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Revenue Procedure 93-42

Revenue Procedure 93-42

Internal Revenue Service

1993-2 C.B. 540

 

26 CFR 601.201: Rulings and determination letters.

Rev. Proc. 93-42

SECTION 1. PURPOSE AND OVERVIEW

.01 This revenue procedure provides guidelines for substantiating com­pliance with the nondiscrimination rules. Specifically, the guidance applies for purposes of substantiating that a plan satisfies the following require­ments: nondiscrimination as to coverage under section 410(b) of the Internal Revenue Code, including the determination of whether an employer operates qualified separate lines of business (QSLOBs) under section 414(r); nondiscrimination in both the amount of contributions or benefits and the current availability of benefits, rights, and features under section 401(a)(4); and nondiscrimination with regard to an alternative definition of compensation under section 1.414(s)-1­(d)(3) of the Income Tax Regulations. These requirements are collectively re­ferred to as the “nondiscrimination requirements” for purposes of this revenue procedure. Where relevant, this revenue procedure applies to the testing of former employees as well as current employees. Unless specifically pro­vided otherwise, this revenue procedure does not apply to the special nondis­criminatory amounts tests under section 401(k)(3) or (m)(2).

 

.02 The guidance in this revenue procedure is designed to allow em­ployers to use alternative methods for substantiating compliance with the non­discrimination requirements. The Inter­nal Revenue Service will treat a plan as satisfying the nondiscrimination re­quirements where an employer shows compliance under these alternative methods because these methods are intended to demonstrate whether there is a high likelihood that the plan satisfies the nondiscrimination require­ments. The guidance in this revenue procedure should be interpreted in a reasonable manner consistent with this purpose.

 

.03 Section 2 of this revenue proce­dure provides standards for determining the quality of data that is appropriate for testing. Section 3 provides stand­ards for identifying the population of employees who must be taken into ac­count for testing. Section 4 provides special rules for determining the highly compensated employees (HCEs). Sec­tion 5 provides the standards under which an employer can rely on a prior year’s test. Section 6 provides special rules for testing multi-employer plans. Section 7 provides special rules for employers that operate QSLOBs.

 

SEC. 2. QUALITY OF DATA

 

.01 If an employer maintaining a plan does not have precise data avail­able at reasonable expense, then the employer may substantiate that the plan satisfies the nondiscrimination requirements using less than precise data if (1) the data being used is the best data available for the plan year at reason­able expense, and (2) the employer reasonably concludes that demonstrating compliance with the nondiscrimina­tion requirements using this data establishes a high likelihood that the plan would satisfy the nondiscrimina­tion requirements using precise data. Data that satisfies this section 2.01 is referred to in this revenue procedure as “substantiation quality data.”

 

.02 For a defined contribution plan, an employer usually obtains precise data for making allocations to accounts and will have this precise data avail­able for the plan year. Thus, to the extent that the data obtained for alloca­tions is relevant to testing for non­discrimination, the substantiation quality data that the employer will have for the plan year to test a defined contribution plan generally will be precise data. However, data as to allo­cations generally is not relevant for testing a defined contribution plan that satisfies section 401(a)(4) of the Code using a design-based safe harbor under section 1.401(a)(4)-2(b)(2) or 1.401(a)­(4)-8(b)(3) of the regulations. Thus, for example, in the case of such a design-based safe harbor plan, for purposes of demonstrating compliance with section 410(b), substantiation quality data need not include data obtained for alloca­tions. In addition, the mere fact that precise data is available for a defined contribution plan does not preclude, with respect to a defined benefit plan maintained by the same employer, the use of less than precise data that is otherwise substantiation quality data.

 

.03 For an employer demonstrating satisfaction of the average benefits percentage test, employee data gener­ally is needed for all plans of that employer. In this case, individual employee data for some plans may not be available at reasonable expense. For example, if a plan does not use com­pensation for purposes of determining accruals, the best available data for the employees who benefit solely under that plan may be the average compen­sation for all employees in the plan and, if the employer is imputing per­mitted disparity, the best available determination of covered compensation may be based on the average age of the employees. Similarly, the best available data with regard to service may be the average service for all employees in the plan. This average data is substantia­tion quality data only if the employer reasonably concludes that demonstrat­ing compliance using this data estab­lishes a high likelihood that the plan would satisfy the average benefits percentage test using precise data. However, this high likelihood standard would not be satisfied if the average service of the nonHCEs was greater than the average service of the HCEs.

