business 
include, but are not limited to, sections 79(d)(3), 105(h), 117(d)(3), 
120(c)(2), 125(g)(3), 127(b)(2), 129(d)(3), 132, 195, 401(a)(3) (as in 
effect on September 1, 1974), 414(q)(4),

[[Page 724]]

501(c)(17)(A)(ii), 501(c)(17)(B)(iii), 501(c)(18)(B), and 505(b)(1)(A).
    (d) Application of requirements--(1) In general. The requirements of 
paragraphs (b) and (c) of this section must be applied in accordance 
with the rules in this paragraph (d).
    (2) Interpretation. The provisions of this section and of Sec. Sec. 
1.414(r)-2 through 1.414(r)-11 are to be interpreted in a reasonable 
manner consistent with the purpose of section 414(r) to recognize an 
employer's operation of qualified separate lines of business for bona 
fide business reasons and not for reasons of evading the requirements of 
any section of the Code, including sections 410(b), 401(a)(26), and 
129(d)(8). See section 414(r)(1) and (r)(7). Thus, for example, an 
employer is not permitted to apply these regulations in a manner that 
may literally comply with the other provisions of this section and of 
Sec. Sec. 1.414(r)-2 through 1.414(r)-11, but that does not reflect the 
employer's operation of qualified separate lines of business for bona 
fide business reasons.
    (3) Separate operating units. No additional requirements beyond 
those provided in these regulations apply to a separate operating unit. 
Thus, a separate operating unit that satisfies the requirements of 
paragraph (b)(2) of this section is deemed to satisfy the geographic 
separation requirement of section 414(r)(7) and accordingly is treated 
as a qualified separate line of business for all purposes under this 
section, including the separate application of section 401(a)(26).
    (4) Certain mergers and acquisitions. A portion of an employer that 
is acquired in a transaction described in section 410(b)(6)(C) and Sec. 
1.410(b)-2(f) (i.e., an asset or stock acquisition, merger, or other 
similar transaction involving a change in the employer of the employees 
of a trade or business) is deemed to satisfy the requirements to be a 
qualified separate line of business, other than the 50-employee 
requirement and the notice requirement of pararaphs (b)(2)(iv)(R) and 
(b)(2)(iv)(C) of this section, respectively. In addition, the acquired 
employees are not taken into account, and the property and services 
provided by the acquired portion to customers of the employer are 
disregarded, for purposes of determining whether the employer's 
remaining lines of business satisfy the requirements of Sec. Sec. 
1.414(r)-3 through 1.414(r)-6. The rules in this paragraph (d)(4) apply 
only for those testing years with first testing days that fall within 
the transition period described in section 410(b)(6)(C). For this 
purpose, the transition period described in section 410(b)(6)(C) lasts 
only for so long as the conditions in that section are satisfied. For 
the definition of ``first testing day,'' see Sec. 1.414(r)-11(b)(7). 
See Sec. 1.414(r)-5(d)(4), Example 1, for an example of the application 
of the rule in this paragraph (d)(4). See also Sec. 1.414(r)-5(d) for 
an administrative scrutiny safe harbor applicable to certain separate 
lines of business acquired in a transaction described in this section.
    (5) Governmental and tax-exempt employers--(i) General rule. Except 
as provided in paragraph (d)(5)(ii) of this section, the rules of this 
section are applicable in determining whether section 401(a)(26) is 
satisfied by a plan maintained by an employer that is exempt from tax 
under Subtitle A of the Internal Revenue Code (including a governmental 
plan within the meaning of section 414(d)). Similarly, except as 
provided in paragraph (d)(5)(ii) of this section, the rules of this 
section are applicable in determining whether section 410(b) is 
satisfied by a plan that is subject to section 410(b) (including by 
virtue of Sec. 1410(b)-2(e)) and is maintained by an employer that is 
exempt from tax under Subtitle A of the Internal Revenue Code (including 
a governmental plan within the meaning of section 414(d)).
    (ii) Additional rules. [Reserved]
    (6) Testing year basis of application--(i) Section 414(r). Whether 
an employer is treated as operating qualified separate lines of business 
under section 414(r) in accordance with paragraph (b) of this section is 
determined on a year-by-year basis with respect to the testing year. It 
is therefore possible for an employer to satisfy paragraph (b) of this 
section for one testing year and to fail to satisfy it for another 
testing year. It is also possible for an employer to satisfy paragraph 
(b) of this section for two testing years but to have designated its 
lines of business differently in each of those two testing years. In 
determining

