SECTION 2. BACKGROUND AND

GENERAL INFORMATION

.01 New sections 401(k)(11) and 401(m)(10) of the Code (‘‘401(k) SIMPLE provisions’’), provide an alternative method of satisfying the nondiscrimination tests contained in §§ 401(k)(3)(A)(ii) and 401(m)(2), applicable to CODAs. These 401(k) SIMPLE provisions may only be adopted by employers that employed 100 or fewer employees earning at least $5,000 in compensation for the preceding year. The 401(k) SIMPLE provisions may not be adopted by an employer who maintains another employer-spon

sored plan covering employees who are eligible to participate in the cash or deferred arrangement using the 401(k) SIMPLE provisions. Generally, no contributions may be made during a year to a plan using the 401(k) SIMPLE provisions, other than those contributions described in section 2.03 below.

.02 A 401(k) plan that includes 401(k) SIMPLE provisions does not have to satisfy the actual deferral percentage and actual contribution percentage tests otherwise applicable to plans containing CODAs and matching contributions and is not treated as top-heavy under § 416 of the Code.

.03 Under a plan containing the 401(k) SIMPLE provisions, each employee may elect to make salary reduction contributions for a year of up to $6,000. The employer must make either a matching contribution equal to the employee’s salary reduction contributions, limited to 3% of the employee’s compensation for the year, or a nonelective contribution for all eligible employees equal to 2% of the employee’s compensation for the year. All amounts contributed under 401(k) SIMPLE provisions must be nonforfeitable at all times.

.04 The plan year of a plan containing the 401(k) SIMPLE provisions must be the calendar year. An employer maintaining a 401(k) plan on a fiscal year basis must convert the plan to a calendar year in order to adopt the 401(k) SIMPLE provisions.

.05 Several additional requirements apply to plans adopting the model amendment and include the following:

(1) a special definition of compensation for purposes of the 3% matching and 2% nonelective contributions described in section 2.03; (2) notification and election period requirements; and (3) transitional rules for growing employers. .06 Except as provided in section 2.02, all other qualification requirements of the Code continue to apply to a plan that contains 401(k) SIMPLE provisions including the contribution limitations of § 415; the compensation limitations of § 401(a)(17); and the requirement that the plan as amended continue to be operated in accordance with its terms. In addition, all other requirements applicable to 401(k) plans continue to apply, including, the distribution restrictions of § 401(k)(2)(B) and the general prohibition set forth in § 401(k)(4)(B) on State and local governments maintaining a

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401(k) plan. Contributions under a plan containing 401(k) SIMPLE provisions are deductible subject to the limits of § 404(a).

.07 The model amendment supersedes any plan provision that is inconsistent with the provisions of the model amendment. For example, if the plan contains a provision that limits any employee’s salary reduction contributions for a year to a percentage that results in an amount less than $6,000, the salary reduction contribution provision of the model amendment permitting yearly contributions of up to $6,000 will govern.

.08 Employers adopting a new 401(k) plan containing the model amendment may make it effective as of any date on or after January 1, 1997, but in no event later than October 1 of the year in which adopted. Employers amending an existing 401(k) plan to incorporate the model amendment must make the model amendment effective as of the following January 1 unless they are using the 1997 Transition Rule described in section 3.

SECTION 3. 1997 TRANSITION RULE

.01 Employers that have maintained a 401(k) plan in 1997 may adopt the model amendment for 1997 if the following conditions are satisfied:

(1) the employer adopts the 401(k) SIMPLE provisions by July 1, 1997, effective as of January 1, 1997; (2) the salary reduction contributions for the year made prior to adoption of the model amendment do not total more than $6,000 for each employee; (3) the matching or nonelective contributions described in section 2.03 are of inherently equal or greater value than the contributions required under the plan prior to the amendment; and (4) all eligible employees are provided with an election period described in section 3.3(b)(iv) of the model amendment. .02 If an employer adopts 401(k) SIMPLE provisions under this transition rule, the model amendment applies to the plan for the 1997 year. For example, the cumulative salary reduction contributions for the year, including those made prior to and those made following the adoption of the model amendment, must not total more than $6,000 for any employee.

year following the date of adoption.