 

.04 The following examples illus­trate principles in this section.

 

Example 1 . Employer A sponsors a defined benefit plan for the employees in Divisions X, Y, and Z, which are located in different geographic areas. Each division separately maintains its own payroll and personnel records. Under Employer A’s plan, the relevant components for determining the em­ployees’ accrual rates are compensa­tion, age, and service. The plan uses a definition of compensation that satisfies section 414(s) of the Code. Because of the cost of gathering and merging precise data for all employees in each division, Employer A determines that for 1995 the best data that is available at reasonable expense is the data that is gathered as of the 1995 valuation date and used for preparing the Schedule B of the 1995 Form 5500. The valuation data includes each participant’s rate of pay, date of birth, and date of hire. Using the valuation data and reasonable assumptions to construct each em­ployee’s compensation and service his­tory, Employer A’s plan passes the tests for determining whether the plan meets the nondiscrimination require­ments. Because Employer A reasonably expects this data to approximate the relevant compensation, age, and service components, Employer A reasonably concludes that there is a high likelihood that the plan also would satisfy the nondiscrimination requirements if it were tested using precise data.

 

Example 2 . The facts are the same as in Example 1 , except that the data gathered for Division Y is missing the date of hire for a group of Division Y employees that is a small percentage of the total employees in the plan. An estimate was made for these em­ployees’ years of service on the basis of the average number of years of service for other employees in Division Y of the same age. The estimation of the missing data does not preclude Employer A from reasonably conclud­ing that there is a high likelihood that the plan would satisfy the nondis­crimination requirements using precise data. If, however, Employer A were missing relevant data on one or more of the most highly compensated em­ployees in the plan, or on a group of employees subject to a benefit formula that generally was not available to the other employees, then Employer A would be required to undertake more scrutiny of the underlying information to support the reasonableness of its conclusion.

 

Example 3 . The facts are the same as in Example 1 , except that Employer A maintains two plans, Plan XY for employees in Divisions X and Y and Plan Z for employees in Division Z. Plan XY’s minimum age and service eligibility conditions are the attainment of age 21 and the completion of one year of service. Plan Z provides imme­diate entry upon attainment of age 21. Employer A is testing Plan Z using the option of section 1.410(b)-6(b)(3)(ii) of the regulations that permits the disag­gregated portion of the plan benefiting otherwise excludable employees to be tested separately. In separately testing the portion of Plan Z benefiting other­wise excludable employees, the regula­tions require that only the group of employees who have attained age 21 but have not yet completed one year of service be taken into account. Em­ployer A cannot identify, at reasonable expense, the group of employees in Divisions X and Y who have attained age 21 but have not yet completed one year of service. Thus, for purposes of applying the separate test to the portion of Plan Z benefiting otherwise exclud­able employees (i.e., those who have attained age 21 but have not yet com­pleted one year of service), Employer A treats as excludable the employees in Divisions X and Y who are excludable under Plan XY, even though some of those employees (i.e., the excludable employees under Plan XY who have attained age 21) are required by the regulations to be taken into account in separately testing this disaggregated portion of Plan Z. Using this data, the disaggregated portion of Plan Z passes the tests for determining whether it meets the nondiscrimination require­ments. Because the relative composi­tion (in terms of HCEs and nonHCEs) of the group of employees who have attained age 21 but have not yet completed one year of service is similar among the Divisions, Employer A reasonably concludes that there is a high likelihood that the disaggregated portion of Plan Z also would pass if the Division X and Y employees in this age and service range also were taken into account.

 

SEC. 3. SINGLE DAY “SNAPSHOT” TESTING

 

.01 An employer may substantiate that a plan complies with the non­discrimination requirements on the basis of the employer’s workforce on a single day during the plan year (snapshot day), provided that day is reasonably representative of the employer’s workforce and the plan’s coverage throughout the plan year. A snapshot day will not be treated as failing to be reasonably representative solely because of a significant change in the employer’s workforce caused by an extraordinary event, such as a merger or acquisition. The snapshot day for a plan generally must be consistent from year to year. A single snapshot day must be used for each plan being tested; for this purpose, plan is defined in section 1.401(a)(4)-12 of the regulations. Different plans main­tained by the same employer may use different snapshot days or the same snapshot day.