[[Page 725]]

whether an employer satisfies paragraph (b) of this section for a 
testing year, the requirements of that paragraph are applied solely with 
respect to the testing year. Thus, all property and services provided by 
the employer to its customers during the testing year must be provided 
exclusively by portions of the employer that for the testing year 
constitute qualified separate lines of business. Furthermore, each 
employee of the employer must respectively be treated as an employee of 
one and only one of those qualified separate lines of business for all 
purposes with respect to the testing year.
    (ii) Sections 410(b), 401(a)(26), and 129(d)(8). For purposes of 
paragraph (c) of this section, relating to the separate application of 
sections 410(b), 401(a)(26), and 129(d)(8) to the employees of a 
qualified separate line of business, the determination whether an 
employer operates qualified separate lines of business in accordance 
with paragraph (b) of this section for a testing year generally applies 
for all plan years beginning in the testing year. Rules for the separate 
application of sections 410(b), 401(a)(26), and 129(d)(8) are 
respectively provided in Sec. Sec. 1.414(r)-8, 1.414(r)-9, and 
1.414(r)-10.
    (7) Averaging rules. The employer is permitted to apply certain 
provisions of these regulations on the basis of a consecutive-year 
average (not to exceed five consecutive years) under the averaging rules 
of Sec. 1.414(r)-11(c).
    (8) Definitions. In applying the provisions of this section and of 
Sec. Sec. 1.414(r)-2 through 1.414(r)-11, the definitions in 
Sec. Sec. 1.414(r)-11(b) and 1.410(b)-9 govern, unless otherwise 
provided.
    (9) Effective--(i) General rule. The provisions of this section and 
of Sec. Sec. 1.414(r)-2 through 1.414(r)-11 apply to plan years and 
testing years beginning on or after January 1, 1994 (or January 1, 1996, 
in the case of plans maintained by organizations exempt from income 
taxation under section 501(a), including plans subject to section 
403(b)(12)(A)(i) (nonelective plans)).
    (ii) Reasonable compliance--(A) In general. With respect to plan 
years beginning before the date on which the Commissioner begins issuing 
determinations under section 414(r)(2)(C), and on or after the first day 
of the first plan year to which section 414(r) applies under section 
1112(a) of the Tax Reform Act of 1986, an employer is treated as 
operating qualified separate lines of business if the employer 
reasonably determines that it meets the requirements of section 414(r) 
(other than the requirement of administrative scrutiny under section 
414(r)(2)(C)).
    (B) Determination of reasonable compliance. Whether an employer 
reasonably determines that it meets the requirements of section 414(r) 
generally will be determined on the basis of all relevant facts and 
circumstances, including the extent to which the employer has resolved 
unclear issues in its favor. For the period described in paragraph 
(d)(9)(ii)(A) of this section, the Internal Revenue Service will 
consider the employer's compliance with the terms of these final 
regulations (other than the requirement of administrative scrutiny under 
paragraph (b)(2)(iv)(D) of this section) to constitute a reasonable 
determination that the employer neets tge reqyurements of section 414(r) 
(other than the requirement of administrative scrutiny under section 
414(r)(2)(C)).
    (C) Effect on other plans. If an employer sponsors a plan that has a 
plan year beginning within the period decribed in paragraph 
(d)(9)(ii)(A) of this section, the employer's reasonable determination 
of its qualified separate lines of business for the testing year in 
which that plan year begins, and the allocation of employees to those 
qualified separate lines of business, must also be used for purposes of 
applying Sec. 1.414(r)-8 and Sec. 1.414(r)-9 for plan years that begin 
in that testing year but after the end of the period described in 
paragraph (d)(9)(ii)(A) of this section.
    (e) Additional rules. The Commissioner may, in revenue rulings, 
notices, and other guidance of general applicability, provide any 
additional rules that may be necessary or appropriate in applying the 
qualified separate line of business requirements of section 414(r). 
These additional rules may include, for example, new safe harbors in 
Sec. 1.414(r)-5.

[T.D. 8376, 56 FR 63437, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32916, June 27, 1994]

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