[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)-11]

[Page 760-762]
 
                       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)-11  Definitions and special rules.

    (a) In general. This section contains certain definitions and 
special rules applicable under these regulations. Paragraph (b) of this 
section provides certain definitions that apply for purposes of these 
regulations. Paragraph (c) of this section provides averaging rules 
under which certain provisions of these regulations may be applied on 
the basis of a two-year or a three-year average.

    (b) Definitions--(1) In general. In applying the provisions of this 
section and of Sec. Sec. 1.414(r)-1 through 1.414(r)-10, unless 
otherwise provided, the definitions in this paragraph (b) govern in 
addition to the definitions in Sec. 1.410(b)-9.

[[Page 761]]

    (2) Substantial-service employee. An employee is a substantial-
service employee with respect to a line of business for a testing year 
if at least 75 percent of the employee's services are provided to that 
line of business for that testing year within the meaning of Sec. 
1.414(r)-3(c)(5). In addition, if an employee provides at least 50% and 
less than 75% of the employee's services to a line of business for the 
testing year within the meaning of Sec. 1.414(r)-3(c)(5), the employer 
may treat that employee as a substantial-service employee with respect 
to that line of business provided the employee is so treated for all 
purposes of these regulations. The employer may choose such treatment 
separately with respect to each employee.
    (3) Top-paid employee. Generally, an employee is a top-paid employee 
with respect to a line of business for a testing year if the employee is 
among the top 10 percent by compensation of those employees who provide 
services to that line of business for that testing year within the 
meaning of Sec. 1.414(r)-3(c)(5) and who are not substantial-service 
employees within the meaning of paragraph (b)(2) of this section with 
respect to any other line of business. In addition, in determining the 
group of top-paid employees, the employer may choose to disregard all 
employees who provide less than 25 percent of their services to the line 
of business. For purposes of this paragraph (b)(3), an employee's 
compensation is the compensation used to determine the employee's status 
as a highly or nonhighly compensated employee under section 414(q) for 
purposes of applying section 410(b) with respect to the first testing 
day. For this purpose, only compensation received during the 
determination year (within the meaning of Sec. 1.414(q)-1T, Q&A-13) is 
taken into account. See Sec. 1.414(r)-3(c)(7) for examples of the 
determination of top-paid employee.
    (4) Residual shared employee. An employee is a residual shared 
employee for a testing year if the employee is not a substantial-service 
employee with respect to any line of business for the testing year.
    (5) Testing year. The term testing year means the calendar year.
    (6) Testing day. The term testing day means any day on which Sec. 
1.410(b)-8(a)(1) requires any plan (within the meaning of Sec. 
1.414(r)-8(d)(2)) of the employer actually to satisfy section 410(b) 
with respect to plan year that begins in the testing year. Thus, if a 
plan is required to satisfy section 410(b) on one day within each 
quarter of the plan year under the quarterly testing option of Sec. 
1.410(b)-8(a)(3), each of those four days is a testing day. Similarly, 
if a plan is required to satisfy section 410(b) on every day of the plan 
year under the daily testing option of Sec. 1.410(b)-8(a)(2), every day 
of the plan year is a testing day.
    (7) First testing day. The term first testing day means the testing 
day that occurs earliest in time of all the testing days under all plans 
of the employer with respect to the testing year. If a plan is tested 
under the annual testing option of Sec. 1.410(b)-8(a)(4) (other than 
for purposes of the average benefit percentage test of Sec. 1.410(b)-5) 
for a plan year that begins in a testing year, then, solely for purposes 
of determining the first testing day in a testing year, the employer may 
treat any day in the plan year as a testing day, provided that the 
coverage of each plan of the employer on the day selected is reasonably 
representative of the coverage of the plan over the entire plan year. 
The first testing day with respect to a testing year must fall within 
that testing year.
    (8) Section 401(a)(26) testing day. The term section 401(a)(26) 
testing day means any day on which Sec. 1.401(a)(26)-7(a) or (b) 
requires any plan of the employer actually to satisfy section 401(a)(26) 
with respect to a plan year that begins in the testing year. In no event 
may a section 401(a)(26) testing day with respect to a testing year fall 
before the first testing day for that testing year. For purposes of this 
paragraph (b)(8), the term plan has the same meaning as in Sec. 
1.414(r-9(c)(2).
    (c) Averaging rules--(1) In general. The provisions specified in 
this paragraph (c) are permitted to be applied based on the average of 
the percentages for the current testing year and the consecutive testing 
years (not to exceed four consecutive testing years) immediately 
preceding the current testing year.

[[Page 762]]

    (2) Specified provisions. The provisions specified in this paragraph 
(c) are--
    (i) The 90-percent separate employee workforce requirement of Sec. 
1.414(r)-3(b)(4);
    (ii) The 80-percent separate management requirement of Sec. 
1.414(r)-3(b)(5);
    (iii) The 25-percent provision-to-customers requirement of Sec. 
1.414(r)-3(d)(2)(iii);
    (iv) The minimum and maximum highly compensated employee percentage 
ratios under the statutory safe harbor of Sec. 1.414(r)-5(b)(1)(i) and 
(ii) (50 percent and 200 percent, respectively), but not the 10-percent 
exception in Sec. 1.414(r)-5(b)(4);
    (v) The employee assignment percentage applied for purposes of the 
dominant line of business method of allocating residual shared employees 
under Sec. 1.414(r)-7(c)(2) and the pro-rata method for allocating 
residual shared employees under Sec. 1.414(r)-7(c)(3).
    (3) Averaging of large fluctuations not permitted. A provision is 
not permitted to be applied based on an average determined under this 
paragraph (c) if the percentage for any testing year taken into account 
in calculating the average falls below a mimimum percentage, or exceeds 
a maximum percentage, by more than 10 percent (not 10 percentage points) 
of the respective minimum or maximum percentage. Thus, for example, the 
statutory safe harbor of Sec. 1.414(r)-5(b) is not permitted to be 
applied based on an average determined under this paragraph (c) if the 
percentage for any testing year taken into account in calculating the 
average falls below 45 percent (which is 10 percent below the 50-percent 
minimum) or exceeds 220 percent (which is 10 percent above the 200-
percent maximum).
    (4) Consistency requirements. A provision is permitted to be applied 
on an averaging basis under this paragraph (c) regardless of how any 
other provision is applied, except in the case of the separate employee 
workforce and separate management requirements of Sec. 1.414(r)-3(b)(4) 
and (5), which each must be applied on the same basis as the other. A 
provision is also permitted to be applied on an averaging basis under 
this paragraph (c) for a testing year, regardless of how the provision 
is applied for any other testing year. However, once a provision is 
applied on an averaging basis under this paragraph (c) for a testing 
year, it must be applied on the same basis to all the employer's lines 
of business to which the provision is applied for the testing year. The 
percentage for a preceding testing year may be taken into account under 
this paragraph (c) only if--
    (i) The employer calculates the percentage for the preceding testing 
year in the same manner as the employer calculates the percentage for 
the current testing year;
    (ii) The employer is treated as operating qualified separate lines 
of business in accordance with Sec. 1.414(r)-1(b) for the preceding 
testing year; and
    (iii) The employer designated the same lines of business in the 
preceding testing year as in the current testing year.

[T.D. 8376, 56 FR 63460, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32922, June 27, 1994]