 

.02 Under this section 3, the em­ployees taken into account for purposes of substantiating compliance are solely the employees of the employer on the snapshot day (snapshot population) de­termined by applying sections 414(b), (c), (m), (n) and (o) of the Code as of the snapshot day. An employee’s status on the snapshot day is the status that is relevant for purposes of substantiating compliance for the year. For example, an employee who is a collectively bargained employee on the snapshot day is a collectively bargained employee for substantiating com­pliance. Similarly, an employee who is covered under a particular plan on the snapshot day is covered under that plan for substantiating compliance.

 

.03 A snapshot day is selected ac­cording to the following:

 

(1) The employer tests the amount of benefits or contributions and the current availability of benefits, rights, and features using substantiation quality data for the snapshot popula­tion. Generally, it will be practical for the employer to select a snapshot day that is the same day for which the employer has substantiation quality data. For example, if an employer determines that the valuation data for a defined benefit plan is substantiation quality data, it would be practical for the employer to select the valuation date as its snapshot day, provided that day is reasonably representative, so that in collecting its valuation data the employer simultaneously collects sub­stantiation quality data for all of the employees in the snapshot population.

 

(2) An employer need not, however, select a snapshot day that is the same day as of which substantiation quality data is available. For example, if an employer were using a January 1 snap­shot day for its defined benefit plan, the employer might also select January I as the snapshot day for its defined contribution plan, provided that day is reasonably representative. Under sec­tion 2, if the defined contribution plan is a safe harbor plan under section 1.401(a)(4)-2(b)(2) or 1.401(a)(4)-8(b)(3) of the regulations and need only determine the number of em­ployees who benefit under the plan, the employer’s data as of the snapshot day may constitute substantiation quality data. In other cases, the employer generally will not have substantiation quality data for a defined contribution plan until the end of the plan year, when the employer calculates allocation amounts. In the latter case, the snapshot population could be estab­lished as of the beginning of the year for the defined contribution plan, but whether the plan meets the non­discrimination requirements would be determined as of a date later than the snapshot day, when the substantiation quality data for the snapshot population is available to the employer.

 

.04 If a defined benefit plan has a minimum service requirement that would preclude eligible employees from actually accruing benefits for a plan year, the application of section 410(b) of the Code to the snapshot population may overstate the plan’s coverage under section 410(b). For example, where a defined benefit plan has a provision requiring that an employee have 1,000 hours of service to accrue benefits, and the snapshot day is early in the plan year, employees who terminate after the snapshot day may have been treated as benefiting who do not in fact benefit. Similarly, if the snapshot day is later in the plan year, employees who terminate prior to the snapshot day and who fail to bene­fit because of the service requirement will not be reflected. Therefore, if employees terminate in a defined bene­fit plan with a minimum service re­quirement and the substantiation quality data or snapshot population does not reflect the level of turnover, an adjust­ment must be made to the test that reasonably compensates for the dif­ference between relative turnover rates among eligible HCEs and nonHCEs. The employer must account for the effect of the minimum service require­ment by making an appropriate adjust­ment to the ratio percentage or non­discriminatory classification percentage of section 410(b) to reflect termina­tions. For this purpose, an adjustment of 5 percent ( i.e. , 70 percent becomes 73.5 percent) for a 1,000 hour rule will be treated as a safe harbor.

 

.05 Similarly, if a defined contribu­tion plan has a minimum service re­quirement, such as a provision that limits allocations solely to those employees who are employed on the last day of the plan year, the applica­tion of section 410(b) of the Code to the snapshot population may overstate the plan’s coverage. Where a defined contribution plan’s substantiation quality data does not include actual allocation amounts as of the end of the year, however, the effect of a minimum service requirement and the need for any corresponding adjustment will de­pend upon whether the snapshot popu­lation reflects the level of turnover of eligible employees. If a defined con­tribution plan with a “last day” or similar service requirement has a snapshot day in the first quarter of the plan year and the plan’s substantiation quality data includes actual allocation amounts, then the snapshot population will be treated as accurately reflecting the plan’s coverage. In other cases where the snapshot population does not reflect the level of turnover, an adjustment must be made as described above in section 3.04. In addition, an adjust­ment to section 410(6) of 10 percent for a “last day” rule ( i.e. , 70 percent becomes 77 percent) will be treated as a safe harbor. The safe harbor adjust­ment of 10 percent also applies if the plan has both a last day rule and another minimum service requirement ( e.g. , 1,000 hour rule).

