http://www.mhco.com/FAQs/FAQ-TH_Top-Paid5%25_070904.htm
"Even when using the “top-paid group election” to determine highly compensated employees, the 5% owners rule must be considered since 5% owners may not be in the top 20% group. How can these rules be reconciled? Email Alert 2004-14 07/09/04

The highly compensated group consists of individuals who own more than 5% of the business entity in either the current plan or the prior year, and employees who received compensation in excess of $80,000 (as indexed--$90,000 in 2003) the prior plan year. The top-paid group election permits the employer to limit the highly paid group to owners and the top 20% of employee when ranked by compensation."

Do the paragraphs above accurately represent regulations? Can anyone provide passages from official literature to buttress the above?

The text accurately reflects the rules. You'll just need to pull the regs at 414(q) to see that to be the case. I've always found the phrases a bit confusing, though, because the use of the word "may" can be misinterpreted. A quick example:

10 employees and therefore the top 20% is 2. Consider the 10 employees and their ownership and comp as:

1: 50% $200,000
2. 00% $200,000
3. 00% $150,000
4 50% $120,000
Numbers 5 through 10: 0% $50,000

In this case we find that number 4 is a more than 5% owner but is not in the top-20. The language cited is meant to say that even though number 4 is not in the top 20% that person is nonetheless an HCE.

So, there are 3 HCE's based on the above using the top 20 election (1, 2 and 4)

If not making the top 20 election, then there are 4 HCE's.