 

.06 Under this section 3, it is intended that all plan provisions that are in effect during the plan year be tested on the basis of the snapshot population. In certain cases, however, a plan may include a provision that must be tested in that plan year but that primarily affects employees who were employed prior to the snapshot day and who are not in the snapshot population. For example, the snapshot population would not reasonably represent the employees for whom an early retire­ment window is available if the win­dow was opened during the year and significant numbers of employees re­tired under the window prior to the snapshot day. In such case, the effect of the early retirement window is tested on the basis of a snapshot population that is reasonably representative of the employer’s workforce when the win­dow opens, such as the prior year’s snapshot population if it is reasonably representative.

 

.07 If an employer is substantiating whether an alternative definition of compensation is nondiscriminatory, the employer tests the definition of com­pensation on the basis of substantiation quality data for the relevant employees in the snapshot population. Thus, for purposes of section 1.414(s)-1(d)(3) of the regulations, the employer compares the substantiation quality data for the definition of compensation being tested to the substantiation quality data for total compensation.

 

.08 Although this revenue procedure does not apply for purposes of satisfy­ing section 401(k)(3) or (m)(2) of the Code, plans with salary reduction, matching, or after-tax features may be tested under this section 3 to substanti­ate compliance with the other non­discrimination requirements (e. g., coverage or current availability of benefits, rights, and features).

 

SEC. 4. SIMPLIFIED IDENTIFICATION OF HIGHLY COMPENSATED EMPLOYEES

 

.01 An employer may determine which employees are HCEs under section 414(q) of the Code under the simplified method of this section 4 as an alternative to determining HCEs in accordance with section 1.414(q)-1T of the Temporary Income Tax Regula­tions. In applying this section 4, section 1.414(q)-1T applies to the extent that it is not inconsistent with the methods specifically provided below:

 

(1) An employee is an HCE under this section 4 if (a) the employee is a 5-percent owner; (b) the employee’s compensation for the plan year exceeds the section 414(q)(1)(B) amount (in­dexed to $96,368 for 1993); (c) the employee’s compensation exceeds the section 414(q)(1)(C) arnount for the plan year (indexed to $64,245 for 1993) and the employee is in the top-paid group of employees within the meaning of section 414(q)(4); or (d) the employee is an officer described in section 414(q)(1)(D).

 

(2) The compensation used to deter­mine whether an employee is an HCE under this section 4 is compensation that reasonably approximates the employee’s section 414(q)(7) compen­sation for the plan year.

 

(3) The lookback provisions of sec­tion 414(q) do not apply to determining HCEs under this section 4.

 

(4) An employer may use the sim­plified identification of HCEs under this section 4 for one plan even if the employer uses the calendar method for identifying HCEs described in section 1.414(q)-1T, Q&A-14 (b)(4) for an­other plan.

 

.02 An employer that applies this simplified method for determining HCEs may choose to apply this method on the basis of the employer’s work­force as of a snapshot day that is the same snapshot day that the employer is using for substantiating compliance with the nondiscrimination require­ments. In addition, the employer may use a snapshot day that satisfies the requirements of section 3.01 of this revenue procedure in determining HCEs even if the employer is not using a snapshot day to substantiate com­pliance with the nondiscrimination re­quirements. In applying this simplified method on a snapshot basis:

 

(1) The employer determines who is an HCE on the basis of the data as of the snapshot day, except as provided below in (3). For example, in determin­ing the number of employees in the top-paid group of employees, only employees in the snapshot population are taken into account. Similarly, in determining who is a 5-percent owner, only the ownership of the employer on the snapshot day is taken into account.

 

(2) If the determination of who is an HCE is made earlier than the last day of the plan year, the employee’s compensation that is used to determine an employee’s status must be projected for the plan year under a reasonable method established by the employer.

 

(3) There may be employees not employed on the snapshot day that are taken into account in testing and, thus, must be categorized as either HCEs or nonHCEs. This would occur, for exam­ple, where a plan must satisfy the “ADP” or the “ACP” test in section 401(k)(3) or (m)(2) of the Code or where the employer is not substantiat­ing that a plan satisfies the non­discrimination requirements on a snapshot day but is using a snapshot day to identify HCEs. In that case, the employer may use the option described in this section, subject to the following modifications. In addition to those employees who are determined to be highly compensated on the plan’s snap­shot day, as described above, the em­ployer must treat as an HCE any elig­ible employee for the plan year who:

 

(a) terminated prior to the snapshot day and was an HCE in the prior year;

 

(b) terminated prior to the snapshot day and (i) was a 5-percent owner, (ii) has compensation for the plan year greater than or equal to the projected compensation of any employee who is treated as an HCE on the snapshot day (except for employees who are HCEs solely because they are 5-percent owners or officers), or (iii) was an officer and has compensation greater than or equal to the projected compen­sation of any other officer who is an HCE on the snapshot day solely be­cause that person is an officer; or

 

(c) becomes employed subsequent to the snapshot day and (i) is a 5-percent owner, (ii) has compensation for the plan year greater than or equal to the projected compensation of any em­ployee who is treated as an HCE on the snapshot day (except for employees who are HCEs solely because they are 5-percent owners or officers), or (iii) is an officer and has compensation greater than or equal to the projected compen­sation of any other officer who is an HCE on the snapshot day solely be­cause that person is an officer.

 

.03 If a plan provides for a defini­tion of HCEs, an employer that uses the simplified identification of HCEs under this section must amend the plan to incorporate this simplified identifica­tion method, including the use of a snapshot day if applicable.

 

SEC. 5. THREE-YEAR TESTING CYCLE

 

An employer may rely for the two succeeding plan years on the tests substantiating that a plan complies with the nondiscrimination requirements for a plan year if the employer reasonably concludes that there are no significant changes subsequent to the test ( e.g ., significant changes in plan provisions, the employer’s workforce, or compen­sation practices). For this purpose, whether a change is significant depends upon the relative margin by which the plan has satisfied the nondiscrimination requirements in the most recent year in which the plan was tested and the likelihood that the change would elimi­nate that margin. If there is a signifi­cant change in one plan provision, the effect of which can be isolated from the effect of other provisions, the employer may continue to rely on the prior test during the interim two years, provided that the employer can demon­strate that the effect of the amended plan provision is nondiscriminatory. Employers using the three-year testing cycle for purposes of substantiating compliance generally must treat the year in which the final regulations under sections 401(a)(4) and 410(b) of the Code become effective with regard to the plan as a year of significant change requiring actual testing. How­ever, if a plan first complies with these regulations in a year prior to their effective date, then the employer may treat that year, rather than the year in which the regulations are first effective, as a year of significant change for purposes of beginning the three-year testing cycle.

 

SEC. 6. MULTIEMPLOYER PLANS

 

.01 This section provides additional rules for determining whether a multi­employer plan described in section 1.410(b)-9 of the regulations satisfies the nondiscrimination requirements. These rules are provided because the plan administrator of a multiemployer plan may not have direct access to the employer-specific data that is needed for nondiscrimination testing but that is not needed for determining employees’ benefits under the plan. These rules are in addition to the other rules of this revenue procedure, such as snapshot testing and the three-year testing cycle, which also apply to multiemployer plans.

 

.02 A multiemployer plan must sat­isfy the nondiscrimination requirements on the basis of each participating employer’s disaggregated population of employees who benefit under the plan and who are not treated as collectively bargained employees under section 1.410(b)-6(d)(2) of the regulations. Failure of a multiemployer plan to satisfy the nondiscrimination require­ments may result in disqualification of the plan for all participating employers. In a proper case, the Commissioner has the authority to retain the qualified status of a multiemployer plan for innocent employers. Pursuant to this revenue procedure, the Commissioner generally will exercise this authority where the plan administrator has fol­lowed procedures that are reasonably designed to obtain from each participat­ing employer appropriate information substantiating that the disaggregated portion of the plan with respect to that employer satisfies the nondiscrimina­tion requirements and it is reasonable for the plan administrator to rely on that information. Appropriate informa­tion need not be actual data, but it must be based on the employer’s substantia­tion quality data. For example, for a safe-harbor plan under section 1.401­(a)(4)-3(b), appropriate information could include the number of the employer’s nonexcludable HCEs and nonHCEs, including the number of HCEs who are benefiting under the plan, provided that it is reasonable for the plan administrator to rely on that information. Alternatively, for example, appropriate information could be an employer’s certification that the portion of the plan benefiting its disaggregated population of noncollectively bargained employees satisfies the nondiscrimina­tion requirements based on substantia­tion quality data, provided that it is reasonable for the plan administrator to rely on that certification.

 

.03 For purposes of substantiating compliance with the nondiscrimination requirements and the “ADP” test under section 401(k)(3) of the Code, the plan administrator may rely on appropriate information provided by a participating employer as to its HCEs and nonHCEs, provided that it is reasonable for the plan administrator to rely on that information. Appropriate information includes information as to the employer’s HCEs and nonHCEs determined using the simplified identi­fication of HCEs under section. 4 of this revenue procedure.

 

.04 In determining whether the plan administrator’s procedures satisfy the standard in .02 of this section, the Service will take into account that for the 1994 plan year, plan administrators may be in the process of revising cur­rent procedures to obtain the informa­tion necessary to substantiate compliance with the nondiscrimination requirements.

 

SEC. 7. QUALIFIED SEPARATE LINES OF BUSINESS

 

.01 This section provides special rules for demonstrating that an employer operates QSLOBs. Except as otherwise provided, the other provi­sions of this revenue procedure, such as substantiation quality data, snapshot testing, and simplified identification of HCEs also may be applied for purposes of section 414(r) of the Code, such as in determining whether the administra­tive scrutiny requirement of section 1.414(r)-1(b)(2)(iv)(D) of the regula­tions is satisfied.

 

.02 Application of the QSLOB rules depends in part on the level of services provided by an employee to the em­ployer’s different lines of business and the amount of an employee’s com­pensation. The provisions of section 2 of this revenue procedure regarding substantiation quality data also apply for these purposes. Thus, for example, in determining the level of services provided by an employee to a line of business, an employer may use any reasonable estimate, provided that the estimated data satisfies the require­ments for substantiation quality data.

 

.03 Snapshot testing is applied to the determination of QSLOBs according to the following:

 

(1) An employer that uses the provi­sions of section 3 of this revenue procedure regarding snapshot testing for purposes of section 410(b) of the Code also may use snapshot testing for purposes of designating its lines of business and determining whether its lines of business are QSLOBs. In this case, a snapshot day used for section 410(b) purposes is treated as a testing day under section 1.414(r)-11(b)(6) of the regulations. Thus, if the employer applies section 410(b) to all of its plans on a snapshot basis, the first snapshot day to occur in the testing year is treated as the first testing day under section 1.414(r)-11(b)(7).

 

(2) An employer that is not using the provisions of section 3 of this revenue procedure regarding snapshot testing for purposes of section 410(b) may use snapshot testing solely for purposes of designating its lines of business and determining whether its lines of business are QSLOBs. In this case, the first testing day as determined under section 1.414(r)-11(b)(7) must be used as the snapshot day.

 

(3) Although the QSLOB rules gen­erally may be applied on a snapshot basis, snapshot testing does not apply for purposes of the requirement under section 414(r)(2)(A) that a separate line of business have at least 50 employees.

 

(4) In applying the separate work­force and management tests of section 1.414(r)-3 on a snapshot basis, the employees taken into account are only those employees of the employer on the first testing day. Pursuant to section 1.414(r)-3(c)(5)(ii), the services provided by employees to the employer’s lines of business for the testing year are based on the employees’ actual services throughout the year. However, for purposes of applying the QSLOB rules on a snapshot basis, an estimate of the employee’s services for the year will be treated as substantiation quality data even if that estimate of the employee’s services for the year is based on the employer’s reasonable expectation for the period following the first testing day. The preceding sentence applies whether or not more precise data at reasonable expense is available subse­quent to the first testing day. Thus, for example, if an employer uses snapshot testing, the determination of whether an employee is a substantial-service employee with respect to a line of business is based on a reasonable expectation of the employee’s level of services throughout the testing year, rather than the employee’s actual level of services on the first testing day.

 

(5) If an employer determines that it operates separate lines of business on the basis of a snapshot day, there may be employees not employed on the snapshot day who are taken into account in testing for purposes of the nondiscrimination requirements (e.g., the plan is demonstrating satisfaction of the “ADP” test in section 401(k)(3)). Thus, those employees must be assigned to a QSLOB. In that case, when each of those employees is first taken into account, the employer may assign the employee on the basis of a reasonable expectation of the employee’s services throughout the year.

 

.04 The three-year testing cycle un­der section 5 of this revenue procedure applies to the determination of an employer’s QSLOBs for a testing year if the employer reasonably concludes that there are no significant changes to the employer’s business that affect its lines of business in the two succeeding testing years. If a significant change affects some but not all of the employer’s QSLOBs, the employer may continue to rely on the prior test with respect to the unaffected QSLOBs during the interim two years, provided that the lines of business affected by the change are QSLOBs after the change.

 

SEC. 8. EFFECTIVE DATE

 

This revenue procedure is effective for plan years beginning on or after January 1, 1994.